Addtech AB

STO:ADDT B

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. This is the conference operator. Welcome, everyone, to Addtech's First Quarter Report 2023 Presentation.

[Operator Instructions]

At this time, I would like to turn the conference over to Niklas Stenberg, CEO; and Malin Enarson, CFO of Addtech. Please go ahead.

[Niklas Stenberg, executive]

Thank you, and good morning, everyone. Welcome to this first quarter webcast First, some highlights. All in all, a solid start to the year with continued growth and high profitability across the line. The high customer activity and favorable business climate for our companies continued in the quarter, and we can summarize the total sales growth of 16%, of which 7% was organic. This should also be seen in the light on very challenging comparisons from last year. The result grew by satisfying 22%, and we improved our margins year-on-year.

I also want to highlight the solid cash flow during the quarter and that we continue to keep up the high acquisition pace, 6 new companies during the quarter, and we still keep our debt ratio at a very good level.

Some more on sales. As I said, we increased the sales according to plan. And as you can see in the lower graph, this growth was broad-based and supported by solid double-digit growth numbers in all business areas. And as I said, we have tough comps in all of the business areas. In the quarter, we also had good contributions from our acquisitions and also positive currency effect of 4%. We saw continued high customer activity in most market segments, and we don't see any signs of a general slowdown, but we see some variations, both in and between segments.

Given the uncertain macro climate, it's, of course, satisfying to see the continued solid order intake. We strengthened our order backlog from already high levels during the quarter. So our book-to-bill improved and ended slightly above 100. I will come back to the market development a bit more within short.

EBITDA, positive margin and profit trends continued also in this quarter with a very solid EBITDA growth in all business areas, as you can see in the graph. And our company's ability to manage the inflationary pressure and an improved product mix and the firm grip on the cost base increased the EBITDA, as I said, 22%. We also note good contributions from the acquired companies and also an increase of our gross margins. So we have good pricing power in the group.

I mentioned operating cash flow, and this is thanks to a combination of the strong results and high margins and of course, clear and long-term focus on the working capital improvement. So [ R/RK ] remained at high levels of 66%.

Moving on to some brief highlights on the different business areas. So Automation delivered a solid Q1 with good sales development, especially towards the defense industry. Process mechanical industry flattened out during the quarter, and the segment medical weakened somewhat from high level, so very tough comps from last year's quarter here. Electrification also favorable business development. Despite the challenging comps, we saw 10% sales growth. And in most key segments, electronics, special vehicles, defense developing strongest.

So the sequential decrease from Q4 was expected because Q4 was extremely good in Electrification. We also saw a decline in wind power. We've been talking about the wind power segment for many quarters, and now we saw the actual effect on sales here. And we also have some decline in the battery group this quarter. And that relates to a rapid release in supply chain on some battery types that has led to an overcapacity on the market.

If you look on Energy, the high demand for electrical transmission and distribution remains unchanged. We have been talking about this market many times and that there are massive and long-term investment plan for four grids in most geographies. But it's important to know here that it's a stickiness on the market due to various things like access of entrepreneurs, materials and not the least, the long permit processes. And this causes variations in product deliveries over time. So it's not due to capacity constraints on our business, it's more external reasons that is affecting that.

Sales development in building installation continue to be strong. And as I usually point out, when you look at this sector for energy and for Addtech as a whole, we are primarily exposed to hospitals, data centers and infrastructure such as railway, so basically nonresidential projects. Also in Energy, the wind power weakened during the quarter. Industrial Solutions is favorable in general terms, challenging comps here as well. And sales within the forest and sawmill industry remained stable at high levels, strong deliveries of projects, but with the continuous low demand for new projects, but as we have talked about before, we have a solid order backlog here with visibility into 2024.

The business development in special vehicles was good during the quarter, and the mechanical industry flattened out. And last and not least, Process Technology, a very solid quarter. The market situation was very favorable for especially companies supporting customers in process industry and the oil and gas market is sticking out on the positive side here. Also, Energy, Medical Market, Marine segments continued to show good strength. And this, in general, strong development within this business area also reflecting the high margin is fueled by high demand for aftermarket components and services this quarter.

So to sum up, overall, a good business climate on most segments, but there are variations. We see some variations within segments such as medical and process industry. And one thing we can note is that the aftermarket is still strong, while there is some hesitations in the OEM sales that is more investment related. But again, it's more hesitations than signals of a slowdown. That's important to point out.

During the quarter, we have completed 6 acquisitions, so we're keeping up a good pace here, and 4 of them are outside the Nordics, adding in total SEK 465 million. And as you can see, we continue to deliver on our strategy to do more acquisitions outside the Nordics. And as I usually point out, our M&A strategy is not focused on geographies, but rather technical niches and cultural match. And the Canadian company, Darby Manufacturing is a good example of that. We have known the company for many years through our U.S.-based subsidiary, Sittab Inc., and it's within an area that we are very familiar with.

Looking forward in M&A, we continue to have a positive view of the acquisition market. We have good firepower thanks to the strong balance sheet and solid cash conversion. And that in combination with our well field pipeline of high performers means that we see good opportunities to maintain a good pace going forward.

Over to you, Malin, some more details on the figures.

[Malin Enarson, executive]

Thank you. Yes, our focus on keeping a firm grip on the cost base continued to improve our cost efficiency quarter-by-quarter in comparison to sales, as you can see in the left graph. This, in combination with our company's ability to offset the inflationary pressure, improved product mix and good leverage from both acquisitions and organic growth, defended the margin at high level.

The first quarter EBITDA margin came in strong at 13.7%. When adjusting for the revaluations of contingent considerations and one-offs, which had a net positive effect on profits by approximately SEK 16 million negative effect, obviously, we end up with a very satisfying 14% for the quarter. We believe the rolling 12 margin level should persist throughout the fiscal year.

Inventory levels is a concern and a key topic for the management team. The buildup over the last 2 years is primarily driven by the strong sales growth and of course, fueled by the supply chain restraints. The last few quarters, we have seen a steady improvement of inventory levels versus sales, which is reassuring and the trend we expect to continue, even though during Q1, we saw a flattening out, which, of course, is a disappointment. This is something that I know that my colleagues in the business area teams have full focus on, so I'm convinced that we will soon be back on track again.

Our profitable working capital remains on a high level, thanks to profit margins and overall efficient management of working capital. I'm also very pleased to conclude a strengthened cash flow and cash conversion also in this quarter despite the continued growth and continued improvement is primarily driven by the high margins and the improved working capital development relatively to the same period last year.

Our financial position is strong and improved sequentially, which is pleasing and despite the high acquisition pace during the quarter. The KPIs are fluctuating over the year, but are on average at satisfactory level. Our interest rate sensitivity is very low, and we don't foresee that the market interest hikes will impose any restrictions on our strategy in the foreseeable future. We have come to the headroom to support our ambitions going forward.

[Niklas Stenberg, executive]

Thank you, Malin. So if you look ahead, despite the uncertain macro situation, my confidence in the resilience of our strategic positions, partly driven by the green shift in the society remains. And the outlook for the coming quarters is good. And as I already said, we currently see no signs of a general slowdown in the business, and we have well-stocked order backlog with good quality, which, as I said, strengthened further during the quarter.

So the market varies in different segments, but I'm firmly convinced that our ability to quickly adapt to changes in the business situation means that our companies will continue to create conditions for long-term profitable growth and take the opportunities that also rise in whatever business climate we are in.

So finally, to sum up, I am pleased with the quarter. We concluded a very strong start of the year despite the tough comp, continued growth and improved profitability. And we strengthened the backlog, as I've been saying a couple of times.

And about the outlook, it will be the same message as for many quarters now, for the coming quarters is good. But of course, we are humble how the macro uncertainties around us will affect the future market conditions. So I think the final word here would be then, as I also point out regularly, that we keep one foot on the gas and one foot on the brake, and make sure that we continue to develop in a good way. So that was that.

Now I'm looking forward to some questions. Please go ahead.

[Operator]

[Operator Instructions]

The first question is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. A few questions. Firstly, I mean, is it possible to sort of give any flavors on sort of the demand development during the quarter, sort of month by month? And if you have seen any big changes in that situation in any of these segments?

[Niklas Stenberg, executive]

Yes. We saw an improvement on demand during the quarter. So sequentially in the quarter, month by month, was a positive development, I would say, more or less across the line. So from that perspective, it's clearly a positive development.

[Carl Ragnerstam, analyst]

Okay. Sounds good. And also, I mean, look, you said that the backlog strength, and I guess that means a positive book-to-bill. Is it sort of -- is it possible to quantify the book-to-bill during the quarter? Or is it just above 1? Or is it...

[Niklas Stenberg, executive]

Yes, I would say, I mean, it's -- I guess, you can say just above 1. And that is also, I would say, broad based. It's in all business areas apart from Industrial Solutions, and that is because of the very, very tough comps on the sawmill order intake last year. So if you take that aside, then we have a positive book-to-bill in all of the business areas. And that's, of course, strength. It's a broad-based situation.

[Carl Ragnerstam, analyst]

Okay. And but in Energy, you at least wrote the report that the number of the projects decreased during the quarter. Could you just remind us, maybe I entered the call a bit later, but what is behind that?

[Niklas Stenberg, executive]

Sorry, what is...

[Carl Ragnerstam, analyst]

Behind that, the number of -- yes, I mean, the decrease in number of completions.

[Niklas Stenberg, executive]

Yes. Okay. Yes, I mean, it's like I said during the call now is that -- I mean, the underlying demand is really, really strong, and we have very, very strong positions. But it varies -- the outcome of the projects varies quarter-by-quarter, and also here, we had very tough comps from last year on that project completion on transmission. So I guess that is the point that we will have a long-term stable development here. But you cannot see that it will increase quarter-by-quarter because it varies due to more external reasons, especially the permit situation that you can read about in the paper more or less every day that is creating a stickiness on this market.

[Carl Ragnerstam, analyst]

Okay. Got it. And then the final question is maybe on the margin. You continue to improve margins year-over-year. Is it possible to quantify what is sort of organic measures? And what is more M&A-driven?

[Niklas Stenberg, executive]

Yes. I mean we have a positive effect on both sides. I think you can say more or less equally positive from acquisitions, but also we still have a good incremental margins. We are increasing the gross margins, as I said, which is very pleasing, and we keep the costs in good control, as Malin indicated before. So it's -- and also very good contributions from acquisitions. So it's on both sides.

[Operator]

The next question is from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just a few questions, please. On the -- you talked about the process industries having a bit of a -- yes, good order book, but maybe some delay in new projects coming in. How do you expect that to play out as we look into '24? Will there be at a certain stage where you will need to make some adjustments to your capacity in this sense? So when does it start to become sort of more of an issue for Addtech? Or is it poor visibility just at the moment?

[Niklas Stenberg, executive]

Yes. I guess you referred to Industrial Solutions maybe or you said Process Technology.

[Johan Dahl, analyst]

I'm talking primarily about the pulp and paper, sawmill, et cetera.

[Niklas Stenberg, executive]

Yes, yes, yes. Okay. Yes. I mean, so as we've been saying before, it's -- when we talk about this, it's primarily the sawmill sector that has had a number of extremely high years, as you know. And we have a visibility a bit into 2024. So at least remaining of this financial year, but of course, at some point -- and there is still a slow development on the market, and that is relating to the high interest rates and the end market consumption of a timber or saw the yes, materials. So of course, at some point, we need to see an increase on demand on these projects so that we continue to fill in the visibility into next year.

[Johan Dahl, analyst]

Got you. And just on the 7% organic growth, do you have any sort of appreciation of what is price in that? And was it close to your expectations when you started the quarter that level? Or was it a disappointment or positive, if you could just add on that.

[Niklas Stenberg, executive]

Yes. I mean, as I said during the call, we are pleased with 7%. I would say this was in line with our expectations. And again, you have to remember, we have 17% organic growth first quarter last year. So it's extremely tough comps. And let's see, what was your other question?

[Johan Dahl, analyst]

Do you have any view of the pricing component there?

[Niklas Stenberg, executive]

Yes, yes. So I mean, when you talk about this price component, of course, you have to bear in mind that this is more of a -- we are trying to make estimations and that is, of course, difficult when you have 150 companies in 20 different countries. But our estimation is that the price component is still on pretty much the same level. So like 30% price, 70% volume. So the inflation is still part of the game.

[Operator]

[Operator Instructions]

The next question is from Johan Sundén from Carnegie.

[Johan Sundén, analyst]

First is regarding wind power segment. You said that you now see feeling the weakness in the segment. Is it possible to quantify the kind of drop you're seeing in organic growth rates to wind power business? And kind of how discussions is developing currently with clients, if the potential kind of improvement in sentiment? Or how should we view that specific pocket?

[Niklas Stenberg, executive]

Yes. I mean as a sum, you could say that the wind power is some 4%, 5% of our sales. So if that is giving some indication on the impact, I think it's to go too much in detail and talk about how much we've seen the drop here. But that is at least the size of the business. And when you talk about the sentiment going forward, I mean, we've been talking about it for the whole year that we've seen a slower pace, especially in demand, and now was the quarter when we actually saw it on the sales figures. And there's a little variations. We are taking market shares on some customers here. And while on other sides, where we have strong relations, the indications is more that the remainder of this year will most likely be on a slower pace, but hopefully pick up during '24.

[Johan Sundén, analyst]

Perfect. And then just a clarification on the book-to-bill. When you say above 1 on -- in this quarter, does that include the quite weak order intake on the sawmill side. So meaning the other segment has a quite strong book-to-bill quite above -- well above the 100 or 1.0 threshold?

[Niklas Stenberg, executive]

Yes. I mean, when we talk book-to-bill, we talk about the entire portfolio, so including acquisitions. So the answer to that is yes. It is including the sawmill. And if you take those out of it, it's also organically on par with last year.

[Johan Sundén, analyst]

Okay. Perfect. Just a final question from my side. It's on the net financial, which was pretty high in this quarter. Maybe it's a question for Malin. But can you give some color on what is the driving force behind the step-up in net financials and how to model it ahead?

[Malin Enarson, executive]

Well, I mean, the -- it is obviously the interest rate mainly, I would say. So I think that for now in the first quarter, I think that we see -- and then, of course, it's also revaluations of the currencies. So I would say that what we see is like [ 86 ] or something that figure. I think that most of it is interest rates. And then it's also revaluation of currency accounts and also derivates.

[Johan Sundén, analyst]

And no kind of color on how much is what like?

[Malin Enarson, executive]

I think that around 2/3 of that is -- maybe not as much, but around 2/3 is interest rates.

[Operator]

The next question is from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

My first one is, we might have touched upon it a bit here regarding the energy product X maybe. But could you just comment a bit more on the comments you made about the battery modules and the battery business there about inventory adjustments and whatever dynamics there are affecting sales figures for this segment.

[Niklas Stenberg, executive]

Yes. So I mean the underlying position we have on the battery market is really, really good. So long-term development here is -- has not changed at all. And you could simplify our battery sales with our core business is customer-specific batteries and the other one is more kind of standard batteries. And what we saw this quarter was, as I said, a very quick release on supply chain and that led to an overcapacity on the market. So the customers came from waiting for a long, long time, building up stock and then realize that we don't need more batteries at this point. So that was an effect in this quarter. And looking ahead, this will have some kind of effect the coming quarter. But it's really difficult to quantify how much and when, but it did have an effect in this quarter.

[Karl Bokvist, analyst]

Understood. And then a bit on, as you commented, with gross margins and so on, but it seems like the underlying profit grew clearly much more than underlying sales. Or do you see any kind of dynamics here that you feel might make this not hold also going forward, if you still see a fairly good demand environment, for example?

[Niklas Stenberg, executive]

Sorry, can you -- what do you mean it's not hold?

[Karl Bokvist, analyst]

No, what I meant is that you still saw good demand, et cetera, and you were happy about gross margin development and so on. So are there any things that could mean that we would see the underlying units having development more in line with our sales figure or any kind of cost figure or some kind of mix that you see that would make us need to take this into account?

[Niklas Stenberg, executive]

Okay. So you mean -- if I understand you right, if the margins are kind of boosted or we'll be able to keep the margins on this level. Is that...

[Karl Bokvist, analyst]

Maybe not boosted, just that the underlying units performed very, very well. And if you see -- if you referenced tougher comparables, if the tough comparables could be even tougher on profit development despite they are tough on sales, but if they are even tougher on the profit development. That is my question.

[Niklas Stenberg, executive]

Okay. So yes, I can -- if I start, maybe you want to add something, Malin, but I would not say that, I mean, because if we look on the product mix this quarter, if we look at what's coming ahead, if we look on the OpEx development and also on the gross margin side. At this point, I don't see -- and you also mentioned before, Malin, that we foresee at this point to be able to keep the rolling 12 margins. So no, I don't see that's coming.

[Malin Enarson, executive]

No. No, I agree. I agree.

[Karl Bokvist, analyst]

All right. And then also just it's early days, of course, but based on what you do disclose about the acquisitions, they seem to contribute with very high margins. Are there -- is there any kind of particular acquisition you made recently that explains this? Or is it still at the kind of group of companies you have acquired all have very good margins?

[Niklas Stenberg, executive]

Yes. I mean I would say that it's more broad-based. I mean, of course, it varies, but it's not -- I would really say that the acquisitions overall has performed very well. And this is an effect of what we've been talking about for a couple of years now that we are much more focused now on ensuring that we acquire companies with good margins. And that has a very good position and possibility to grow. So it's more the portfolio that delivers.

[Karl Bokvist, analyst]

Understood. And my final one is just more of a perhaps technical thing. But if we look at the growth figures from last year, they are -- the growth figure for, let's call it, your fiscal Q2 last year, those year-over-year figures do not deviate too much from the year-over-year figures we saw this comparison period. So I just want to understand if you feel there's anything other that you feel is important when it comes to comparisons and tougher comparisons for the next quarter?

In case to any particular project deliveries or any particular margin effect just to understand or if the comparisons are pretty similar, both the next quarter and as we saw this one?

[Niklas Stenberg, executive]

Okay, that's difficult to remember from the top of my head, but I would say it's probably -- as I can recall, there was not any like particular things happening last quarter. I think it's tough comps...

[Malin Enarson, executive]

A very strong quarter, but I don't think anything special.

[Niklas Stenberg, executive]

Exactly. No, exactly.

[Malin Enarson, executive]

Tough comparisons but...

[Niklas Stenberg, executive]

Yes. And I mean that is what we are in now. I mean we will face tough comps going forward, of course. But your question is -- the answer to your question is that it's a similar situation as this quarter.

[Operator]

This is the conference operator. There are no more questions registered at this time.

[Niklas Stenberg, executive]

Okay. So -- then I guess we conclude here, and thank you for listening in. And I also wish you a great summer, and we'll talk later on. Bye-bye.

[Malin Enarson, executive]

Bye. Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.