Addtech AB

STO:ADDT B

Earnings Call Transcript 2023-Q1

[Niklas Stenberg, executive]

Good morning, everyone, and welcome to this webcast and presentation of our quarterly report for the first quarter. And with that said, I'd like to start with a brief overview.

We have started this financial year in a very strong way. The positive developments we've seen in earlier quarters, with very strong underlying demand across the board and high activity in all business areas continued also in this quarter. Net sales up 33% of which 17% organic. I'm very proud in the way our entrepreneurs continue to handle the operational challenges, primarily continuing value chain disruptions and price inflation. So the outcome on sales growth and how they have defended the operating margins on record high levels, 13% in this quarter, is very impressive.

The acquisition pace during the quarter have been high. 5 successful companies acquired during the period and one more after closing, with a total annual sale of a bit more than SEK 500 million. Taking into consideration our long-term target of acquiring approximately 10% top line, we have clearly started this year strongly in terms of acquisitions as well. The high activity and customers' willingness to invest continued during the quarter and our order books strengthened. I will come back to what trends we see in the market shortly. The macro situation is uncertain clearly, and we, of course, follow the development closely. But in the first quarter, we see no clear signs of a slowdown in our operations or any changed customer behaviors during the quarter.

Yes, so you see in the top right graph on this picture the strong growth, 33%, as I said. All business areas continued to deliver strong organic growth and the growth is really across the board, as I said, and on most market segments and geographies. But it's also clear that we have strong momentum in areas with structural growth and driven by megatrends such as electrical transmission, electrification of equipment, fiber material, and energy efficiency solutions driven by environmental legislation. So it's clear to us that the focus on positions with sustainability angle is giving result here.

As I said, supply chain challenges continues, component shortages and long lead times. And at this point we don't see any clear indications of an improvement. So, at this point, we foresee that these challenges will remain throughout this calendar year at least. Despite another quarter with high level of invoicing, we continued to build our order books and, again, strong positions in niches with underlying growth that are mentioned, and well established relations are key success factors here. And if we look at the quarter deeply inside month by month, it was sequentially improving, so ending on a strong note in June.

To then go over to EBITA development. The positive margin trend continued in the quarter due to active efforts to offset price increase. In parallel with keeping a firm grip on the cost base, we have managed to increase EBITA which is 42% with record high margins. OpEx are increasing in line with our expectations, but our cost of sales is decreasing, meaning that our sales growth is higher than the OpEx increase. So that is good. Malin will come back to this a bit later. Also, I can mention that the acquired companies have contributed in a good way during the quarter, both on EBITA and margin.

A very brief comment on each of the business areas. Automation delivered a very solid quarter, marked by a continued good market situation in the key markets such as process industry, mechanical industry, and medical industry, that is the largest segment for Automation. And during the quarter, continued increase in demand from defense sector is noted. We mentioned this already in Q4, but it is clearly developing here. And in total generated an EBITA growth of 63%.

Electrification also began financial year in a strong way, high organic growth due to continued favorable market situation. Here we have the key segments a lot of input components to electronic, energy, special vehicles, and telecom, and all of these markets still good. Also, here we see an increased demand from defense industry. The positive trend in sales of battery modules continue. Also this quarter, of course, a favorable contribution from the recent acquisition of Fey. So it all boils down to top line growth of 54% and EBITA growing 57% with high margins.

Energy continues to leverage on their strong position in attractive segments. The highly favorable markets for infrastructure products continue to improve from already high levels. But, in addition, demand from construction side, OEM, and industry customers remains favorable as well. EBITA increased 34% with high margins despite a somewhat increased price pressure in certain segments.

Industry Solutions also another strong quarter and investment in sawmill industry continued to develop positively and strong earnings and profit growth in companies within waste and recycling. And demand for ergonomic products and hydraulic solution to the vehicle market was stable.

Finally, Process Technology also delivered a strong fourth quarter -- first quarter as forest and process industry being key drivers. And the positive trend within marine segment continued still from low levels, but we do see increased activity here, and a good margin developments.

As I said, we have started the high acquisition pace in this quarter. SEK 500 million of very fine companies and one additionally after. So in terms of geography, we continue to increase acquisitions outside Nordics in accordance with the ambitions and also increased activity on selected markets.

I'd like to take the opportunity to mention a little bit more. One of the important acquisitions that we have made outside of Nordics, Arruti Group, a traditionally family-owned company, established in the middle of the '60s. And they are a leading supplier of electrical transmission lines and substations. Based in Spain, but is also well-established supplier to grid operators in Europe, parts of South America, and Canada. So this company complements our business very well and elevates us from being a Nordic player to a global player in this area. And electrical transmission lines that these companies are working with is a clear growth segment with huge potential, and we have now, as you can see in the picture, in total 5 well-run companies in this area.

Talking about acquisition. We continue to take a positive view on the acquisition market, working actively both to fill and process the attractive pipeline with companies that fits into our selected niche segments. So we see a continued strong market for acquisitions, and we can continue to be selective in what we acquire. So that's a very positive position, I'd say.

Yes, over to you Malin.

[Malin Enarson, executive]

Thank you. Yes, as you've heard Niklas say, we have seen very strong growth in sales as well as in profits in the quarter. And the development in sales has again come from a very good demand situation in mainly all of our important market segment. Our gross margin has decreased somewhat, but the development is overall in line with our expectations. The same applies for overhead costs. High marketing and sales activities during the quarter led, as expected, to a slight increase of costs, but all in all, as you can see, thanks to our company's active efforts to offset price increases and ability to deliver on the good demand situation, combined with continued overall good cost control, we managed to keep our operating margin at a high level of 10.9% on rolling 12. This is a proof of strength in these challenging times with unpredictable price increases from suppliers and high transportation costs.

We had good cash flow during the quarter, contribution from higher profits and continued strong margins, partly though offset by an increase in working capital. This increase is a well-known pattern where our working capital is bound to raise for the moment, both due to increased volumes, that means more capital tied up in accounts receivables, but also due to the fact that we need to allow inventory levels to rise somewhat due to component shortages and long lead times. Our profitable working capital remains on high levels thanks to good working capital efficiency overall.

Our financial position remains very strong. Our net debt has increased mainly due to high acquisition pace, but our key KPIs are still at satisfactory levels. During the quarter, we have secured a new increased credit facility and therefore we obviously have comforting headroom to support our ambitions going forward. Thank you.

[Niklas Stenberg, executive]

Yes. Thank you, Malin. So [indiscernible] to look ahead, recent years increased focus in, I'll say, sustainable technical solutions and a high acquisition rate has put us in a strong position, as I talked about earlier, in areas with structural underlying growth. And, as always, I'm fully confident that our acquisitions and the areas we choose to focus on will continue to create long-term profitable growth and sustainable shareholder value. So our focus is to continue to create organic growth and acquiring selective companies to strength our position. So our strategic direction is clear. And with highly engaged and skilled teams, we are well prepared to take on this continuous -- the continuous part of this financial year.

So, to sum up, before we go to Q&A, continued strong customer demand in most of the key segments. We have been able to handle the inflation pressure and to keep up the high operating margins. And looking in the outlook, as I said, certainly we keep an eye on the macro indicators and especially keeping our ear towards the ground with close contacts with our companies and with our end customers, but we, so far, this quarter, don't see any signs of a slowdown in the operations. That is the situation at the moment. So we are very satisfied with this quarter.

Now over to Q&A.

[Operator]

[Operator Instructions] The first is from the line of Max Bacco of ABG.

[Max Bacco, analyst]

Niklas and Malin, as always, I want to say congratulations once again on a very strong report, beating our expectations. So a few questions for me and I think the first one is to you, Malin, and it is the usual question, if you can give a hint on the split between price and volume in the 17% organic sales growth if that's possible.

[Malin Enarson, executive]

Yes, it is possible, at least as good as it can be. So we have, of course, discussed this a lot, and we also talk a lot with our companies about this. And our view right now is that -- you have to correct me here, Niklas, if I'm wrong, but we say that 20% -- around 20% of the growth is actually prices and the rest is volumes.

[Niklas Stenberg, executive]

That's correct.

[Max Bacco, analyst]

Okay, perfect. And the next one. I think you mentioned this, Niklas, but just to ask again. Did you see a sequential improvement of demand during Q1 or was it stable throughout the quarter?

[Niklas Stenberg, executive]

No, it was sequentially increasing, a little bit slower in April. But then, again, we have Easter in the period. But then again May and June sequentially improve.

[Max Bacco, analyst]

Okay, perfect. And we are halfway through July now. Has it continued on par with June? Can you say anything about that so far?

[Niklas Stenberg, executive]

Yes, we don't see any clear changes in development. Of course, we are in July now. July is always a bit weaker. So if we compare to the level we went out of June and then compare it to the level we were in July, it keeps the development it should, if you get my point.

[Max Bacco, analyst]

Yes. And the order books were further strengthened. And can you say anything about the book-to-bill ratio in the quarter or how the order intake developed during the first quarter?

[Niklas Stenberg, executive]

Yes, we definitely have a positive book-to-bill in all business areas, yes.

[Max Bacco, analyst]

Okay, perfect. Yes, 2 final questions. As you mentioned, the changes of working capital was minus SEK 236 million. A lighter weighting on the cash flow. What do you see going ahead? Do you expect -- it, of course, depends on organic growth, but do you expect an improvement in cash conversion going forward, or should we expect working capital to raise going forward as well?

[Malin Enarson, executive]

Should I?

[Niklas Stenberg, executive]

Okay.

[Malin Enarson, executive]

Or perhaps you can go...

[Niklas Stenberg, executive]

No. I can just start by saying that we have been talking I think for almost a year saying that when supply chain disruption is getting a bit more back to normal, that should give a positive effects on that side. But we still see these challenges. So, of course, from that perspective, we see continue to see this development and in parallel with the strong growth. But I don't know if you want to add something, Malin.

[Malin Enarson, executive]

No, but that is, of course, true. It's a combination of things that makes the working capital rise right now. It's both the necessity of letting inventories rise a little due to the supply chain situation but also because of our growth. So as you said, it depends a bit on the growth situation also.

[Max Bacco, analyst]

Yes, okay. And finally, you mentioned this also somewhat. But we saw very good operating leverage in Automation and Industrial Solutions and somewhat softer in the remaining segments. Was it due to price pressure or dilutive acquisitions, or why didn't we see the same positive operating leverage in the 3 remaining segments?

[Niklas Stenberg, executive]

Yes, the way I see it, we have good operating leverage in the others as well. If you look on Process Technology, for instance, they have increased the margins from Q4. Last Q4 was exceptionally high for Process Technology, so you shouldn't really look into that. So, in my view, that has developed. Energy have had a very stable good situation on the margin throughout the last 2 years. Energy had a very good situation throughout the COVID period and also last year. So, yes, so I don't know if you want to add something, Malin. In my view, we have good operation leverage.

[Malin Enarson, executive]

I'd like to say that we have very good operating leverage in all the business areas. So [ rather ] it's extremely very good in the 2 you mentioned. So I think if we can't be satisfied with this kind of leverage...

[Operator]

Our next question comes from the line of Herman Eriksson of Danske Bank.

[Herman Eriksson, analyst]

Yes. So just going back to the working capital again. So we have seen now for the past 5 quarters that the inventory levels, as a percentage of sales, has increased quite rapidly. So I was just wondering, at the levels you're right now, are you at all concerned, especially even if you haven't seen any weaker demand yet. We're seeing that the macro outlook is weaker. So are you concerned regarding levels you have now? And do you feel like you need to decrease the safety levels you have?

[Malin Enarson, executive]

Maybe I should start with commenting on the inventory levels and you can maybe fill in with macro. But I'd say that it's not that we have safety stock. We have very good growth and very high demand, so we need to, of course, in the same way -- we order our components, of course, at the same pace as the customers are ordering from us. So it's not that we have safety stocks lying around. And I think that as long as we have this growth and demand situation, we have to allow our companies to have -- that we have to trust them that they do what they have to do to have the components ready for their customer orders. So no worries there, even though, of course, it is very important to keep track that it is firm orders on all -- from all customers. So we don't sit here if then macro outlook will actually hit the fan. And there you can maybe...

[Herman Eriksson, analyst]

Yes. I think talking about macro, the most important thing to remember is that one of the big strength in our business model is our ability to adapt quickly when things are happening, both in good times and in a worse climate. So as long as we continue to be very adaptive, which we have proven over and over again, so I'm not so worried about that. And as you mentioned, Malin, we have good quality in the order stocks, and it's relating to firm orders. Then we know from history, of course, that you never know if customers start taking back orders even if they are bound by agreements. That can happen. But, again, we are working very much into this and looking in the order stocks to ensure that it's good quality and also, as you mentioned, Malin, that the companies don't order unless there is a firm order from a customer. Okay, perfect. That was my only question.

[Operator]

[Operator Instructions] And our next question comes from the line of Johan Sunden of Carnegie.

[Johan Sundén, analyst]

Niklas and Malin, a few questions from my side as well. First question is on net financials in the quarter, a little bit higher than it used to be. Can you just, I guess, Malin, could you give some highlight of what's driving that and how to think going forward?

[Malin Enarson, executive]

Yes. That is, I would say, one-offs because it is set up [ at least ] for the new and extended credit facility, first. And then it's -- also we have unrealized exchange rate losses from revaluation of forward contract. And they can -- we have forward contracts on our dividends from our subsidiaries, so we have to reevaluate them, and that was also a quite a hit in this quarter. So, I would say, that both maybe around 30 or something -- 20, 30 you could consider as rather one-offs.

[Johan Sundén, analyst]

Excellent. That was a good clarification. And, Niklas, when you discussed the various segments, you highlighted subsegment in the Energy side which saw price pressure currently. Feels a little bit strange in my view given where we have inflation in the world. But can you give some more color on that comment please?

[Niklas Stenberg, executive]

Yes. Maybe price pressure actually was the wrong way to put it. In the Energy segment, we have quite a lot of electrical installers, so wholesalers as customers. And there we have fixed contracts for certain periods. So we have a price increase now from 1st of July, for instance. So it's more relating to that, I would say, than actual price pressure. So I think I'll revise my comments in that perspective. So it's been difficult for some companies to keep up the price increases during this period because of that.

[Johan Sundén, analyst]

Excellent. That's much clearer. And another question I had, you touched upon the defense subsegment and end market exposure as a growing piece of the pie. How big is that exposure? Is it more than 5% or less than 5%, just to get the sizes?

[Niklas Stenberg, executive]

Yes, as per end of March, because we are looking in -- we are evaluating the sizes of the segments every year, and if I remember right, it was some 3.5% to defense sector. So it's still a quite low exposure. So it's less than 5%. It was less than 5% end of March, I'll put it that way.

[Johan Sundén, analyst]

Excellent. On the gross margins, I noted that the gross margin came down slightly if you compare to Q1 last year. Is it mix effect from new acquisitions coming in or how has that impact or is it just purely this kind of pricing effect you refer to in the electrical installation subsegment that is impacting? And how do you think we should view your gross margins going forward if the cost pressure easing a bit, we see raw materials coming down, etc.

[Malin Enarson, executive]

Yes. I think that it's both the explanation that Niklas just said about these fixed price lists and that kind of business. And then it's also a mix effect of acquisitions and product mix, of course. So I would say that it's all in line with our expectations so far, and I would expect -- I would say that a rule throughout the year I would say that rather this is maybe a bit low, even though it's as expected for this quarter.

[Niklas Stenberg, executive]

So I think, at this point, what we feel at the moment, we don't see any alarming development on the gross margins. So our view is that we still have the pricing power necessary.

[Johan Sundén, analyst]

Excellent. Let's see if there's more -- if I had any more questions. I think I'm happy there. Thanks a lot for good answers and congratulations on good results.

[Operator]

And there are no further questions from the phones at this time. So I'll hand the floor back to our speakers.

[Niklas Stenberg, executive]

Okay. So thank you very much for listening in and posting your questions. And I wish you all a nice summer with hopefully some nice weather, and then we speak again later on. Thank you very much.

[Malin Enarson, executive]

Thank you.