Addtech AB

STO:ADDT B

Earnings Call Transcript 2022-Q2

[Christopher Casselblads]

Good morning, everyone, and most welcome to our second quarter results presentation. My name is Christopher Casselblads. And with me here in the room, I have Niklas Stenberg, our CEO; and Malin Enarson, our CFO. The setup is, as usual, we will spend approx 25 minutes to go through the details in the report and then open up for questions. With that said, I leave the word to you, Niklas, please.

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

Thank you, Christopher, and good morning, everyone. Welcome to this presentation. To start up with a little summary, it was, of course, a great pleasure to conclude another strong quarter for Addtech. Very good underlying demand in all key segments and high activity is the most important part of it. It's very satisfying to see again how well our entrepreneurs continue to handle operational challenges. Now, of course, component shortage, price increase and the transport costs, et cetera. Strong market in combination with good cost control and well-handled cost inflation gave an EBITDA growth of almost 40% and a record high margin over 13%. Looking at cash flow, it remained stable, primarily thanks to strong profit generation, of course, partly offset by receivables and inventory buildup to fulfill customer demand. All in all, very satisfied to see our [ R/RK ] reaching top level over 60%. During the quarter, we also launched a new sharpened organization. I will come back to that later. So looking more into sales development. As I said, the strong underlying demand and good acquisition pace gave 20% with solid contribution from all areas, an organic increase of 10%. Worth reminding here is, of course, how we were affected last year by the pandemic. We had very limited positive effects from COVID business. Rather, we had quite tough situation in especially marine sector, but also mechanical industry, special vehicles where customers really pulled the hand break. So if we then take 2020 out of equation and compare it to 2019, we can see that we have underlying growth in all business areas, so a positive situation. A lot of work have been done, as I said, to make a walk around for components and alternatives. As one of our company's MD has put it to me last week, he said "It's not that there aren't components in the world, but you have to fight to get to the top of the priority list." And I think that says quite a lot about the situation. Our best judgment, as I write in the report, is that on the total sales of Addtech, we've been able to deliver more or less in the space that we have wanted. So we have been able to fulfill our customers' demand to a large extent. What stands out from a market perspective, sales of input components to manufacturing companies stands out very strong. Approximately half of Addtech sales are OEM business, where we generally experience a strong momentum now. Still positive trends as previous quarters in forestry industry, wind power and electronics. Marine sector are -- is still unchanged at quite low levels. But the order situation is very good. We continue to build order stock. We've done that since November last year. And the extraordinary high demand situation because I think that's the way to put it. It's a mix of backlog from last year's project that was postponed to some extent, customers stockpiling for long lead times, but primarily, it's an increased end customer demand that is behind these figures. And the second quarter also strong as from an EBITDA perspective, as I said, up almost 40% and both organically and complemented by acquisitions. Besides the strong market, the fact that our cost level is still relatively low, continues to be part of the explanation. We got full effect this quarter from the measures we took last year just as expected. And again, good work from our customers in relation to price inflation that gives us this high level margins. But the upcoming quarter, we expect cost levels to normalize. Of course, the companies are now entering a much more forward-looking mindset, which means that we will gradually increase the cost going forward. A picture to summarize shortly development in each of the business areas. Every business area have organic growths and also good from -- input from acquisitions. Automation, very good demand on the major segments, especially strong recovery from companies outside of the Nordics, where we have really tough situation last year. And in automation, taking 2020 out of equation, we have growth in all 3 business units, Motion & Drives, Industrial IT & Sensors and Fibre. And very strong margin development here, primarily thanks to operational leverage. Components then, very good momentum. Just as automation components is to a large extent related to OEM customers, so more CapEx-related business. Strong growth here on most segments and geographies. It's actually only in Norway that is still on a low level activity. Finland experiencing very strong growth. We have good positions on medical and electronic markets that is going well now. And Denmark continues to be strong, especially our sales to wind power is continuously on a high level. Good effects from efficiency measures made last year in components that is giving good leverage on the margin. Energy is the area where we have a quite tough comparisons and it had a very good year last year. So the comparably low growth level are in line with our expectations. Building installation market is getting stronger for our companies and also OEM markets for electrical material is picking up. Also positive to see is that the projects on the transmission side, so for the natural grids, the project inflow are coming in again, which is very good, but more affecting, I would say, '22, '23. So our next financial year. But all in all, a very strong stable quarter. Industrial process, looking at last year, a very tough situation. We lost, as you probably remember, quite part of the scrubber business then and also mechanical industry were hampered by COVID. Now I would say that most segments are strong, except for marine segment that is still on a quite low level, both scrubber, but also marine in general, it's still quite low activities on new builds, et cetera. Sawmill market has still very positive momentum. We saw record high prices on [indiscernible] earlier this year, and that has come down a little bit, but there is still a very good investment climate on that market. Margins for industrial process. Again, I'm repeating myself here, but very strong contributions from acquisitions, but also good leverage from sales volumes. And finally, Power Solutions, also a tough situation last year. Special vehicles is the biggest customer segment here, losing about 30% of the volume comparable period last year. And now that market is back on growth also compared to 2019 and a good sentiment here going forward. Another segment to mention is the Battery Systems stood up good last year and have a very interesting market situation now. Of course, issues will long lead times. Everybody wants battery cells in the world, which means some inventory buildup. But strong margins here as well if we take into account the restructuring costs in the quarter. Very brief summarized for 6 months. Yes, 2 strong quarters in a row, increased sales by 18%. Acquisitions is doing as they should. And stable, good organic growth and a record high margin also accumulated. We will come back later to cash flow and working capital. Acquisitions, as you all know, an important part of our strategy -- growth strategy. We have done 11 acquisitions so far, adding about SEK 840 million. We continued this quarter, making 5 selected companies and 2 also after the period. And it's very positive to see that our ambitions to grow outside of Nordics is increasing. So the last 3 acquisitions, for instance, is 2 in Germany and 1 in Netherlands and also in 3 different business areas which is very positive. So -- and looking at the acquisition pipeline, it still looks good. It's also positive. We can now, in a larger extent, we're out drinking coffee again and meeting -- building up the pipeline even more. So it looks promising. Over to you, Malin.

[Malin Enarson, Chief Financial Officer]

Yes. Thank you. The development in sales in the quarter as well as in the period has come from a good demand situation in mainly all of our important market segments, as you heard Niklas talk about. With professionally protected gross margins and continuously low costs, we achieved a very satisfying and increased profit that significantly exceeded the increase in sales. The good leverage from the organic growth, together with contributions from good margin acquisitions gave us record high margins for the quarter. We talked in the end of last year about the fact that we expected our margins to get boosted during the first 2 quarters of this year due to sharp efficiency measures last year. And that is what we see now. Our costs remained low due to the fact that volumes have increased without the need of extra hands and feet so far. We actually still see an organic decrease of employees, and this is mainly due to the measures taken already last year, where we laid off approximately 8% of the workforce. But low costs are also explained by marketing and travel costs. It's not yet back to normal levels or maybe we should rather speak about the new normal. So we expect the costs maybe to increase, but not yet back to where they were before when it comes to marketing activities and travel costs. In our prognosis, we have expectations of rising costs going forward due to increasing marketing activities throughout the organization. So margins should stabilize on a somewhat lower level than we see for the period, accumulated even though we expect margins to be good for the year as a whole. We had good cash flow also in the second quarter, even though somewhat lower than comparing period. The rate in profit is, of course, the main reason for this. For us, cash flow is translated down to profitable working capital, as you well know. And the equation right now gives us record high profitable working capital at 61%. As I mentioned, mainly due to high profit and margins, our working capital is bound to raise for the moment, both due to the increased volumes. That means more capital is tied up in accounts receivables, but also due to the fact that we need to allow inventory levels to rise due to component shortages and long lead times. Satisfying to see that our turnover rates are going in the right direction in all constituent parts of working capital despite the before-mentioned issues. Volumes increases more than capital tied up. Looking at our key KPIs, like equity ratio, leverage and gearing, we see that we are now back to normal levels, which is very satisfying given that we have a high acquisition pace continuously and a normal dividend payout affecting the period. The trend line of our gearing is in perfect line with expectations with the highest level always during the second quarter. Our credit facilities have comforting headroom and are sufficient for our ambitions going forward.

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

Thank you, Malin. What you see in this picture is the yearly development in organic and acquired growth the last 20 years. And one of the important key success factors for Addtech is to have a strategic mix between organic and acquired growth. And from a profit growth perspective, over time should be equally generated by these two. If we take out the years with very specific crisis like the IT situation, beginning of 2000 financial crisis and now the COVID far to the rise, as you can see, we have kept up a good, stable organic growth and also kept up a good acquisition rate. And organic growth has, in general, been some percentages better than industrial GDP. So besides the fact that organic growth generates a better return, it's also proved that our decentralized culture combined with active ownership works well over time. We strongly believe that best decisions are made close to the market. And I would say that this quarter that we are presenting now is one very good example of that. And if we move to this slide then, it illustrates primarily just what I said that for Addtech the companies that you see on the outside of the picture are the heroes. And if they, in addition, feel powered by Addtech, then we have succeeded. So to secure that our entrepreneurs have their eyes on the core business and their challenges, we support them in various areas such as sustainability. And the network is another very important key factors for the companies. So for us to be able to open up the network and make it possible for co-creation and sharing best practice is very important. And I would say the way how we cluster our companies is one of the things that differs Addtech from other compounders. And looking at this picture, we are celebrating 20 years as a separate listed company this year. And when summarizing, we can -- as you see in the picture, proudly report an average annual profit growth of 18%, while our own ambitious targets of 15%. And also worth noticing is that we have made this without any capital infusions and keeping a relatively low leverage on the balance sheet. And to take us over to the next final picture here then is that one key success factor is that we are never satisfied. We always adjust and sharpen the setup. And what you see in this picture is the new organization from 1st of October. We will come back with more detailed information and pro forma figures as soon as possible. Our organization is working on that, but we will report it in Q3 report. But very briefly, bottom line, the change is quite undramatic to recluster it something we do periodically in order to improve and secure the network that we get the best out of the network. But of course, we keep entrepreneurial focus and the organization model with business areas and business units has been the same since 2008, and we are very satisfied with the setup. So briefly, what is it that we have done now? Well, it's a way to make it even clearer where we see future growth. So it should be even easier for both internal and for capital market and acquisitions to see where we see the pockets of growth going forward and also to secure that we have the right people in the right spots. So as you can see in the picture, the names of the new business units and in the bottom of the picture, some of the growth drivers that is, we believe will drive future long-term growth for Addtech. So it's very, very positive, and we have a good feeling about this in our organization. So to sum up, strong underlying demand as we see a limited effect from component shortage, thanks to extremely hard work of all of our entrepreneurs. We keep up the high acquisition pace and looking good also forward. Strong EBITDA growth, almost 40%. And as Malin indicated, good cost control but also primarily strong market development and the new organization from October 1 to really capture future growth. Finally, looking at the future to come, we estimate that the demand will stabilize on a high level as supply chains will gradually normalize. We have a strong order stock, as I talked about in the beginning, which is, of course, positive. The cost base will increase as the companies are entering into growth mindset. And of course, I have to put in as well that certainly, there are still challenges and disruptions and long lead times, et cetera. So it will most likely be period also forward where we have to continue to work very hard with that. But all in all, we are very satisfied and looking forward to the coming quarter.

[Christopher Casselblads]

Okay. Thank you, Niklas. Operator, we are ready for questions.

[Operator]

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

[Carl Ragnerstam, Analyst]

It's Carl from Nordea. A couple of questions from me. You stated that your backlog is further strengthened. So I guess it's fair to assume that the order intake is -- or was above 10% in the quarter. I guess, could you give any figure of the order intake growth and also, of course, which segments that are the primary growth drivers.

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

Okay. So as you know, we don't reveal numbers of the order intake. But I mean, we have a positive book-to-bill in the quarter and also accumulated. If that was your question, you talked about 10% growth. We have a positive book-to-bill, and we have also continued to build up the order stock. So from that perspective, we have more in the books to put it that way. If you look on where we see it, well, as I said in the beginning, the OEM sector has been -- has had a very strong demand and that is affecting automation and components, primarily. And then, of course, in the industrial process, we have also good inflow. And sawmill market is one of the areas where we still see a good investment climate. But again, I would say it's pretty much overall the line, good situation.

[Carl Ragnerstam, Analyst]

Perfect. And we have discussed before pre-buying effects or inventory build-up effects from your customers. Is it possible to quantify it in the quarter? And when you say that supply chains will normalize, is it fair to assume that when entering next quarter, we will not see an inventory buildup anymore?

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

Yes. I mean to quantify to what extent there is some kind of stockpiling, it's very difficult to actually pinpoint. Our best estimation is that in the total, if you look at in order stock, in total, we don't see that, that is the primary effect. To some extent, there are some customers ordering more than they need at the moment. But in total, I would say that's not the main effect in the demand. It's more real demand and customers that are using as much as they can to produce for end customer demand. And when I talk about normalizing going forward, I hear a lot of different things. And of course, this differs from market to market. My best estimation at this point is that we will -- I think I've said it before, I think it will be a couple of quarters ahead where we have to continue struggling. I think it's sometime into 2022 before we see some clear normalization. But from a stockpiling point of view, I don't see -- at this point, I don't see that, that should increase. It's a high end customer demand that is driving the growth.

[Carl Ragnerstam, Analyst]

Sounds great. And also, when you said on the cost ramp-up, do you expect costs to relate to fair selling and marketing to go back to the pre-pandemic levels? Or do you expect to retain some of the cost savings you implemented? And also, have you thought about changing your approach when it comes to attending fares to go more digital? Or do you -- I guess, need to have a certain presence in order to defend your market shares?

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

Yes. Absolutely. But I mean that's, of course, a very relevant question. I think Malin touched that a little bit earlier that our best estimation at the moment is that -- to some extent, it will be a little bit more effective way of approaching going forward. It's also a matter of the fact that the customers also change their behavior. So if you take exhibitions and fares, some of the market segments are very traditional, are moving back to physical fares with a lot of people and products in big exhibition halls. But there are also many market segments where the customers prefer to meet digital. So we have changed the approach in many of our companies during the year in the segments where it's relevant to work in a different manner. So the costs will increase and come back and -- but probably not fully back to where we were.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And the final one from my side is on Energy. I mean it's always difficult to assess, but it looks like you returned to organic growth in the quarter. Would you say that the grid market is coming back after a pause or is it -- or should we still expect sort of a mute demand the coming few quarters here?

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

Yes. I mean, we have said all along that last year, this transmission market is going a little bit -- every second year is a strong year. And then it's time to go out and build everything up. And we have said all the time that this year will be a little bit flattish. As I said, we see now that the project inflow is really coming back, primarily affecting next year, it's projects to build up next year. But I think it's fair to say that at least to some extent, we will see an increase also this year, that could give a little positive impact. But it's not like overnight, we're coming back to huge growth. But the projects are flowing in, and that's the most important part for long term.

[Carl Ragnerstam, Analyst]

Yes. And when you say next year, is it 2022? Or is it the next calendar year for you? Or how do you define it?

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

It's primarily our financial year '22/'23.

[Operator]

[Operator Instructions] The next question comes from the line of Johan Sundén from Carnegie.

[Johan Sundén, Research Analyst]

Yes. A few questions from my side as well. The first one relates to Power Solutions and the restructuring that you took this quarter. Can you precisely give some more color on what that was for and what to expect kind of future efficiency gains from that measures?

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

Yes, it's more relating to -- in combination now with the reorganization we did some changes in the management. So it's more of a onetime cost relating to the new organization. So it's not like a long time saving. Well, maybe a little bit, but not that will really affect the margins long term.

[Johan Sundén, Research Analyst]

Perfect. And then also on to the supply chain situation. You stated during the presentation that you have had discussions with one of -- one person in your branches. And that said that you have to fight for being a prioritized supplier to get your hands on components. Should we see a risk that you have been prioritized during this quarter and maybe they will prioritize any other supplier during the upcoming quarters? And how has the kind of supply chain situation developed sequentially during the quarter? Is it basically the same as it was when we entered the quarter? Or has it been worse or be improved?

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

Yes. Coming to the -- your first part of your question, I would say more that the story I said I mean it was one of the managing directors in one of the subsidiaries. I think that gives a very good flavor of the upside of working with small niche companies that are really on their toes. And so I don't see any risk that we will now solve further down in the priority list. It's just a matter of having good relations and really be on the toes. And that is what our company is over and over again, show that they know how to deal with it. Second question, my best estimation talking to all of our companies is that -- is more same-same, I would say. It has not been much improved, but it has not been worse either. So it has been a constant challenge. And some -- again, 140 companies, some are saying that now it's getting more or less back to normal, and some of them are saying that it might even get worse. But in total, I would say, same-same.

[Johan Sundén, Research Analyst]

Perfect. And on the Marine side and on Norway, which maybe our 2 pockets that doesn't are performing as well as they can do. How are you thinking going forward there? Has there been any kind of improvements in discussion with clients on the scrubber side and also on Norway and oil and gas segment, we've seen oil prices coming up quite significantly and natural gas prices also very high.

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

Yes. If we start on Marine side. Yes. I mean, at the moment, the activities are on a stable low level. There have been some increased discussion about -- especially on new builds, refurbishment, I think will not come back in quite period. So maybe a little improvement might come on that side. Marine, in general, for us, it's some service installation, et cetera, on ships. And that is opening up now when we can enter back to ships. But if you look on the total sales, that's not affecting so much for us. If we then go over to Norway and the oil and gas sector, first of all, it's important to note that for us, this is a quite limited amount of business that is directly reflected. It's just maybe 2%, 3% of our total sales that are directly affected by investment in oil and gas, but it's kind of hampering the other sectors in Norway as well. We get a little bit positive signals there as well that the investment might increase a little bit, but nothing that we really see yet in the figures.

[Operator]

[Operator Instructions] The first -- another question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

Sorry, I was late to the call, but would you possibly be able to say roughly how much your acquisitions contributed year-over-year to earnings in the quarter? Just a fair assumption there.

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

Year-on-year accumulated?

[Johan Dahl, Analyst]

No, in the quarter, I'm just trying to figure out here, I mean, either it's driven by the acquisition. Margins were really impressive. It's either acquisitions contributing much more than perhaps I had expected or it's something else that driving margins or -- is if you could clarify, is it price? Is it -- what is the product mix when you look at the group in total, and some clarification for it?

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

Yes. Okay. So generally, you can say that acquisitions are contributing more or less in line with our total margin. So it's a good contribution. But the big margin effect comes from the organic growth and good leverage on that. And as we've been talking about during this presentation is that the sales have picked up much faster than the costs level have picked up. So coming quarters, we will see that costs will rise since we are now -- many of the companies are now in a forward-looking mindset, but the cost levels are still quite low, and that's why we get this kind of upside on the margin. That's the main reason, more than product mix or something like that. And it's broadly basically all over the business.

[Malin Enarson, Chief Financial Officer]

And also protected gross margins.

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

Yes. Yes. Also, we've also been talking, of course, a lot about the price inflation and the fact that the companies have in a very good way been able to put that forward. So stable gross margins and low costs.

[Johan Dahl, Analyst]

Yes. I mean because just doing the math here swiftly, it seems that you got the whole 30% gross margin through to the bottom line on that growth. And in addition, some sort of price increases accretive turning? So is that sort of the correct way of viewing it or...

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

Yes.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions at this time. Please continue.

[Christopher Casselblads]

Okay. So in that case, I think we conclude today's webcast. Thank you all for participating and take care. Bye bye.

[Operator]

Bye.