Addtech AB

STO:ADDT B

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. This is the conference operator. Welcome, and thank you for joining the Addtech AB Q3 Report Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Niklas Stenberg, CEO; Malin Enarson, CFO of Addtech AB. Please go ahead.

[Niklas Stenberg, executive]

Thank you, and good morning, and welcome, everyone. We will summarize the quarter and then open up for Q&A as always. All in all, we can conclude another very strong quarter. The high customer activity and the favorable business climate for our companies continued in the third quarter. Very solid contributions from all business areas and net sales grew with 30%, of which 14% organic, despite tough comps. Of course, very satisfying to see that we managed to improve our margins, despite continued high inflationary pressure. And this is primarily thanks to all hard work out in the companies and a good proof of the strength in our business model and culture.Our EBITA increased 37%, with a historically high margin of 13.5%. That you should adjust for revaluation of content and purchase price, then we have 13.1%, which is still a very high margin. And the margin improvement is broad based. So very satisfying that our positive profit trend is continuing due to the very solid demand in basically all segments and geographies, the order intake continued to be strong and the order backlog as we write in the report increased in the quarter.The macro situation, as we all know, is highly uncertain, and we follow this development, of course, closely. But at this point, we see very few clear signs of a slowdown in underlying customer activity, but of course, well prepared for potential tougher market conditions. If we go deeper into the sales, as I said, strong growth, 30% on aggregated level and supported by double-digit numbers in all business areas, and as I said, despite tough comps.Organic growth, 14%. And if you take out the price effects, we still have double-digit volume-driven growth. So that is a very strong sign. If you look at the bottom graph of the picture, the key strength in the quarter is that the growth is really across the board. In terms of growth in the quarter, automation, electrification and energy are the key drivers. And if I was to highlight some segments or areas standing out in terms of customer demand, it's continuously the power grids in energy, further increased demand for solutions in energy efficiency; and finally, continued high activity within the defense industry.And as I said in the beginning, satisfying to see the continued high activity and that the order intake continued at high levels and the book-to-bill strengthened across the border in the quarter. The subsiding disruptions in the value chain continues. So the lead times are slowly going back to normal. It's early to say that the challenges are behind us. We still are struggling in some parts. So clear focus on -- still on active dialogs with both customers and suppliers.If you look at earnings, the positive trend continued, as I said, and strong EBITA growth in all business areas. So it's really due to the active efforts to offset price increase and also keeping a strong grip on the cost base that has led to this and improved margins from high levels. It's a good development in acquired companies, and we also have a positive contribution from currency, but it's primarily the strong organic sales that have given this strong outcome.Of course, also positive to see, we continue to strengthen the operating cash flow. So the effects from higher inventory levels were clearly offset by the strong results in high margins. Also, our super capacity measurement [ RQ/RK ] remained at very high levels, over 65%. We will come back to this within short.Very short comments on each of the business areas. As I said, automation, very good market situation in the quarter. The overarching positive trend remains in the key markets, process mechanical industry and also medical technology and the increased demand from defense industry continued and together with an ease of the component shortage and shorter lead times, it had positive effect on the sales.Margins a bit down sequentially in the quarter, but this is mainly related to seasonality effects and some product mix. Electrification delivers another strong quarter, strongest development within electronics and special vehicles. And here also, we have some positive effect on the increased demand from defense. The remaining main segment for electrification had a stable market situation. Also in electrification, margin sequentially a bit down in the quarter, same reasons as mentioned above. So the margins in automation and electrification remain at good levels and in line with our expectations.Very solid business situation in energy, demand from infrastructure products within transmission and distribution continues to improve from already high levels. We also see an increased demand in the quarter from customers within building and installation. And we're looking at this sector, we are primarily exposed to hospitals, data centers and infrastructure and those kind of segments.Also the expansion of fiber optic networks and installation products, the manufacturing industry had also strong market situation. The wind power segment continued to trend slightly weaker as we've been indicating a couple of quarters already. And this is more of a structural change in the wind market, the shift from onshore to offshore wind mills that is causing a bit of a slower pace.Industrial Solutions remained strong, very tough comps for this business area. And the sales in forestry and sawmill industry remained stable at high levels, but the flattening in demand for new investment projects. But this is, as we've also been talking about earlier quarters, quite undramatic and we have a solid order backlog with the visibility into 2024. Also very satisfying that customer activity in waste management continues to increase and also solutions for special vehicles remained stable at high levels.And last, Process Technology also delivers a strong third quarter. Marine, special vehicles, energy segments sticking out most positively. And in the marine segment, we now see a clearly positive trend from low levels, and I would specifically pinpoint the service and replacement part of the marine segment.So summarizing our first 9 months. We conclude a very solid period, organic growth of 17% in the period. EBITA growth even stronger with 39% and the margin accumulated of 13.3%, despite the inflationary pressure on almost all inputs. And cash flow in the period improved year-on-year. The bottom line, we generate earnings per share for our shareholders, an increase of approximately 40%. So a very strong period.Looking at acquisitions, we continue to deliver in accordance with our growth plans, 10 acquisitions so far and total annual turnover that we have added is SEK850 million approximately, and we have welcomed 250 new colleagues in these acquisitions. In terms of geography, we continue to increase the number of acquisitions outside of the Nordics, and this is just according with our ambitions to be stronger on selected markets and segments.And in general, looking at the acquisition market, we continue to have a positive view here. We are working actively to fill and process that attractive pipeline, and we have a lot of ongoing projects in different stages. One example of an attractive acquisition that we did in the Dutch company, AVS that we did in the quarter, and into the Process Technology business area. It's a very excellent complement to this group. It has a turnover of SEK140 million, as you can see, with good margins. And AVS develops valve solutions to the power generation market, and we are developing different kind of solutions. One example is a unique fast start/stop solution for natural gas power markets. And this is a functionality to balance the share of renewable energy into the power systems. So we're very excited about this acquisition.Over to you, Malin.

[Malin Enarson, executive]

Yes. Thank you. As Niklas said, the development in sales has come from a very good and broad business situation as well as a very strong order backlog. Our profit margins continued to improve during the period, thanks to the strong growth in sales, together with our company's ability to offset price increases and overall good cost control.In the quarter, the operating margin was strong at 11% adjusted for the revaluation of contingent considerations, which had a positive effect on profit by approximately SEK20 million. We believe this margin should be able to proceed throughout this last quarter of this fiscal year.We are happy, of course, to conclude strengthened cash flow during the quarter, mainly due to contribution from higher profits and continued strong margins, but we also saw a release in working capital this quarter. Inventory levels rose so, but are still on normal levels in relation to the order backlog.We saw a sequential decrease in inventory versus sales in the quarter, which we expect to continue. Inventory levels is a key topic for the management team right now. Our profitable working capital remains on high levels, thanks to profit, margins and overall efficient management of working capital.Our financial position remained strong and improved sequentially as expected. Our key KPIs are at normal and satisfactory levels. We have no worries for our interest rate sensitivity. It will not impose any restrictions on our strategy in the foreseeable future. We have comforting headroom to support our ambitions going forward.

[Niklas Stenberg, executive]

Thank you, Malin. As I mentioned, of course, we also read the papers and the macro climate remains uncertain. And we are, of course, humble and follow this development. If you look at this picture, I usually show this, it's our 5 areas for future growth. And they are all strategically chosen areas where we have structured underlying growth, growth drivers that are linked to macro trends, especially the green shift. So we have the industrial automation, power transmission, electrification of society and emission reduction, et cetera.So even if the last quarters, we have had a very broad-based growth with strong contributions from all segments, we are prepared. And the point I want to make is that we are well positioned and have growth. We see potential growth in a number of areas, irrespective of the general business climate.The position is key, but the most important factor for our success, as we always talk about, is the well-proven business model with the entrepreneurial led and the centralized companies too. But as in this quarter and the period very quickly can adapt to handle challenges and capture the opportunities that arise. So these 2 combined makes me fully confident that we are well prepared for the future.To summarize before we go into Q&A, another strong quarter, solid growth, and we defend our margins at satisfying levels. Our acquisition engine is running, and we have welcomed 10 more companies so far, and we have a well-filled pipeline and good firepower. And with a clear -- very few signs of a slowdown in underlying activity, we are prepared to act if and where the business weakens and on the other hand, to continue the growth journey in other areas.Last but not least, in the quarter, we signed the science-based target initiative, and this is yet another sign of our ambitions within sustainability and our willingness to contribute to reduction of CO2 footprint. So we're proud to make this commitment and are convinced that it will benefit us as a group and for our individual companies as well in different ways.Thank you, and let's see if we have some questions.

[Operator]

[Operator Instructions] The first question is from Johan Sunden of Carnegie.

[Johan Sundén, analyst]

Congratulation on good results. I have one question. It's on the margin. You have earlier commented that the margin profile for the full year should not decline compared to where we are on, say, year-to-date or a rolling 12-month basis. Given that you haven't had so much support from pricing yet, how kind of -- how or should we be for increasing cost ahead.

[Niklas Stenberg, executive]

Okay. So when you say we haven't had support from pricing yet, can you elaborate a bit on what you mean by that?

[Johan Sundén, analyst]

Yes. If you said that you had an organic growth of, say, 14% and about volume was over 10% of those 10 percentage points of those 14%. We have inflation in the economy that's quite much higher than 4% in general. So it should be -- you should have had quite much support from cost savings.

[Niklas Stenberg, executive]

Well, I guess, one answer, as Malin indicated, I mean, our best judgment at this point is that for the short term, we should be able to protect the margins at this point and to continue to push further the price increases. I mean, we still have price increase, but it has eased up, I would say, if you compare it to the situation we have been in. So we don't foresee that we will have a change in -- at least in the short term. What will happen in a bit longer perspective, it really depends on where the inflation is getting. Of course, it will be harder and harder to increase prices going ahead. If that answered your question.

[Johan Sundén, analyst]

Yes, maybe a clarification. So on the full year, this kind of current run rate of, say, 13.2 percentage points, 13.3 percentage points in the margin shouldn't be tough to meet at least.

[Niklas Stenberg, executive]

Yes, I think that is what we have indicated, yes.

[Operator]

[Operator Instructions] The next question is from Dan Johansson of SEB.

[Daniel Johansson, analyst]

I had 2 more questions here, if I may. Maybe I'll start with a question on working capital. It was a positive contribution now and you said that supply chains are easing a bit, and I guess growth will start to normalize a bit going forward, although it's on a high level. So should we expect you to continue to sort of improve on working capital here going forward? Is that your expectation here for the coming quarters?

[Malin Enarson, executive]

Yes. That is our expectations. Absolutely. Of course, as long as growth continues, that makes always the working capital a bit of strength. So of course, we hope for continuous growth. And therefore, we are not, of course, absolutely sure what happened to working capital, but our expectations is that it will continue to ease.

[Daniel Johansson, analyst]

Okay. Sounds good. Perhaps the last question or one more question at least. If you could share some more light perhaps on the order intake. I think you mentioned, Niklas, that book-to-bill strengthened a bit. Is it strong across the board like your revenues right now? Or is it any particular segments driving that still a very healthy order growth? And perhaps also if you can give some -- is it growing also in terms of volume? Or is -- or yes, how does it look in terms of the order intake here?

[Niklas Stenberg, executive]

Yes. I mean it's really across the board, and that is what is, of course, most satisfying for us. I mean, so it's across the board in all business areas, but it's primarily in the energy sector that is sticking out a bit on the positive note.

[Daniel Johansson, analyst]

Okay. Sounds good. Interesting. And perhaps maybe a final question as well. I mean in terms of your acquisition dialog, how is the inflow of new dialogs here? Is there a lot of available targets? And I mean, is it a struggle to perhaps come across in terms of prices, et cetera? I guess, some companies you're looking at perhaps seeing a bit of a slower market, but are price expectations or multiples coming down a bit as the market is coming down? Yes, what do you see in terms of acquisitions here?

[Niklas Stenberg, executive]

Yes. I mean our view of this is that the companies that we are interested in, we really share or pick the companies that usually have a very strong track record and strong positions on the market. In general, I would say they still have a quite optimistic view of the situation. Most companies have not seen any clear signs of a decline, which means that they usually don't sell their companies quickly with the rebates. Instead, they prefer to continue to run until we are prepared to pay whatever they want. They are not thinking in terms of multiples, they're thinking in terms of a price target.So I would say it's a continuous good acquisition market. The deal flow is good. I mean we are always looking into and discussing with several hundred companies, still the same way. And we are still getting some still deals coming into the pipeline. So I really don't see any big change at this moment. And I think we have to see much more clearer signs of a slower market before we can start talking about the general price reduction.

[Operator]

[Operator Instructions] At this time, there are no questions registered. Would you like to add some closing remarks?

[Niklas Stenberg, executive]

No. Thank you, and have hoped for some more questions, but it's a busy day. I know that. So with that, I think we conclude and say thank you, and have a good day.

[Malin Enarson, executive]

Thank you.

[Niklas Stenberg, executive]

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