Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Sdiptech Q1 2024 report presentation. For the first part of the presentation, participants will be in listen mode. [Operator Instructions]. Now, I will hand the conference over to CEO, Bengt Lejdstrom; and CFO, Susanna Zethelius. Please go ahead.

[Bengt Lejdstrom, executive]

Thank you, and very much welcome to this presentation of our first quarter 2024. I'm Bengt Lejdstrom, and together by my side here, we have our new CFO, Susanna Zethelius, which joined just a few weeks ago. So, I'm very happy to have her also here on the call. And today's presentation will first start off with a brief presentation of Sdiptech itself in case with new listeners, and then we will present the outcome of the first quarter and then end with some outlooks for the near future. But let's look into Sdiptech in short and who we are. We are a company that acquires and develops companies that all work for creating a more sustainable, efficient and safe society. And since that is built into much of infrastructure, we also call ourselves an infrastructure technology group, even though we are not operators of infrastructure. But our company's customers typically are. And we have organized our business into 2 business areas, where we have 3 sub-segments each, and we will get a little bit more in those details later on. But we have the resource efficiency business area where we have companies taking care of our scarce resources of the planet within, water and sanitation, power and energy and bioeconomy segments that we have selected. And then the other business area is called the Special Infrastructure Solutions, where we have companies dealing with air and climate products and services within air and climate, and safety & security solutions as well as transportation and logistics. And the reason why we have chosen this segment is that for all of these, we believe there are some very key drivers for growth. First of all, the driver then for a more sustainable, efficient and safe societies that we all have and have had for a long time. But also then that much of the infrastructure is owned, so we need to renovate and replace and modernize the infrastructure that drives demand. We also consume more and more of all this, not the least our resources, which become more and more scarce to some extent, that has also a good driver for development and growth. And as well, we see a lot of regulations within this area to make sure that we will be doing things that in the long run. So, all of these drivers together support us and our companies in the growth for the future. And I think, we have proven that, not least this quarter by having a very solid growth, more or less all over the group. To summarize, we are 40 business units, about 2,400 employees, and we have had a compound growth on our profit, the adjusted EBITDA since the introduction of the stock exchange in 2017 of almost 40%. And by now, we have almost 80% of all our turnover is contributed to one or more of the United Nations sustainability development goals. On the right-hand side, you see where our companies are residing. It's in the Nordic countries, U.K., Italy, the Netherlands and Croatia right now. We will come back to the more split of our revenues, et cetera, later on in the presentation. So that's a brief introduction to Sdiptech.Looking at the first quarter and a summary. We saw a strong net sales of SEK 1.3 billion, which was an increase of 24% compared to the same quarter last year. Of those 24%, 10% was organic, excluding currency effects. The currency effects was about 2%, meaning that the remaining 12% came from acquisitions. And looking at the profit, the adjusted EBITA SEK 151 million, which was also an increase of 24%, 5% organic. Also here, we had some 2% coming from the currency, meaning that about 17% was contributed by acquired companies. And in both the increase in turnover and profit was the same. We have the same margin as last year, 19.1% on the last 12 months basis. This means that we now have a group that generates more than SEK 5 billion in net sales over a 12-month period and a decent cash conversion of 73%. We will come back to these figures in a bit more detail. When it comes to acquisitions, we did one acquisition in the quarter of JR Industries. We actually presented that acquisition already in the Q4 presentation in February, since this was in January, we acquired JR. But we have done an additional acquisition in April after the quarter 1, and we'll come back to that one as well. Some other highlights is that we see a very, for us, favorable market conditions and a solid demand continue. As I also explained, we see that we have strong, pretty much resilient growth drivers within our sub-segments, and we could see that also in our profit growth. So even though we had some pretty tough comparables last year, which we have very good organic growth all over in 2023, all the 4 quarters. We anyhow could show a 5% profit increase and 10% sales increase in this quarter, which we are, of course, very happy and proud of. Our cash flow, pretty strong, we think, about SEK 170 million coming in, which gives us, of course, headroom for investment in CapEx, et cetera. And as I mentioned, when it came to the actual cash conversion, it was a little bit lower, below what we aim at the 80%, and we will come back to that as well, but still for being the first quarter of the year, pretty decent cash flow. We could also see that our debt ratios were decreasing compared to the same quarter last year, which is an effect of that we have a good cash flow and -- but also that we have a bit lower pace of acquisitions. All in all, this resulted in an increased earnings per share of 12% for the quarter than 2.71 per share. Looking a little bit more into the quarter. As I said, the sales increased 24%, 10% organic. And it was the organic growth. We're pretty much in the two business areas. So both business areas are performing very well. And we don't see any signs really of a slowdown. So we see business as usual for this quarter #2 and onwards. And so it's a stable situation all in all. Of course, for different business units, they can go a bit up and down quarter from quarter-to-quarter, but that's in the business. So that's nothing strange. But all in all, for our 40 business units altogether, it's a very solid and stable situation, both with order intake and sales. When it comes to our EBITDA margin was 18.8%. And more or less the same as last year. You may recall that we have mentioned 20% a number of times. That's where we're aiming at. But since some of the later acquisitions have been great companies, but with slightly below the EBITDA margin, we're not there yet. But of course, we're aiming at that still. But it's very much given by the companies we acquire. And when it comes as well then to the EBITDA margin, we had some effects from two companies that we are still having savings activities, restructuring activities to business units that are a bit exposed to new construction. We had that already in Q4, and we said at that time that, that will continue into Q1, which it did, but it's a pretty small effect, all in all, on the group. But it hits the margin a bit since they have the turnover. And you can see on the right-hand side of the chart there that the margins have been very stable now since more than a year, 2 years, but about slightly above 19%. These sales in itself has grown -- increased with 29% compound growth since 2017. Looking at the EBITDA development. As I said previously, it's about 40% on average since 2017, pretty stable, as you can see from this chart as well, even though then this quarter was 24%, an effect is that we did some -- not as much acquisition last year, as we have been doing previously, that, of course, affects the total increase of profits during this year. But I will come back to the acquisition ambitions for this year a bit later. And again, most comparable units had very good results, both in sales and profit than last year, and also acquired units, they performed as expected. Then turning into the two business areas, starting with Resource Efficiency. They had an increase of their sales with 16%, but the profit increased by 25%, meaning that some of the businesses with a higher than average EBITDA margin performed very well. Some examples of that is our unit for taking care of sludge and turning that into fertilizers. Sorry. And another example is our units which rent out equipment for electricity for temporary events and building sites. And there were others as well within this business area, not the least our most recent acquisition. One of the most recent acquisitions called HeatWork in Norway, which also have during the winter part of the year, but they performed very well as well. So all in all, great companies with good profit margins performed very well, meaning that the EBITDA margin increased then to 24.5%. And well, again, as you can see on the right-hand side, we have 3 business area both in sales, margins and profit levels. Special Infrastructure Solutions. In this quarter, they saw an increase of sales of almost -- here, we, of course, are affected by having the acquisition of JR coming in here. And JR is a big company. So that affected the numbers. And also the profits increased by 19%. And especially in this business area, we have some of the -- we acquired JR but also GAH Refrigeration and ELM, and the forklift attachments. All big companies performing very well, but that is slightly below the average EBITDA margin. So that means also that the EBITDA margin here decreased a bit. And in this business area, we have these 2 business units we were talking about, that had some temporary negative effects on the result as such, but very small amounts, but affecting the EBITDA margin because of their turnover. Also this, looking at the right-hand side, you see the development for this business area of great development over the years and has it leveled out at around 20% of EBITDA margin, if we look at the last 12-month basis. Then coming to acquisitions. As you can see, we have been acquiring pretty much during the years. Going all the way back to 2016, we have had a target of acquiring a profit, a run rate profit of SEK 90 million, and we increased that target in 2021 to be SEK 120 million to SEK 150 million of acquired run rate profit. But we saw them last year with the increasing interest rates and the focus on debt levels, and the increased cost of capital that we took a decision to slow down the pace a bit. We only acquired -- it was actually 2 business units, bringing in SEK 50 million of run rate last year. We said then early on that this year 2024, we would increase the speed a little bit to be perhaps slightly below the EUR 120 million, so around SEK 100 million and SEK 120 million profit, and we have so far done the JR and the WaterTech which we did a few weeks ago, adding up to SEK 65 million in run rate EBITDA. And the outlook still is very well -- very good for acquisitions. We control the pipeline ourselves. We take the decisions on which speed we run these processes since they are typically not any structured M&A processes. It's us contacting companies that typically don't even know that they should sell that company. But after a few years of contact, we perhaps can convince them to sell to us, and we have a very long relationship with them before actually closing a deal. That means that the ones we are contacting today that are companies we will acquire in 2, 3 years' time, and also that the companies we acquired today is companies -- for some time. And since interest rates have gone up and cost of capital have increased, meaning that we are perhaps not willing to pay as much as previously. And that, of course, then extends the negotiations with the sellers. But we're still very comfortable with that we can reach this goal for this year. And of course, we never do an acquisition if it's not a very good company. So, we're not acquiring for the sake of it, but it's -- given our other financial targets, we acquire in a very controlled and low risk pace. And as I mentioned, in addition to JR Industries, which we acquired in January already, we acquired WaterTech of Sweden, that's actually our first Swedish acquisition since almost 5 years ago. A small but very skilled company outside Stockholm, that deals with -- for water treatment. And they have already started cooperation with our Danish company called Kemi-tech, that are dealing with the same things, as well as our U.K.-based company, Water Treatment Products, which also dealing with specialized chemicals for industrial water treatment. And that's an example of how we see this, that we are focusing on certain segments initiatives that if we acquire a similar type of companies, they can cooperate on the top line, so to say, but not really aiming for any cost synergies, even though perhaps we can get some of that, but that's not the rationale for requiring these companies. So, that's a very good example of how we -- our companies we acquire can benefit from being a part of the Sdiptech Group. So with that said, I will then hand over to Susanna.

[Susanna Zethelius, executive]

Thank you very much. Thanks. And first of all, I just want to say that I'm very happy to be here at Sdiptech, and I'm looking forward to working more than on the rest of the team. And with that, a couple of comments. Firstly, on the sales split. And I understand these charts have been quite stable over time. So revenue by type. So proprietary products stands for a little bit more than half. And then roughly 20% each on installation and service -- and the installation and service that we have in our portfolio, it's mostly on our own products, and it provides a good margin. And to some extent, also recurring revenue. Previously, we had more service and installation also on other brands, but it's been a conscious decision to shift focus over time. Then regarding the geographical split, U.K. is the #1 market closely, and the #2 market. And like Bengt, mentioned already, in April, we made our first acquisition for 5 years in Sweden with WaterTech. And then looking a bit at the cash flow and cash conversion. So it's been a solid quarter with cash flow from operations at SEK 167 million, which corresponds to a cash conversion of 72%, and that is within our ambition, which is between 70% and 90% of cash comp. We do see a significant improvement here versus the same quarter last year when we had a cash conversion of 45%. And the reason that we've had this improvement is that we made a targeted effort together with our group companies to review their inventory needs and to work with customer payments, for example. And this is something that we will continue to work on going forward. And then a few additional metrics. So, profit after tax increased to EUR 107 million compared to SEK 96 million the same quarter last year. The main reason here is, of course, the revenue increase. And I mean, we're very pleased to see this development also considering the interest rate levels and tax increases that we've had for the past year. Then earnings per share as a result, increased as well to SEK 2.71 billion. Then looking at debt leverage ratios. If we compare those to year-end, there was a slight increase, which was caused by acquisitions in this quarter, but more importantly, and as planned, they go down versus the same quarter last year. So with that, I would like to hand back over to Bengt.

[Bengt Lejdstrom, executive]

Thank you, Susanna. Very well done, after just a few days here in the group. And then summing up with some highlights for looking ahead. As we said, initially, we don't see any real signs of slowdown. So it's a continued solid demand in our business units and in the segments we're operating in, which is our thesis. But even though we had also mentioned the strong comparisons from last year, where we had a very strong organic development all through the year. But we benefited compositions in these more or less noncyclical sectors. We will continue with the acquisitions. We have done a little bit more than perhaps half of what we're aiming for this year. So coming acquisitions this year will perhaps be a little bit smaller. But still, we have a big number of companies in our pipeline, which we are discussing with currently. So we don't see that's slowing down really. So, we will most certainly be able to reach our targets, and we have good financing capabilities to do that, both from cash already at hand, but also from committed credit lines. And given them that we will continue with what Susanna said, reduce the debt leverage. We will do our acquisitions in a careful but still steady anyway. And also, a few words on our sustainability efforts. As you may know, we have both as an official target, related to our bank loans and also to our sustainability-linked bond. We have a goal of reducing our CO2 footprint by 50%, counting from the year 2021. And of course, that is a lot of activities going on, and they take effect -- take some time before they take effect. So, we have a little bit lower ambition for the first years of this cycle. And hopefully, when we come to 2026, we're able to see that total of 50% reduction. So far, for the 2 first year, 14%, which is actually spot on the plan or a little bit above, actually. We also have, of course, the preparations for this ESRD, which affects us when it comes to different reporting responsibilities, et cetera. And we're also looking into the opportunities to commit to the science-based target initiative for the sustainability goals, but we need to do some research. And so, before we can commit to that, but it's a work going on. So that's really our -- the way we look at the nearest future. So with that said, we will hand over for questions.

[Operator]

[Operator Instructions]. The next question comes from Niklas Sävås from Redeye.

[Niklas Sävås, analyst]

Congratulations to your role. Good to see you continue on the path of strong organic growth, and you mentioned a solid demand overall. But I'm curious to hear if there are any sort of one-offs or larger project-related initiatives that impacted growth in the quarter?

[Bengt Lejdstrom, executive]

No. No. Actually not. Of course, we have some businesses that are project-related. And as I said, they can go up or down from one quarter to the other, but with all the 40 units that evens out. So no. There's not any single business unit doing some extra this quarter.

[Niklas Sävås, analyst]

Good. And on the cash conversion, I mean, you mentioned that last year was a bit below your target, and this quarter was actually quite strong, in my view, for the first quarter. But still, you mentioned that you have targeted efforts to improve working capital within the business units. I'm just curious more, can you give some more color on those efforts?

[Bengt Lejdstrom, executive]

Yes. No, we're working closely with the companies to reduce inventory levels, for example, to optimize having inventories and what you do not keep on stop. And of course, also working with getting the customers to pay on due time and so on. We are luckily enough not hit by any customer defaults. So we have good customers paying, but we can all have shorter payment terms. So of course, we do that as well. During the quarter, we, as many others, had some, call it, Easter-effect that the end of the quarter was during a holiday. So some customers choose to pay our invoices in the beginning of April instead of end of March, but I guess that was for many other companies as well. But yes, we work closely with our business units to improve all the working capital efficiency in total. So that continuous work. And hopefully, we will be able to see the results of that going forward this year as well.

[Niklas Sävås, analyst]

Okay. So it sounds like it's many sort of smaller initiatives. It's not like that there are a few business units that are quite -- I mean, on the negative side here. It's overall that you work with this continues to all. And on the acquisitions, I mean, you mentioned that you focus on maybe acquiring a bit, I mean, less the second half or at least not more than you have done so far during this year. I'm just curious to hear if you get the chance to do a larger acquisition in the near-term, how would you handle such a situation?

[Bengt Lejdstrom, executive]

Yes, since we are controlling very much the process, and of course, depending on what other scenarios and target -- potential targets we have, we could extend those processes in time. Typically, the sellers, they are not in a rush to sell. That's not the ones we're looking for. So it's -- if we find that in order to stay within the boundaries of our different KPIs, and we think that it's better to do this acquisition next year instead of this year, we would just slow the pace a little bit in the discussions. So, we're very much in control. That's also, as I said, that we're not participating in this time structured deals.

[Niklas Sävås, analyst]

Perfect. And good luck for the quarter ahead.

[Operator]

[Operator Instructions]. There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Bengt Lejdstrom, executive]

Yes. We have some questions coming in, in the chat function. And we see -- try to see if there are some similarities between the questions. And one that pops up here is, we have previously been talking very much about our EV charging business unit because they had some issues in 2022, and we fair enough disclosed that was transparent about how they were performing last year. We prefer not to go into each and every business units we have. If it's not a very special situation. And in this case, Rolec is performing as expected in our market conditions. So it's nothing really to report on that. So you could just trust us that they are performing as expected. And then we have questions about, let's say, here, construction units, the one we have been discussing that we are doing some cost-reduction measurements and so on. That was in Q4 and as well some in Q1. We don't see this at the same level going forward. These are companies that during this quarter, quarter 1, did a loss but a very small loss. But still, as mentioned, they had some decent turnover still, meaning that they were diluting the EBITDA margin. But they showed slowly bit by bit, first of all, come into the black numbers and also then performing as effective for these type of companies dealing with installation and service in construction business. Let's see what other type. We have some question about the sales mix between high margin business and lower margin business units. Yes, as mentioned, we are, of course, very happy that any of our business units are performing well,, and now are a little bit bigger, but also a little bit lower than average EBITDA margin business have been performing very well. I mentioned 3 of them, our GAH for the refrigeration units for last mile transport vehicles and the Danish ELM with our forklift attachment, and also now the newly acquired JR with the roller shut the doors. And of course, we hope that it will continue to develop very well. But of course, the other more high-margin businesses, we look for that they can also then perform as well. So it's very hard to predict the actual outcome of that. So we're still saying that the 19% to 20%, that's where we hopefully should be at when it comes to our EBITDA margin, a little bit depending on the sales mix. And then we had a question also coming in on building blocks of the organic growth, what comes from price increases and what comes from volume growth. But of course, in the organic sales, you have some components of price increases. But for our part, the major part of that comes from volume growth. We haven't seen that much of cost increases this year. There has been some on the staff side, but our personnel costs are about 1/3 of the total volume. So, that doesn't affect us more than perhaps to 1% or 2%, all in all when compared to the revenues. So that would mean that we had another 7%, 8% of pure volume growth. And I think as well that for us, we don't do major huge price increases from one year to the other. So much of the growth comes from volume growth. We also have questions on -- well, the organic growth going forward. But we have, as we said, that we have pretty tough numbers to compare with a fantastic year. All in all, with a 13% profit growth, excluding currency effects. That is above our target of 5% to 10%. We're aiming to be within the 5% to 10%. So that's really our ambitions and targets, and we did this first quarter. So yes, let's see how that turns out. And then there's a question on acquisition multiples for the latest positions. And if you dig deep into our reports and into the notes towards the back end of the report, you can find all the numbers on how much we have paid for certain profits. And there, you will find that the latest acquisitions have been pretty modest multiples when it comes to enterprise value compared to EBIT. We have said previously that we typically pay about 5 to 7x EBIT day 1. And if we include expected earnout payments in the future and compare that with today's profit, we're typically between 7 and 9x altogether, even though when we actually pay the earnout, the profits are much higher. So the multiple typically around 5, 6x. And as you can see from the most recent acquisitions, they have been paid a little bit more than 5x, between 5 and 6x EBIT day 1. So I would say they have come down a bit or 2 ago, which is an effect of the increased cost of capital that buyers like ourselves are not willing to pay as much, and the sellers slowly but steadily start to accept that. I think that was the questions coming in on the chat. So with that, we thank you all very much for listening in. And of course, as always, we're happy to answer any further questions if you come up with them. But for now, we say thank you, and goodbye.

[Susanna Zethelius, executive]

Yes. Thank you very much. Goodbye.