Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2022-Q2

[Martin Westerlund]

Hi, and welcome to today's webcast with Sdiptech. Today, we have the CEO, Jakob Holm; and the CFO, Bengt Lejdstrom, with us. My name is Martin Westerlund, and I work for Finwire. After the presentation, there will be a Q&A session. And if you have any questions for Jakob and Bengt, please visit finwire.tv, and click on this webcast.

And with that said, I'll hand over the word to you, Jakob and Bengt. Please go ahead.

[Jakob Holm, executive]

Thank you very much, and welcome, everybody, to Sdiptech's report for the second quarter. My name is Jakob Holm, CEO of Sdiptech. And as always, with me are Bengt Lejdstrom, our CFO. And today, we will do, of course, a walk-through of the second quarter important events and then the financial development and finally, as always, an outlook for the future. Sdiptech, we are, as you know, an infrastructure technology group. Our main marks are in the Nordics and in the United Kingdom. And recently, as you all know, we've also established ourselves in Italy and Netherlands in relation to the good underlying trends in those markets. We continue to grow our sales at SEK 3 billion over the past 12 months. Our profitability margin continues to increase as it has done quarter-by-quarter over a long period now, and that we foresee that, that will continue. So we're very happy about that. That's very much related to that we focus on high-margin positions also enables us to have a stronger competitive edge against competitors, of course, and a better sustainability in our profitability and also growth.

So that's really the core of our strategies and the profitability is increasing as a consequence. And our overall goal is, of course, to create value by increasing our profits every year. Our operating profit has an annual growth rate of 41% since 2017. And that's really our focus. And in addition to high-margin positions, the infrastructure sector really is characterized by long-term investment needs, positive trends related to more technology advancements related to more sustainable efficiency society, but also solid volume drivers that more consumption of water, more consumption of energy, more transportation volumes increase and so forth and so forth.

So over foreseeable future, the growth trends are very positive in all our new markets. And then move over to the second quarter, important events. We are slightly down organically on net sales, and we really want to describe this carefully to you all. First of all, the demand continues to be strong. So the reason for us being slightly down on net sales is not that the demand is going down. On the contrary, the demand continues to increase. And the majority of our business units are growing organically positive on both net sales. So that's very important for everyone to bear in mind. And then we have a few business units that are temporarily down net sales, and that's really the contribution that translates into negative organic growth number.

And one business here worth mentioning is our business GAH Refrigeration that delivers refrigeration units for transportation vehicles for the last-mile transportation, a very good business with strong underlying growth drivers. And the customers' grocery chains are really placing a lot of orders to us. But for us to deliver the refrigeration units, there also needs to be a vehicle to put that refrigeration unit into. And there is, as you all know, a lack of vehicle currently in the market for delivering new vehicles. So therefore, we are building a backlog of orders. And eventually, when the vehicles start arriving to the market and to our customers, we will start to deliver upon that, the backlog. But for the second quarter, that has been a quite a significant down for that unit that also affects the entire group's numbers, but it is temporary.

The second unit worth mentioning is our unit for EV chargers. And there is a regulation change in the market for United Kingdom for the 1st of July. It implies a major hardware upgrade. For instance, the ability to remotely turn on and off and also remotely take care of maintenance and so forth, that is a new requirement. And there are a number of additional requirements. So the entire market is doing an upgrade now. And it is a challenge for all players to deliver on this. We have our material ready, but the market is a bit hesitant at the moment to take orders since they know that there is a shift, and we expect that hesitance to continue also in July and in August. And then hopefully, after that, the market will go back to normal with the excellent growth that is underlying implicit in this units for electric vehicle for us. So anyway, so there's no change in demand for what we're seeing, and we are expecting a catch-up in the future.

And the margin expansion has continued for the quarter, 18.9%, up 0.8 percentage units. And as always, our strategy to focus on high-margin positions in our acquisitions that really drive as one important part that drives the profitability improvement. And over a number of quarters, also organic growth has really driven the improved margin as well, although this quarter the increase in prices has temporarily, of course, hit our profitability. So what is really improving the margin in this quarter are the acquisitions. So the prices for material continues to increase even since the first quarter, and we are continuously working on our price revisions with our customers. And for the majority of our units, it's possible to do it rather swiftly. The customers, they really want our products. They need our products for critical needs in the infrastructure sector. So we have a good dialogue and the ability to raise the prices.

And then, of course, we have quite a few customers where we have long-term contracts where the prices are -- the mechanisms to increase the prices are more regulated into contracts. So those kind of contracts, those kind of customers, of course, the price increases come with a delay. So all in all, we are doing all we can, and we are quite active, but some of the contracts, they are over longer term create a delay. But eventually, we are comfortable that we will achieve a full compensation for the pricing. As I said, the products are really important for our customers. And normally, our product is also a very small share of wallet for our customers, so they have no problems accepting high price for such important products.

And our cash flow continues to be strong. That's a very important message as well. We work with our cash flow very actively. And it is at 87%. It could have actually been even better since we have built up stock of raw material to really in a more proactive way be able to deliver to our customers, given the shortages of components and raw materials. But nevertheless, despite that, we have a strong cash flow generation, which is a very important message to also deliver to everyone. And the final message, our acquisition pipeline is stronger than ever. And that is a result of our focus on new markets, Italy and Netherlands, and we have been developing these markets over quite some time actually. And I think all of you that know Sdiptech, we focus on quality in our acquisitions. We're not the volume type of acquirer. We really focus on quality. And we have done 1 acquisition in Italy, 1 acquisition in Netherlands. And that is a result of overall work that we have done over a longer period of time, so it is paying off. We've also expanded our resource efficiency business area into areas beyond water and energy, also resources related to, for instance, the production of food. So the agriculture, the bioeconomy area, very, very important for everyone.

So with that said, we are expecting to exceed our acquisition target this year. But once again, we very much focus on quality. So we focus on quality over quantity, I see that it's actually spelling mistake there. So we continue to focus on quality, as you all know. And then this is just a graph rising what we actually said. So SEK 125 million we delivered so far this year. And our previous goal was at SEK 90 million acquired EBITA*. We raised that goal to SEK 120 million to SEK 150 million last year, we delivered SEK 158 million. We are still with a target of EUR 120 million to EUR 150 million, and we believe that we are in a good position to exceed that for this year. And then finally, 2 slides just introducing our recent acquisitions, Resources Data Management, Scottish company, fantastic company that provides control steering of business, of equipment in buildings to do one thing, optimize the energy consumption. The most important customers are grocery chains in the U.K., but also in Asia and in U.S.A. So that's very interesting, adding some new geographies for our companies. And other companies that we have can really benefit from this. So we are more and more becoming a coherent group of companies and RDM is a good example there. And one important UN sustainability development growth goal that we are addressing with this company is, of course, to reduce the energy consumption, which is extremely important. And then acquisition of Kragelund, our first acquisition in Denmark. And they are a very highly innovative company that develops attachments for forklifts and to improve safety, to enable forklifts to do a very complex type of leaps, we will do with good safety security for everyone involved. So leading company, very interesting companies. We're really happy to also include that into our group.

And with that, I hand over to Bengt to walk us through the financial development.

[Bengt Lejdstrom, executive]

Yes. Thank you, Jakob. And yes, we will start with having a look at our sales in the group. As you can see on the left side of this slide that we have increased sales on a last 12-month basis compared to a year ago, 24%, which is slightly less than what was the average up to that point a year ago was 26%. As we can see here, the compound growth over the years since 2017, but still very good development we think. Perhaps you can remember that we acquired Rolec charging units in U.K. in first half last year, which, of course, made a real jump in the figures. But with the 24% increase in 12-month basis since last year, we are very happy with and proud of. Our margins have increased slowly and steadily. A big part of that is, of course, coming from our change of the mix of businesses that we have in our group, divesting low margin businesses within the Property Technical Service business and acquiring product-based businesses instead. So slowly increasing and now then on a 12-month basis 19.1%. We have said that we think 20% is where we should be. So that's what we are heading at.

Looking on the right side of the chart, you see our sales split by countries. U.K. is, of course, our biggest geography. We have 11 companies there right now, we have business units, and they are quite big most of them. Almost half of the group turnover come from customers than in the U.K. because this is what this figure are representing. The black slides here with 12% down for other countries, meaning exports really out of our own geographies are also slowly increasing as we acquire more and more product-based companies. Right now, the sales of products is about 60% of the total group turnover [indiscernible] bit lower, less than 60% at year-end, now it's above 60%. So it's increasing and the amount of share of installation business is being reduced further. [Technical Difficulty] between different categories, you can look at our report towards the end, you will notice that roughly the split is 60% products, less than 20% on installation and service each and then going to the next slide, where we cover our profits. [Technical Difficulty]

[Jakob Holm, executive]

Okay. It seems like Bengt's connection is cracking up there. Bengt, could you try to redial in once again because it's very difficult to hear what you're saying actually.

[Bengt Lejdstrom, executive]

[Technical Difficulty] will redial.

[Jakob Holm, executive]

Yes, we will continue sure. Okay. So moving then over to the development of our EBITA*, our profit -- operating profit. And our sales has increased 27% in the quarter. And excluding the currency effects, the organic growth rate was minus 2%, but we're not happy about that in terms of sales. And then moving over to profits that translated into minus 12%. One aspect, of course, to the development -- negative development of the profits is, of course, that the sales were down. And as we discussed earlier, the majority of our businesses are growing organically positively and then we have a few business units that are temporarily down due to due to some obstacles. So that's one aspect also affecting then, of course, the profits.

And of course, the other aspect affecting the profits are the increase in procurement prices that has increased since the first quarter and that we -- as we discussed, we are discussing with all our customers to be compensated for that, and we are comfortable to achieve it. Exactly when that will happen, we don't want to promise anything, but we are comfortable that the work is going in the right direction. Our profits then have grown 34% over the past 12 months, which is, of course, in line with our targets. Having then look at the business area resource efficiency, very positive development in that area. Of course, we have the unit for electrical vehicle charges. We've already discussed that. So that, of course, has had some impact for also this business area. But overall, good development for the new acquisitions as well, Agrosistemi and IDE. So that's important. Of course, it's important to have a new acquisitions that deliver in a good way. And Agrosistemi and IDE have definitely done that. And organically, in general, good profit development in most units, but the same thing there. The pattern is the same that there's some units that have not been able to, in a quick way, be compensated for the high prices, but eventually, we are comfortable that it will -- that we will achieve it.

I'll continue until Bengt.

[Bengt Lejdstrom, executive]

I don't know if you can hear me now.

[Jakob Holm, executive]

Yes. Now we can hear you.

[Bengt Lejdstrom, executive]

So yes, when it's not the best timing that connection was cracking up. Looking at the special infrastructure solutions then, and just as a reminder that last year have included the 2 remaining businesses from the Property Services business area that we have those 2 units are now in Special Infrastructure Solutions and all numbers you see here have been pro forma, of course. So over the quarter was strong for this business area with an increase --. [Technical Difficulty]

[Jakob Holm, executive]

Bengt, I think it's too poor quality. So I will take over. You have to when this just -- but I'll continue. So what I think Bengt said, we have merged the former Property Technical Services area with SIS, Specialty Infrastructure Solutions. And the 2 remaining businesses that are now part of Specialty Infrastructure Solutions. And I think we've been through the important aspects, the cooling and refrigeration business, we've talked about that, difficulties in delivering the products since there's a lack of vehicles. But eventually, that will, of course, pick up. The demand is there. Previously, we had some challenges in a business unit that provided automation of container ports, but that has been resumed now. To start with, it was challenging since the customers at the container ports really focused on operations provided the very heavy pressure to get the container transportation volume.

So they focused more on operations than development projects. And then on top of that, there was also restrictions in China related to the pandemic in the beginning of the year. So there were a number of things that was challenging for that business, but things are back on track now, very positive. And of course, the demand there is significant. So it's a very interesting business unit. And yes, I don't think they need to add anything else really. The pattern is really the same in terms of increasing prices and that we are comfortable that we will achieve.

And now Bengt, have you improved your quality, I don't know.

[Bengt Lejdstrom, executive]

I'm not sure.

[Jakob Holm, executive]

Try to speak loud, perhaps the mic needs you to be very consistent in your voice.

[Bengt Lejdstrom, executive]

Yes. So hopefully, you can bear with my connection here then for the additional metrics. As you can see on this slide, we're showing our cash conversion, our cash flow from our operations, including any change in working capital that was in the quarter 7% compared with the profit, which is an increase dramatically from last year when we were building even more inventories. We are still building inventory as Jakob was mentioning before, I think, but still not at the same extent now. But it's good to have the raw material on stock in case there will be any disruptions in the supply chains going forward. Looking on the last 12 months, we're at 85%, so it's quite stable cash conversion right now. The earnings per share was very good. SEK 3.1 per share. Part of that increase from last year is due to a more, I could call it, bookkeeping exercise that we need to do according to IFRS, that we have increased our interest rate used for doing the discounted calculations of the earnout, that's a bit complicated. But in short summary, it means that since we need to increase that interest rate to mirror what's going on in society from 2 to 3 percentage points, it means a little lower of that and that the reduction becomes income in this quarter. So that affects a bit, but the underlying reasons are, of course, is strong competitor.

[Technical Difficulty]

[Jakob Holm, executive]

You're cracking up again now, Bengt. But I think what Bengt was explaining was that the earnings per share have -- 1 effect there is that the interest rate -- the theoretical interest rates used for evaluating the contingent consideration, the earn-out debt in the future has increased that interest rate. And then, of course, with the discounted way of calculating the current value with a higher interest rate, that value of the continued concentration goes down and that the reduction then also then goes over the P&L as a positive effect. So that was one item that has added to the EPS. Are you still with us Bengt. No. Okay. So and then...

[Bengt Lejdstrom, executive]

But I think it's poor connection. .

[Jakob Holm, executive]

Yes. Okay. Try and try to just speak clearly without moving. Hopefully, it will go.

[Bengt Lejdstrom, executive]

I think it's the WiFi here. Looking up on our debt leverage, slowly increasing the net financial debt to EBITDA. That's the most important number,1.6 now. We have said that our target is to stay below 2.5. The debt that we always need to pay to figure on this slide, the total net debt is including then all these earn-out debt and most of that is depending on the development in the group. It's a contingent considerations to call and conditional on that the companies are increasing their profits in order for the-- [Technical Difficulty]

[Jakob Holm, executive]

Okay. He's cracking up again there. But I think the important message here is that the net financial debt, our target there is to be below 2.5. So we have a good financial position to continue with our acquisitions, also supported by good positive cash flow. And then the net debt -- the total net debt is at 3.64, that also includes the contingent considerations, the earn-outs. But it is important to have in mind is that those debts are depending on that there's actually a profit growth for those debts to be paid out. So the debts are sized according to future profits that are higher level than we have today. So that number is a bit difficult to understand. So therefore, we're very much focused on net financial debt, which is really most type of debt that we have to pay regardless of the development, the continued considerations, they will shrink if the profits are not -- don't increase according to agreements. So that's perhaps a little bit complicated, but I think you understand the concept.

All right. So we are coming over to our final slide, the outlook for the future. And despite some negative numbers on the organic growth, we are very confident about the future. The demand is very solid. Infrastructure is always needed. So we have unchanged view regarding that. The order books are strong and good. So what we're doing actually now is the demand is there. But to some extent, we are -- we cannot deliver. So we're building up a backlog and we will catch up on delays as soon as possible, of course.

And for the EV chargers, I think we've already discussed that, but the entire market is affected. There is a discussion related to dispensation about the new requirements. That could be a positive thing, but it doesn't really help on the demand side because customers are still hesitant, because they want to wait to the new version, which is really natural. So there is some hesitation in the markets. We expect it to continue in July and August. But then eventually, we will see catch up and because the demand is there, as we all know, in the chargers for electrical vehicles. The profitability, we expect to continue. The acquisitions will add on a positive side. On the organic side, on our comparable units, as I said, we expect a full compensation eventually. So that will also -- that would also benefit on the positive side. Of course, it's very difficult to say exactly when it will happen. But overall, we feel -- we are confident that the group will establish its profitability around 20%.

And we discussed that acquisitions, we are in a good position, and we expect ourselves to exceed the target this year and the financial position is good, as we said, and we will focus on quality over quantity as there's a typo there.

Okay. So with that, we open up for questions.

[Martin Westerlund]

Thank you very much for that presentation, and we'll jump straight into the questions. What is the feedback you get from your customers wanting about price increases?

[Jakob Holm, executive]

Okay. Well, our customers, they really understand. I mean we are -- everyone is aware of what's going on. We are all living in the same world. So no customer is surprised and every customer really understands. And the products that we provide for our customers, they are critical. And as I said, most like often also very small share of wallet. So the customers, they accept to pay a higher price, it's not really a big deal. It's more when we have contracted over a longer period. The customers, they understand the situation, but they say we have a contract. So you will have to wait until the contract expires. Some of these customers, we are actually able to increase the price anyway because we have a good dialogue, but some customers, they say, "No, we don't want to raise now, we have to wait for the contract," which is fully understandable. So but the dialogue is very good and positive and constructive.

[Martin Westerlund]

Perfect. The next question. Have the valuation multiples of private companies starting to come down as well?

[Jakob Holm, executive]

We do not see that in such a clear way. I know that some of our colleagues in the market are saying that they experienced that. We cannot say that we experienced it. I don't know, perhaps we're looking at different targets, really high-quality targets that we look at, perhaps are different, I don't know. But our view on this is really that there has been a lot of capital in the marketplace for many reasons, as we all know. And that capital needs to more or less vanish before the multiples will go down. And because an owner of a company doesn't suddenly accept a lower price just because something is happening in the stock market. There's no connection. What really drives this is the competition. So when there's less capital out in the marketplace, the competition will go down and then eventually, the prices will go down. And if we look at the financial crisis, 2007, 2008, it took about a year for the price to come down. So that's probably the same type of pattern that we will see here.

[Martin Westerlund]

Okay. Thank you very much. We'll take the next question. Do you see any risk to your current inventory of older EV products?

[Jakob Holm, executive]

No, we do not see a big risk there. And one important aspect there is that we can upgrade the previous products with the new hardware, the new controlling units, so that it can be upgraded. And then also, there are other markets where we can export this product. So the requirements are very specific for the U.K. market. They are not applicable to other markets in Europe, for instance. So we have multiple options there.

[Martin Westerlund]

All right. Next question. Have you seen any indications of weakening demand across your businesses?

[Jakob Holm, executive]

No, no. The demand is solid. As we're saying, water consumption continues to increase. Energy consumption continues to increase. Transportation volumes continue to increase and so forth and so forth, but the infrastructure assets are not being developed at the same pace. So it's actually a growing gap between demand and supply. So -- and that is really the case. That's what we're experiencing.

[Martin Westerlund]

We'll take the next question. You mentioned that [indiscernible] showed a strong quarter. Is it now back to the kind of margin levels you highlighted at the time of the acquisition?

[Jakob Holm, executive]

Yes, it is back where they should be. So yes.

[Martin Westerlund]

Okay. Thank you very much. That was all the questions that we got. And a big thanks to you, Jakob and Bengt, for presenting today. And a big thanks to all of you who follow along for this webcast. I hope you have a great rest of the day. Thank you, and goodbye.

[Jakob Holm, executive]

Thank you for listening. Bye-bye.

[Bengt Lejdstrom, executive]

Thank you.