Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Hello, and a warm welcome to this webcast where CEO, Jakob Holm, and CFO, Bengt Lejdstrom, presents the first quarter report from Sdiptech. My name is [indiscernible] and I'm from Finwire. The audience is yours, Jakob Holm.

[Jakob Holm, executive]

Thank you very much, and very welcome, everybody, to Sdiptech's report for the first quarter. My name is Jakob Holm. And as always, joining me is Bengt Lejdstrom, our CFO. The agenda is the same as always. I'll present highlights of the first quarter, Bengt will develop the details about the financial development and then an outlook -- a slide about the outlook, and of course, the Q&A afterwards.Okay, so the general introduction, Sdiptech, we design, manufacture, and sell products that contribute to more sustainable, efficient and safe societies within important infrastructure segments within our society, such as clean water and sanitation, power and energy, bioeconomy, waste management, air and climate control, safety, security and transportation. So these are our six segments that we focus on. And all -- and the common denominator for these segments is the drivers for growth in addition to the drive for more sustainable, efficient, and safe societies. There are also increasing regulations that really drive, not only growth and demand, but also drive technology development. And this is an important part because when you -- as we do, we own our own products, we have our own R&D, that means that we continuously develop our products to increase our protection against competition and so forth. So that is also an important aspect.Volume is very much driven by -- that the infrastructure is aging and that the consumption of water, energy, transportation and so forth continues to grow. So there are very sustainable, resilient drivers of growth within our segments. Close to SEK3.8 billion in net sales over the past 12 months. Our profitability continuously increases last 12 months at 19.2%. Growth over the past 5, 6 years, 40%, and we more or less keep that pace also on a yearly basis now. And a metric that we also would like to -- we're proud of that, is that we have acquisition criteria that any business that we acquire must contribute to UN's Sustainable Development Goals. And that has been the case since 2017. So that we're happy to have that goal since quite a while now, actually.So highlights for the first quarter. Of course, we're very happy to present -- demonstrate that Rolec, our EV charging unit, is definitely back on track. It's actually better than expected. We have scaled up production volumes in a great way. The new technology is in place. The supply chains to provide that. They are working well. The manufacturing has been trimmed. So it's going well. Very good. We're happy. And also, we could see that the demand is where we want it to be. I'll get back to that. But anyway, the sales and profits were both in line with previous year, and that was actually better than expected. We were expecting to meet previous year in March, but we actually did that for the entire quarter, meaning that March, of course, then was better than March last year. So the trend is positive.Moving on to the second and to the other parts of our group, which is, of course, the majority is provided that our EV charging unit was more or less in the same levels as last year. That means that the strong organic growth of 14.7%, that is really applicable to the entire group then, which is very happy to present that number. And we cannot really see any material signs of demand slowing down, and this is really going back to that -- our customers, their demand is there regardless of the economic situation in society. So that is -- that's the reason why we, many years ago, decided to focus on infrastructure sector. So it's maybe strange to say, but to some extent, we're welcoming a downturn in the economy because that would prove that we are resilient. So that is starting to come through in a good way.Margins continue to improve. They've done that for a number of years. And the majority, primarily in this quarter, driven by acquisitions. Organically, the profitability was slightly down. However, that is not a big issue. There is still some cost increases for us, salary increases, for instance. So we continuously work to bring those costs to our customers. We have good dialogues with the customer, but there is some delay to get that fully into our books. So this is really expected.The cash flow was weaker than usual at 45%. Normally, we are on an average at about 80%. But when you think about it, it's quite natural. The -- our EV charging unit, Rolec, really the strong rebound since the last quarter that, of course, affects the cash flow since last quarter and then sales in general, about 15% is up. So that is an effect of a very strong improvement in this quarter. And we have been going back and forward in our cash flow quarter-to-quarter over the past years, and that is really also part of our work to always managing our deliveries. Our customers, they have -- their needs of our products are critical. So we need to be there for them. So it can go up and down. But in general, we have a very strong cash flow at about 80%.And then just to sum up the situation in our EV charging unit, which now is really, really only positive things to say. We are definitely well positioned for the growth. We have the new generation of our technology in place. It is a total redesign of hardware and software. And as always, the IPR belongs to us, which is not always the case for some of our competitors. And with that platform, we have definitely reduced the time to market in -- for new products or for new functions. So our R&D is significantly more efficient now. And this is a very important aspect in a fast-moving market, such as the EV charging market.And we have more than doubled our production capacity and our lead times are shortened. So very important steps. Of course, we did not welcome the issues that we had in deliveries over the past two quarters before the first quarter. But now that we have taken these investments, we are extremely well positioned. And we also want to mention that we are not exposed to the problems that many other companies in the market are facing today when it comes to technology being non-compliant. That is not the case for Rolec in the markets where we are active. And we just wanted to make that clear.And then looking forward, as you know, I'm repeating some information now, but there is definitely pent-up demand in the U.K., which is our main market. U.K. government will ban petrol and diesel cars in 2030. That's at least the plan. So they are estimating a 10x number of installments of charging points until 2030. The market is not growing at that pace now because it is also hampered because of the overall economy. But when we look at what is the net effect of these two forces pushing in in different directions? Well, then we could always look at the sales of the new EVs in the U.K. And in January, the sales of EVs was up 12%, in February 13%, and now in March 17% up versus last year. So that is a good indicator also for the charging market, of course, that despite of some problematic economic situations for companies and consumers and so forth, the net effect is positive growth. So we are in a good position there, definitely.One acquisition in the first quarter, a great company, HeatWork based out of Narvik, the headquarters, but also the production facilities based there in Northern Norway with sales of NOK120 million. And what we really like about HeatWork is that the products are very niche, they are specialized. This area, in particular, hydronic heating which actually means that you use the heat in water to transfer energy from one medium to another. Sales globally, the technology -- HeatWork has a fantastic R&D department, which is always very important when you have your own products.And one thing, interesting patents, a very, very advanced heat exchanger, very creative and innovative design. That means that they are very -- the products are very energy efficient. For instance, being used when pests -- when you kill pests, normally, you do that with the chemicals, but with HeatWork's technology, you can do it with a very hot, humid air. So that is, of course, much more efficient and better against the environment also. So anyway, a fantastic company, highly profitable as well as always, when it comes to Sdiptech's acquisitions. It will be included in the Resource Efficiency area or it is now as of March this year.Summing up at -- before I hand over to Bengt, our situation with regards to acquisitions. So as you know, we have really been delivering on our targets historically. We had for five years, 90% acquired EBIT as a target on a yearly basis. We increased that to EUR120 million, EUR150 million in 2021, and we exceeded those targets two years in a row. And as an effect, we also added some equity to our balance sheet with good support from existing and new owners. We will not do that this year.So what we said is that, for this year, we will focus to meet to be somewhere in between 120, 150, that's the target, but not exceeded. This is not the year when you go out and ask for additional capital. So we understand that. Our acquisition pipeline is as solid as it always is. Our financial position is good. So we will continue to look for highly qualitative companies, like HeatWork, for instance, and do the acquisitions when we get the good price, acceptable price. If we don't, then we will not pursue the acquisition. So we will be disciplined as always.And with that, I hand over to Bengt on the financial development.

[Bengt Lejdstrom, executive]

Thank you, Jakob. And yes, let's have a look here on our sales development in the quarter. We increased the sales with 37%. All in all, almost 15% of that was organic, meaning that the acquired companies since last year contributed with some 24% or SEK190 million. And it also means that if we compare with one year ago, we have increased on the last 12 months basis, the revenues with 34%. That's a bit above average. We have been on the compound average since 2017 of -- well, actually 27% if you include all the way up till today. So we have a little bit higher pace now, very much then coming from the many great acquisitions we did since one year ago.Looking at the geographical split between where our customers are residing, you can look on the right side of this slide. You see that we have about 20% revenues coming from Sweden, slightly more than 40% coming from customers in the U.K. and then there are a number of other companies around Europe and the world. And what you could see is that part belonging to U.K. here is being reduced. It was actually at the top of 50% of the group's revenues in 2021, but it has been reduced since we have added companies in other geographies and also with more exports.Today, the exporting part of the group's revenue is about 30%, meaning when our units when they sell to customers outside their own region where they have the headquarter. So -- and that's, of course, good from a risk diversion perspective that you're not only exposed to your home market, but to a more global environment. So -- but still, we are looking for companies to acquire in our main geographies, that's the Nordic countries, that's the U.K. and Northern Italy and also from time to time in some other European geographies.Turning to the profit. As Jakob was mentioning, we had 40% all in all profit growth, which is actually exactly the same as the average since 2017, meaning that we have a very steady and stable profit growth over the years. In this quarter, we had 9% almost coming organically from comparable units since last year. And also then meaning that we had a strong contribution from acquired companies was 32%, slightly negative currency effect in here. That's why the numbers don't add up quite.And as you see, the profit margin now at 19.2% on a 12-month basis, it was 18.9% in the quarter, but Q1 is typically a weaker quarter compared to quarter two and quarter four, which are the stronger ones. So that's quite natural, but our margin was stronger than last year. However, if you compare our organic sales growth, the 15% with our organic profit growth, the 9%. You understand that the -- as Jakob was mentioning that our comparable units, they had a slight reduction in their profit margins, but not all.And many companies actually improved their profit margins. And the rest is mainly due to this time lag as we have spoken about many times now, between us being able to increase prices towards our customers based on the cost increases we have from our suppliers. So due to our agreement structure, long-term agreements with long-term customers, that takes some time to change prices. But eventually, we catch up at least if the inflation rate will be stable, which it seems like many signs in the overall economy is pointing at.Looking then at the split from the different business areas. We start with the Resource Efficiency. They had a good increase with 15%. That's contributing from acquisition that is really HeatWork that we're contributing for one month to the business area. And we mentioned also that, Rolec, which belongs to this business area was about the same as last year, meaning that the other companies were strong. And as an example, we wrote here in the report as well that some companies had some issues with component shortages last year. And one example was this Swedish company working with replacements and renovations of water and energy meters in buildings. They are now a good inflow of components and could have a very successful quarter, both in sales and profit. So that's a good sign.And Rolec, Jakob has mentioned a lot about. But as we commented in the year-end report and at that meeting -- for the ones of you who participated at that conference, we mentioned that we're ramping up during the quarter, and we didn't really expect it to be able to reach last year's figures, but it did. So that was a positive deviation from our own expectations. So very glad to see that. The profit then also increased as the sales did and most of that then organically from other companies than our EV charging business and HeatWork contributed with a small amount there since it was only one month.Margin has decreased compared to last year. And to comment here that it's mainly due to that we have had some product development, not the least within the Rolec and the new product generation. And those depreciations then add to the result in a negative way, but in a positive way when it comes to sales really. So the margin have a slight decrease. If you look at the graph here to the left-hand on the slide, the turnover is not as stable as for the group as a whole, but that's, of course, as it can be in the business areas. And since 2021, when Rolec was acquired, it has been a steady growth with some additional three acquisitions since then.Then turning to the second business area, the Special Infrastructure Solutions. We had a very strong sales increase. Of course, a big part of that coming from our acquisitions, four of them since a year ago, well five actually counting in also a company we acquired late in the quarter one last year, but also the comparable units had a very good quarter, and we have mentioned some here and in the report, for example, a company called Optyma in U.K., that's selling security system for public environments. They are benefiting from the U.K. government really wanting to increase the safety and security around the public rail works, so railroads in the U.K. So that's an example of when governments go in and start and support projects within the infrastructure sector. But there were also other companies within this business area that performed very well.And this business area, as you can see from the left part of this picture, then have had a very good development of their sales, of course, then coming from a number of acquisitions. Also, improving the EBITA margin to 19.4% also mainly due to the acquired companies, but not any company in the first quarter. Let's see what happens in the next quarters.We also have some additional metrics that we usually show. And one is the cash conversion, which Jakob mentioned a little bit. And as a comparison, you say that in the quarter four, the last quarter of last year, we had 99%, and this time was 45%. So it goes a bit up and down. And a big part of this quarter's decrease, so to say, in the cash conversion is coming from Rolec's very successful sales. So they're adding accounts receivables to the working capital. But it should be quite stable around 80% in the long run, and we had 71% in the last 12 months.Another metric is earnings per share. As you can see, this one did not increase as much as the overall profit. For example, the EBIT, the accounted EBIT profit increase was 46%. Earnings per share were 20%. And the difference between there is -- and if we compare then to last year, is mainly increased interest costs and the major part of that increase is coming from the increased interest rates. But still, that increase, if we convert that into an actual number, it was about SEK17 million in more interest rates cost -- sorry, interest cost because of the increased interest rates, that's still only about 1.5% of the turnover. So we can manage and handle that.And we also have an increased number of shares compared to last year through this equity raise we did last fall in November, and that adds about 2.4 million shares. So that also affects the earnings per share development. But still, it's a 20% increase. And looking at the running in the last 12 months, the increase in the earnings per share is even 72% up to almost SEK12 per share.And finally is the debt leverage metrics. We split it in two. You have the net financial debt, that's debt we owe to credit institutions, compared to the EBITDA profit, and we have the total net debt compared to the same profit measurement. And they have been quite stable now since last quarter. It's -- the net financial debt is 1.83. It was 1.79 at the end of last year. And the total net debt has actually increased -- decreased a little bit to 3.53. It was 3.55 in last quarter.The big difference between these two is that the total net debt includes all these conditional consideration that the earn-out debts, which are not payable unless the profits are increasing over time. And you can find at the bottom of this page also a number, 36% of all our debt is then related to this earn-out debt, which is very good debt to have in case profits will go the wrong way, then this debt will more or less disappear [indiscernible] due to pay to the sellers of the companies. So it's the net financial debt figure we focus on. And that's still conveniently below our own ceiling that we ourselves internally have put to this number 2.5. So it's a healthy debt leverage, we think at least.All right. So I hand back to Jakob Holm? Jakob?

[Jakob Holm, executive]

Yes. Thank you. Okay, final slide before Q&A. So looking ahead, we are quite confident that the demand is there and order books look good. So where we are present, the demand is rather resilient. And as we mentioned, the EV charging unit is better equipped than ever and really ready to deliver on the increasing demand. And also, as Bengt mentioned a little bit, there are other investments, especially in the U.K. area where the government puts in a lot of money to invest in, for instance, buildings with low carbon footprint and so forth. And that really benefits us in many business units, one of them is RDM, for instance.We believe that the margin expansion, it will continue. It has been going on since 2016. We are confident that it will continue. Organically, we have dropped slightly in profitability, but organically, we should catch up with that and improve. And as always, we acquire a fantastic company. So they also contribute to this improvement. Our acquisition pipeline looking forward, it is normal, it's solid. We will, as I said, only do acquisitions when we believe that they have the quality that is at level, at par of what we demand in Sdiptech. The financial position is strong, as Bengt mentioned. So we have a positive outlook for the future.And with that, let's open up for questions.

[Unknown Executive]

Yes. Thank you, Bengt and Jakob for this presentation. We have some incoming questions about organic growth. Could you please describe that in a little more detail this quarter and also on how much yearly price increases compare.

[Bengt Lejdstrom, executive]

Well, I don't quite understand that in more detail. But regarding how much is coming from price, we don't share specifically that KPI. But of course, part of that is coming from price increases, but it's -- for sure, it's a big part of it is a volume increase that our companies are selling more services or products than compared to last year.

[Unknown Executive]

Given the volatility that Rolec has previously caused, will you look for more large acquisitions like Rolec to balance further fluctuations or consider Rolec a onetime transaction that maybe was to be.

[Jakob Holm, executive]

It's -- you should never say never that probably, but normally -- yes, Rolec, was by far the largest acquisition that we have done at that point in time and that is still valid and our sweet spot in size is SEK20 million to SEK50 million in profit, and that is what we also focus on in the future. That is -- when you have that size, the companies, they are more stable. There's a management team. Succession is more easy to accomplish. And -- but it's not too big, which means that you have more units within the group, and that brings an important diversity and risk reduction into the equation.

[Unknown Executive]

Yes. We have one incoming call from an analyst. I have asked him to unmute. Are you with us from Nordea? No, he seems not to have unmuted yet. Perhaps he will join us later.

[Victor Hansen, analyst]

Yes. Sorry, can you hear me?

[Unknown Executive]

Yes, I can hear you. Please.

[Victor Hansen, analyst]

Yes, I'll state my name.

[Unknown Executive]

Yes.

[Victor Hansen, analyst]

Yes. So it's Victor Hansen from Nordea here. And hi, Jakob and Bengt also. Great. So my first question here, a couple of questions. First one for Special Infrastructure Solutions, it saw mid-teens percentage lower EBITDA sequentially. And I'm wondering if there are any meaningful seasonalities here for the current business area, company mix, or what's driving this decline?

[Bengt Lejdstrom, executive]

Yes. As we said previously that the Q1 is typically not the best quarter of the year from the season. So there are some companies within that business area that do not actually have the peak sales during this quarter. So it's quite natural. As we said, there are a number of companies having organically compared to last year, a good sales increase. So yes, that drop is quite natural if you compare the comparable units, so.

[Victor Hansen, analyst]

Yes. Okay. My next quick question here on M&A multiples. When I try to do the math here, it seems like you acquired HeatWork at about 7x current upfront earnings, if excluding earn-out -- and about 9x when we're excluding earnouts. This is a little bit below what you paid in recent years. And I'm wondering here, if this, recently the numbers mentioned, are more representative of your M&A multiples going forward?

[Bengt Lejdstrom, executive]

Well, I cannot comment on how we calculate that. But we have said that typically, all in all, the multiples are between 7 and 9 and where a big part of that is paid as earn-out in the future. And then it may differ from one deal to the other, how much is paid upfront. But typically, it's around 6, 7 compared to the running EBIT, the run rate at the time of acquisition. So I think HeatWork was a quite, yes, ordinary acquisition in that respect.

[Victor Hansen, analyst]

Yes. Great. And my final question here. So Jakob, you mentioned earlier some safety stock still, which is impacting your working capital here. When should we expect that to turn around? And perhaps if you could give some numbers on what levels you think is a good normalized working capital sales level, [indiscernible] which you probably know it's up on an all-time high now, 18% of LTM sales for inventory that is so -- it's quite high.

[Bengt Lejdstrom, executive]

Perhaps I can comment. If we look at the, sorry, working capital in total, it's about 20% of our sales. And part of that is, of course, inventory. And inventory, if we look at the inventory turns -- and typically, the more product-based companies you have, you may have a little bit lower, sorry, numbers on that. They are high. They have been high during last year for the -- call it, the safety stock reasons. We don't expect companies to add the inventories because of that any longer, really. There are some exemptions that are still finding it better to have a little bit more on stock than less in case something happens with the supply chains, but to pick, that is not so much any longer. What we saw this quarter was a bit more, you could call it, offense -- in the offensive way of building stock that they are expecting higher sales to have a good incoming order book, which means they need to deliver in the near future. So they are building stock for that reason. And some others, still we use it as a good example, our Finnish company with a lot of sales in the U.S. this time of the year, especially you need to ship a lot of products across the Atlantic to the U.S. We acquired a manufacturing facility in last autumn, but that is not up running yet. It takes some time to get everything in place there. So when we look at this inventory buildup in this quarter, we are not really worried. It's more connected to increased sales or orders coming in and not so much any longer for the safety stock. Then to say, what's the exact normalized level, that's, of course, always tricky. But all in all, the working capital, as I said, is typically around 18% to 20% of our sales.

[Unknown Executive]

Thank you, Victor from Nordea. We have one last question here, and that's about how does the supply chain previously problems disorderly last year? How is that moving on now in the early beginning of 2023?

[Jakob Holm, executive]

Yes. Okay. I could answer that. The -- I think what the question is referring to is our EV charging unit. That is where we had challenges in the supply chain. In general, we do not have and have not had challenges with the supply chain. So for the EV charging unit, yes, that has been -- it's working well now. So what we did is that we launched a new technology, which called us new hardware, new electronic components. So every single component needed to be sourced from scratch. That means that you come at the end of the line to order these things and ending up in that situation where the overall supply chains around the world was [ strained ] the way the word was, of course, a very challenging position. So -- but Rolec did a fantastic work. And now we have moved the production to U.K., which means that we have much better control of the supply chain as well. So everything has been fixed, and we're actually very proud the way it has been achieved.

[Unknown Executive]

Okay. And by that, gentlemen, I would like to thank you for this company presentation. And good luck to you both forward.

[Jakob Holm, executive]

Okay. Thank you very much. Thanks for listening in, everybody.

[Bengt Lejdstrom, executive]

Thank you.