Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2022-Q1

[Kristofer Berggren]

Hello, and welcome to this Q1 presentation with Sdiptech. With us today, we have CEO, Jakob Holm; and CFO, Bengt Lejdstrom. My name is Kristofer Berggren, and I work for Finwire Media. [Operator Instructions]

With that said, I hand over the word to Jakob and Bengt. Please go ahead.

[Jakob Holm, executive]

Thank you, Kristofer, and hello, everybody, to our report for the first quarter this year. My name is Jakob Holm. And as always, our CFO, Bengt Lejdstrom is with me here for this presentation.

The agenda is the normal one, first dig into the first quarter and then -- an overview on that one, and then Bengt will move over to the more detailed financial aspects of the quarter, and then end up with an outlook -- future outlook.

Okay. As you know, we are an infrastructure technology group. Our solutions very much are targeted to create more sustainable, efficient safe societies. Our updated numbers as of this quarter, SEK 2.8 billion in net sales. Our profitability margin has been increasing continuously over the past 5 years, currently at 18.9%. And then the most important growth metrics is, of course, growth of our profits, and our EBITA* metric is the one that best represents our performance within the group, our operational performance, and we're very proud to present these nice growth numbers.

Having a look at the map on the right-hand side, we're also now happy to present Italy as we've done our first acquisition there. In the fourth quarter last year, we also did our first acquisition in Netherlands. So we are very pleased to have opened up these 2 important markets for us.

And as you know, our overall goal is to create shareholder value by increasing profits every year. We do this by acquiring companies with high margin positions. We're very much focused on that high-quality companies, and also companies that are in the infrastructure sector, which also means that the demand is long lasting and long-term sustainable as the needs are characterized by that in the infrastructure sector.

And then once again, the graph also illustrates the nice growth metrics, 42% CAGR over the year since 2017. And we are planning to continue along that journey. And one aspect that we believe was quite necessary for us to inform the market about, a very positive development when it comes to acquisitions, and that we believe that we have an opportunity to reach our annual acquisition targets already before autumn, so ahead of time.

And the reason behind -- we've done already 2 acquisitions corresponding to SEK 35 million. Our target is SEK 120 million to SEK 150 million acquired EBITA per year. And we -- as I said, we believe that we might have an opportunity to reach that before autumn -- after summer before autumn. So -- and the reason behind this is really that we have invested significantly in our acquisition process. One important aspect is our geographical presence, as I mentioned previously. So we've opened up a new markets, Italy and Netherlands. And that's not just something that you do overnight, but you invest in this for quite some time.

So the pipelines, they are mature and positive in these markets. We've also strengthened our presence in Italy and U.K. by opening up local presence there, based out of Midlands in U.K. and Milan or Italy, very important for us to capitalize on the pipeline of acquisition objects that we create through our methodology. And we've also expanded our business area resource efficiency to cover additional areas, not only water and energy, but also additional areas that are other types of resources that are important to manage food, agriculture, for instance, waste management and so forth. So that also broadens the companies that we target.

So as an effect, our pipeline of acquisition obviously is stronger than normal. The criteria, they are unchanged. So it is high-margin niche companies, high-quality companies that we are targeting. So we just have come into position where the number of companies are more than normal. So several projects are ongoing, and our financial position is good. Bengt will describe that in more detail later on. But anyway, all of these things together means that we feel that we -- it's necessary for us to inform the market that we have the opportunity to reach the target ahead of plan. Very positive development, of course.

And then moving over to the 2 acquisitions that we have done. Agrosistemi that was done in the beginning of the first quarter, annual sales of EUR 8.5 million. Agrosistemi are specialized in the recovery of sludge from wastewater systems. And so -- and Agrosistemi has proprietary technology to clear this sludge even further, so from harmful substances, and then eventually create a product that is an organic fertilizer.

A very interesting company, interesting products that really contributes to a lot of UN's sustainable development goals. One is, of course, related then to sustainable food production, very applicable in this case, and also to substantially reduce waste generation, that's also an important goal that Agrosistemi contributes to.

And then finally, I would like -- also like to mention goal 15.3 that targets -- UN targets to end the certification and also restore land that has been degraded. And of course, when you add this kind of fertilizers, it really improves the quality of the soil. And it's really proven that, that really can reverse the certification process, which is, of course, extremely positive and important for countries around the Mediterranean area. So we're very happy to include Agrosistemi, and that is really a clear effect of us broadening our business area -- resource efficiency into business area.

Moving over to the second acquisition done in March, TEL UK. Also a very interesting company. They provide systems to evacuate dangerous or hazardous gases in primarily laboratories. There are other applicants agents as well, but laboratories the largest customer sector. And really, the market position for this company is the technology. So with really advanced air flow control monitors, software and hardware combined together, the performance of the system is really top of the line.

So it's really a market position driven by technology leadership. So we're happy to include this company as well. And then, of course, energy efficiency, to improve that is really a key thing to upgrade existing laboratories to become more sustainable, but then also to provide safe working environments for people working in these facilities. So also contributes to some really important sustainable development goals.

And with that, I move -- hand over to Bengt for the more detailed information.

[Bengt Lejdstrom, executive]

Thank you, Jakob. And yes, looking at our financial development, starting with our sales. As you can see on the left-hand side of this slide, we have actually exactly the same compound growth the last 12 months as we have had since 2017, so it's 26%. Of course, then a mix of acquisitions and organic sales growth.

And as you can also see on this chart, you'd see that the profit margin, our EBITA* margin has been increasing steadily over the years and over the quarters. We'll come back to that when looking at the business areas. Looking on how this sales is distributed between the different geographies, we have had now for a couple of years, a diminishing part in Sweden, now at 26%. Not the least because of that, we have divested in the Swedish elevator businesses from first of April last year.

So U.K. sales are a bit more than half of our turnover. And then we have about equal shares in other geographies as in Sweden. And of course, the exports are increasing slowly but steadily since we are acquiring a little bit more product-based companies that can export their products to other geographies than their domestic local market.

And Italy and Netherlands, as Jakob mentioned, they are still small and our company in Netherlands, they are really exporting. So they don't have that huge volume in their own home country. So they are a real global supplier of these solutions. Look, then at our profit development. Yes, it has been a little bit slightly lower the last 12 months, 37% comparing to compound growth up until 1 year ago of 43%. All in all, 42% as was shown on the previous slide. Of course, this also comes a big part from acquisitions, being able to acquire companies with a high margin, but also from a solid organic profit growth over the years. As you know, we have our target of having 5% to 10% organic profit growth on average.

Looking at the quarter, and starting with the sales increase. Well, we increased by 19% compared to last year. Of that, we have actually 8% organic, excluding currency effects, parts of that coming, of course, from some price increases that we have been able to do, but also from increased volumes. The profits have increased more, 25%. There, we don't have that much organic profit growth. It's actually a negative 1%, excluding currency effects. And that is mainly due to that we have seen cost increases on both components, raw materials, logistics, to some extent also personnel costs.

And of course, it's our company's duties to then increase prices towards customers. But unlike, for example, companies that sell to consumers over e-commerce, we cannot just change prices from one day to the other. We have to comply with our agreements with our customers, and perhaps renegotiate them. And so that takes -- take more time to increase prices towards our customers than our suppliers increase prices towards us. So that actually means then that we have had a positive sales growth, but actually a negative profit growth. But it's only 1% negative. And we still strongly believe that our companies in our decentralized model, they are able to govern this and increase prices and eventually fully compensate for these increased costs, then sales and profit increases should go hand in hand.

The profit margins, the EBITA* margin, has increased because, yes, profit has increased more than sales all in all. So up to 18.5% now. We have said that we most certainly will have around 20% as a run rate for the group, but still lacking then somewhat to able to compensate for the higher costs. But eventually, as I said, it will come to a more balanced situation.

Of course, all these, I can say, challenges with the higher prices, with the supply chain have their causes. We have been dealing with Brexit previously. We have been dealing with COVID pandemic, and now we're dealing with the war in Ukraine. So our companies, they do a great job to find ways to keep up their business in a very good shape. Our direct business exposure to these geographies, Russia and Ukraine, is really not material. So it's more of the indirect effects that could, in some way, then affect us.

Looking at the business areas, we have only 2, as you know, since quarter 3 last year, Resource Efficiency and Special Infrastructure Solutions. Sales in resource efficiencies really increased with 61%, partly then of the newly acquired companies, Agrosistemi now in this quarter and IDE Systems in September last year, but also a steady solid growth in several business units, not least our EV charging business, Rolec in U.K., and a number of the different water treatment product companies that we have within the business area. Actually, this Rolec company goes both as organic and acquired in the numbers since we acquired them in February last year. So they are 2 months organic and 1 month as acquired company in these numbers.

The EBITA has increased a little bit more, 66%, now at SEK 81 million, about SEK 48 million last year. The same here, we have, of course, had contributions from acquired companies and -- but also the -- organically, the sales increase in the comparable units have been able to translate that into profit increase since we have very scalable business models. So that's, of course, very good to see.

So all in all, the EBIT margin within this business area has increased, and is now almost 24%. There are a total number of 16 units within this business area now, including Agrosistemi. And the development over time, you can see on the left-hand side of this chart.

Going to Special Infrastructure Solutions. There, the development has been moderate, you can say. Sales have actually decreased by 1%. Most businesses, I would say, have seen a pretty good sales growth anyhow in the quarter, but some have seen a bit less. And our quite new company with the automation systems for container ports and other type of terminals came out good early in this year, but then again, was affected by a new, you could say, COVID outbreak in Asia, and perhaps not that they have that many customers in China, for example, but when big, huge ports like the Shanghai port is affected, then that affects the whole system of transportation and container traffic, which means that all the other ports have to work in another way than they perhaps should in a more optimal situation. So that, of course, makes our projects delayed again. They were also in Q4 last year. So having, of course, a better quarter than last quarter, still affected by some pandemic issues in Asia. But we see now and strongly believe that this will be pretty soon we overcome.

Looking at the profit development, it's actually more or less spot on as last year. We have seen cost increases, which means lower margins in several units. That's the same as for all companies, more or less in the group that the price increases, they are a little bit delayed compared to cost increases. But it's also offset then by our divestment of low-margin businesses and our acquisition of better margin businesses. So we're actually done at the same profit margin as last year, 18%.

Here, we have 17 business units and 1 acquired then in the quarter, the Temperature Electronics or TEL UK. And as you can see on the chart on the left-hand side, we have increased sales up till a year ago quite substantially. And there, you see also that the profit margin have been very stable since that point in time. Also here, we, of course, strongly believe that the companies will be able then to increase prices eventually and also come up a bit in the margins.

Some additional metrics, financial metrics, cash flow, cash conversion. Typically, we say we should be perhaps up to 90%. But also this quarter, we have invested in some buildup of stock. It's really raw material, which is good, which means that we are not that dependent on any fluctuation in the supply chain since our companies had raw material on the shelf in their inventories. It's not a buildup of finalized products because of less sales. As you have seen, our sales have increased. So our accounts receivables have also increased. So we still think that the 73% cash conversion is very healthy and good, and also gives us a good capacity to continue to deliver in the future.

Looking at our earnings per share. So it's tricky to translate the operating profit all the way down to profit after taxes. You have a lot of bookkeeping exercises to deal with before you reach that measurement that we are now above SEK 2 at least, and adjusting for some one-off divestments that we have done in the past 2 years. We are almost at SEK 8 in last 12 months.

Looking at our debt leverage. As Jakob mentioned, we are in a good financial position. When it comes to our net financial debt. Net financial debt here, we mean such debt that we are obliged to pay regardless of our companies are performing, that is bank debt and other type of financial debt. We're at a healthy leverage of 1.3x, which gives us good headroom for taking on more debt when we acquire companies in the near future.

Looking at the total net debt where we also include all our earn-out liabilities, where most of those are only payable if profit increase compared to today's EBITA level. It's almost 3.5%, could perhaps be perceived as a bit high. But again, remember that these debt are not payable at the current profit levels. So since it's earn-outs, and it's incentive for our entrepreneurs who have sold their companies to us to perform even better and get more money in the next 4, 5, all the way up to 8 years from now. So that's why also we don't perhaps consider that leverage as being representative for our current financial position.

Yes. And over to you, Jakob.

[Jakob Holm, executive]

Yes. Thank you. Thank you, Bengt. So summarizing, also looking ahead. We believe that the demand for our products will continue. Infrastructure -- critical infrastructure, the demand in this area sector is always there. And we had over 10% organic sales growth last year, and then 8% this quarter despite challenges with the material shortages and so on. So that's an evidence that the demand is continuously growing.

And as Bengt said, our companies are working continuously to manage and mitigate the issues around the components and material shortages. We have more raw material on the shelves, which is positive. But there could always be one component that could prevent us from finalizing products. So that is a continuous work. So we will most likely have additional delays perhaps in the same way as we saw in Q1 going forward as well.

And the one important message when it comes to Rolec, our U.K. company, providing chargers to the EV industry, there will be an update in the regulations, the 30th of June in the U.K. market. And it is a major hardware upgrade for the entire market. So of course, there could potentially be -- some customers could be hesitant to place their orders. They would instead wait until the new products will come in the marketplace.

And the hardware upgrade, it's quite exciting actually. So we're doing hardware upgrade on our products. It's very much around smart chargers. Of course, our charges, they have been connected. But now the regulations dictate multiple connecting options, for instance. So not only Wi-Fi, for instance, but you should also be able to connect over the seller network and so forth. So multiple connection points or the communication to the chargers -- from the chargers should be encrypted. So anyway, there's some interesting hardware upgrades, and we are taking the opportunity to upgrade even additional things. So our former platform is going to be very interesting for the future, and for our customers.

So we're looking forward to that. It's very exciting. But once again, it could affect revenues in the second quarter. We, however, regard that as a purely temporary effect.

Then moving on to profitability. As Bengt said, there's really no new information here. It's just a repetition. The acquisitions, they will continue to contribute positively as we focus on companies in high-margin positions. Comparable units were negative in terms of organic growth in Q1. We are still in the same position as of now, of course, but we are working, as Bengt said, continually to eventually achieve full compensation for cost increases, difficult to say exactly when that happens. Since there is an ongoing inflation in some areas still. So we cannot provide an exact timing as of now.

But we have been able, as Bengt said, through Brexit, through the challenges during the pandemic and the inflation that we've already seen over the past year, we've managed these cost increases before. We believe we will be able to do that even this time. And therefore, our belief that we will end up around 20% in EBITA* margin is definitely doable and unchanged.

And our acquisition pipe is stronger than normal, nothing new information here really. Other than that, this is our ongoing work and that our investments, they have really paid off in such a way so that we have more target opportunities. Our criteria are still the same, still the same systematic and controlled process that we are operating.

And by that, we really look forward to the next quarter to present to you once again. But before that, we open up for questions.

[Kristofer Berggren]

Great. Thank you, Jakob. And thanks for the presentation. So let's kick off the Q&A session then.

And we have a question here regarding the 8% FX adjusted growth. Could you comment on how much of that was driven by price increases versus volume? You touched on this in the presentation, but could you share a bit more detail into this?

[Bengt Lejdstrom, executive]

No, we actually don't have that exact data from our companies, but -- so I cannot give you a number. But there is, of course, part of that is price increases, of course. But no exact figure, sorry.

[Kristofer Berggren]

Okay. Next question. What gives you the confidence that you will be able to compensate for cost inflation going forward? Could you please remind us of the duration of contracts and your time frame for renegotiations?

[Jakob Holm, executive]

Yes. Okay. Well, I think as I mentioned before, this question perhaps was phrased. We have done this so many times before. We are confident due to the fact that our products, they are prioritized by our customers. So the needs -- the underlying needs are needs to upgrade the infrastructure. So -- even though our products might be a small portion of a large upgrade, they are critical. So from that perspective, our products are prioritized. So in that sense, we are in a good position. You could say or we are in very constructive dialogues with our customers around pricing issues.

And if we can get an okay grant from our customer to increase price, we agree on that. And of course, then we could also, in our turn, get prioritization towards our suppliers. So in that sense, it's a good position, and we've done this before. So we are confident that it will continue because nothing has really changed around needs and structure of the supply chains.

[Kristofer Berggren]

Next question. Rolec expected to experience order delays in Q2. Could you provide an indication of how much of EBIT and sales Rolec has accounted for in Q1? And are there any long-term impacts of the new rules related to demand, cost price, et cetera?

[Bengt Lejdstrom, executive]

Sorry, that second part of the question, can you just repeat that?

[Kristofer Berggren]

Yes. Sure. So the second part, are there any long-term impacts on the new rules related to demand, cost price, et cetera?

[Bengt Lejdstrom, executive]

No, I can start the first one. We don't disclose the actual numbers for each and every company, but Rolec is a good company -- a big company. And in our press release when we acquired the company a year ago, we said there that they have roughly about SEK 80 million, SEK 85 million in profit. So it is our largest company, and of course, it has some impact if profits go up and down, but they have had a very good and solid increase in both sales and profits since we acquired them. When it comes to the other part, perhaps Jakob can enlighten us for that.

[Jakob Holm, executive]

Sure. On the long-term perspective, I would just say that we are quite excited with the hardware upgrade that we're doing now. Of course, we cannot talk openly about all the details around that. But of course, this is our research on what we believe will be the future. And a lot of the development in this industry is done with software, of course, and that can be upgraded quite quickly on a continuous basis. The hardware upgrades are, of course, cannot be done in the same fashion. So therefore, we are doing a major platform upgrade. So we are excited about that exactly how that would play out in terms of sales and revenue from our customers, it's difficult to say. But of course, we don't expect it to become worse.

[Kristofer Berggren]

Okay. Next question. With a couple of investments have years behind you, you have a high degree of contingent considerations that are expected to be paid out going forward. Are there any significant near-term payments upcoming or/and concentrations to specific quarters in 2022 that we should be aware of?

[Bengt Lejdstrom, executive]

We had actually quite significant payouts this quarter. One, I think it was almost SEK 160 million. We have also another bigger one in Q3. Q2 is not that much. And in quarter 3, we will have, from our investment in Auger Site services. And so we'll have that, but that's -- yes, our estimates are about to have the same volume as in Q1 for the rest of the year, I would say.

So yes, but it's a good question. And of course, we are tracking that on a more or less daily basis in our cash flow operations, how this turn out and what's expected to be paid out. So we make sure that we have enough cash at hand to pay these great entrepreneurs for their earn-outs when time is due.

[Kristofer Berggren]

Okay. Do you consider that your balance sheet is prepared for a more accelerated acquisition process than initially planned, maintaining your leverage targets?

[Bengt Lejdstrom, executive]

Yes. The leverage targets, our external targets, the ceiling of 2.5 of the financial net debt compared to EBITA is -- say, it's analytically based on our development of acquisitions compared to our balance sheet development. So we feel very comfortable. Of course, if we acquire a bigger number of companies in a short time, that, of course, put that leverage a bit strength in it -- or sorry, it puts some pressure on it. And until the cash flow has been catching up, so to say. So if acquisitions come steadily, in a parallel string, so to say, then of course, it does -- it's very steady, this ratio. And if -- as Jakob mentioned, we see that perhaps we can complete a number of acquisitions perhaps a little bit ahead of time, then that put that leverage on some pressure, but still fully controlled. And yes, with enough headroom, so to say, for all our financial cabinets, et cetera.

[Kristofer Berggren]

Okay. Next question. Have you considered the possibility of issuing a green bond to refinance all your financial debt at lower interest rates and longer terms?

[Bengt Lejdstrom, executive]

Yes. We keep a close eye on the bond market, of course. And if we do that, most certainly, it would be sustainability linked in one way or the other because that's our vision to work for a more sustainable society. We have, I would say, quite cheap bank financing at the moment. So it's not to replace that. It would be to increase the debt in absolute numbers, but still on a healthy leverage level. So yes, we haven't been considering that for sure.

[Kristofer Berggren]

Okay. Next question. How long do you expect the temporary hesitancy in U.K. for EV charging to last?

[Jakob Holm, executive]

Well, that would typically be during Q2. So up until the new products are released in the marketplace. So it will be limited in time.

[Kristofer Berggren]

Okay. And how is the price-related work developing throughout your different channels, product, installation, services, et cetera?

[Bengt Lejdstrom, executive]

Yes. It's all from company to company and perhaps could be some misconceptions about this installation. We are -- it's necessary for us to report according to all these IFRS rules, and some parts of our business is then considered as installation. But installation could be very much different. It could be like the one we had before, the elevator installations, where we install someone else's products. Or it could be like it is today, we install our own products.

And of course, the way we can control and monitor pricing in projects where we install our own systems and products are much better than when we're installing someone else's product. So I would say the -- it's no big difference really when we look upon how we make price increases in installation work compared to actual hardware, so to say.

[Kristofer Berggren]

Okay. The acquisition target before autumn, do you see imminent potential mainly in Resource Efficiency or SIS?

[Jakob Holm, executive]

It's -- we have the acquisition -- the pipeline that we have and that the opportunities that we have more near time, they are evenly spread. So it's good opportunities in both areas.

[Kristofer Berggren]

Okay. Since your pipeline is so strong, will you exceed the target of SEK 120 million to SEK 150 million of EBITA in acquisitions in 2022?

[Jakob Holm, executive]

It is a quite reasonable conclusion that if we reach the target already before autumn, then of course, we have a couple of months left to continue to deliver. And of course, the pipeline hasn't changed. Our work our methodology is the same. There's nothing particularly creating this extra opportunity now. There's nothing that has happened in the marketplace. It's just business as usual for us with the only difference that the volumes are higher, our organizational footprint is larger. So of course, the opportunities will continue also during the autumn. So that it would be a fair assumption to say that we have a good opportunity to exceed the yearly target for 2022.

[Kristofer Berggren]

Okay. When do you expect [ circumstances ] to normalize?

[Bengt Lejdstrom, executive]

Yes. That's -- of course, there are many aspects to that question. But as I said previously in the presentation, we think that all these, call it, more pandemic-related issues will ease out and be softened. So we hope already from this quarter too, that we have a much better situation. So hopefully, we are over and done with all these indirect effects from, of course, a very sad pandemic in China right now that's affecting the society. But yes, we hope sooner than later.

[Kristofer Berggren]

Okay. You mentioned confidence in your pricing power remaining robust. But is there a level of inflation in any area at which it becomes more difficult to fully pass prices through?

[Jakob Holm, executive]

I would -- well, it's always easy to discuss increased -- to increase direct costs, that's always easy to discuss that with customers. It's more difficult to discuss increased labor costs. But anyway, it's the same type of discussion. It really targets the overall goal that we want to make good business, our customers want to make a good business, a supplier wants a good business, and we are, as I said, in a good position that our products, they are prioritized. So we are able to achieve what is necessary regardless if it's material or personnel cost increases eventually.

[Kristofer Berggren]

Okay. Thank you. Excellent. That was the final question for this Q&A session. So a big thank you to Jakob and Bengt for the presentation. A big thank you to all the viewers and for all the questions that you sent in to us.

I hope to see you again on the next webcast with Sdiptech. And with that said, I wish you all a good day and a good weekend when it's time for that. Thank you.

[Jakob Holm, executive]

Thank you, everybody.

[Bengt Lejdstrom, executive]

Thank you.