Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to Sdiptech Q2 report 2023. [Operator Instructions] Now I will hand the conference over to the speaker, CEO, Jakob Holm and CFO, Bengt Lejdstrom. Please go ahead.

[Jakob Holm, executive]

Thank you very much, and hello, and welcome, everybody [Technical Difficulty] presentation of the report for the second quarter. My name is Jakob Holm, and as always, Bengt Lejdstrom, our CFO, is with me to present the outcome. And the agenda is, as always, we first walk through the highlights of the second quarter and then Bengt will take us through the more details regarding the financial development. And then we will -- it says "what else" here, but we will then have a look at the outlook for the future. That's actually the third point, nothing else.Okay. So, just a short introduction, as always. Sdiptech, we are active in a number of segments within the infrastructure sector, where the key drivers for growth are very strong and long lasting, aging infrastructure assets, increasing consumption of water, energy, transportation and so forth, and also increasing regulations driven by change to more sustainable and safe societies. So, overall, strong drivers of growth within our sectors.SEK 4.1 billion net sales over the last 12 months. Strong operating profit margin. And also -- we also would like to mention that all of our businesses acquired since 2017, in one way or another, contribute to the UN Sustainable Development Goals. And our overall goal in terms of shareholder value is to increase profits every year, with a CAGR of 41% since 2017 and it's a combination of acquired growth, but also organic growth, which we have delivered all the years over the past 3 years, except last year, but we're back now on track on organic growth.And our business model is to acquire and develop companies within the infrastructure sector with high-margin positions. I think you all know that. That's really our focus because that's what we believe provides the most sustainable long-term growth -- profitable growth in the long run.Moving over to the highlights for the second quarter. Demand continues to be strong, 38% increase in net sales, but demand is more reflected then in the organic growth, which was 15%, excluding currency. That is actually the same organic growth [Technical Difficulty] also had in the first quarter. So the organic growth has really been 15% throughout the first and second quarter of this year, demonstrating solid growth.And that is really related then to the customers that we have are typically operators of assets and the demand of our customers doesn't really change with economic conditions. The investments are there all the time and so forth. So, from that perspective, demand is very solid.Our EV-charging unit Rolec, has delivered according to plan, is developing well. The new technology platform is working well. The new products on the platform have, since January, been produced and everything is working according to plan. The new production -- the manufacturing has moved from China to U.K. also, as you know, and everything is working well. So, nothing special to mention any more regarding the EV charging unit. So everything is good there.Moving over to profits. Also, 15% organic growth, which really means that from comparable units, the profitability is really the same as it was last year. That is thanks to the higher cost that we have had related to purchase prices or increasing personnel costs and so forth. We've -- as we've always said that we will do, we have also been able to pass that on to customers. So that's just comforting to also show that in the numbers.So, organically, profitability unchanged, but we still have the margin expansion, which is then related to the acquisitions coming into the group with a higher profitability. So now, in the quarter, 19.7% on the operating profit level and it has really been increasing for many, many years. So that trend continues.Looking at the cash flow, that was weaker than usual, 33%. It should be normally at around 80%. And the reason for that [Technical Difficulty] develop that a bit more further, but it's really related to a strong increase in sales driving up the levels of receivables at the end of the quarter. So that's -- so really the reason why we have a weaker cash flow is also related [ to sales ]. So, although we, of course, want to have, be at the 80% that we normally have, we also would like to just say that the reason why the cash flow is weak is related to strong growth, which is actually a positive thing.And the fourth point that we would like to mention is that we have, as you know, goals and 1 of them is to reduce our carbon dioxide emissions by 50% until 2026, and it's the Scope 1 and Scope 2 and also the emissions is then also compared to the turnover since we are growing so fast with acquisitions, we need to have [Technical Difficulty] so cut that by half. And we measure this in a comprehensive way on a quarterly basis.We met the goal for last year and we're also happy to say that we are in line to meet the goals also for this year. So that is very comforting, and we could see that we have a very good [Technical Difficulty] the group to really drive this change in the best possible way, so that's very optimistic and positive.One acquisition, not in the quarter. It was actually just after the quarter in the beginning of July, Kemi-tech, a Danish company specialized in chemical treatment of water contaminations. Typically, what you could find in steam boilers or cooling system, district heating and so forth, and with different kinds of contaminations that are developed in the water, it actually hampers the efficiency of the systems. So, water treatment really is important to improve the efficiency and it's a good business case for our customers. Kemi-tech is able to really present good [Technical Difficulty] to each customer on how things can be improved on the bottom line. So it's a very strong proposition.It's very interesting also to see that this is like a sister company to Sdiptech's existing company, Water Treatment Products, which is active on the U.K. market. So, this is very much a [Technical Difficulty] acquisition where the companies can really help each other, add to each other. They're active on different geographies, but the offering and the customers and so forth are similar. So they're really sharing the same type of challenges. So this is really interesting to see how we can develop this together [Technical Difficulty] contributing in a very good way to 3 development targets, and we will include -- the Kemi-tech is included in the Resource Efficiency business area as of July 2023.Finally, from my side, just summarizing the situation regarding [Technical Difficulty] acquired SEK 36 million so far this year, and the pipeline is solid. Our financial position is good, it's strong. So we're planning to meet the target, EUR 120 million to EUR 150 million for this year. We're not expecting to exceed it, but we're planning to be within the range, a EUR 120 million to EUR 150 million. So, we have the pipeline and we have the financial capacity to also deliver on that. So everything is normal from that perspective.Okay, then handing over to Bengt.

[Bengt Lejdstrom, executive]

[Technical Difficulty] compound annual growth since 2017 is [Technical Difficulty] it was now 38% in the quarter compared to last year.And as Jacob said, 15% of that was organic, excluding currency effects. We have had some currency effects now because of the weaker Swedish krona. And as you can see on the right-hand side of the slide, the percentage of revenues coming in outside Sweden is actually about 80% of the total group revenue. So of course, that has some effect. But in the number for organic growth, we exclude that effect, of course. But it's about 5%, rough numbers.And we're happy to see that the contribution was broad from most business units, both from acquired ones and also for the comparable units, with a good strong order intake overall and we see a -- as an outlook, we don't really see a big change of that. Jakob will come back to the outlook as such. But good to see that we're delivering well across the group. And I mean it has -- it's cautious, so to say, with this stable demand and solid [Technical Difficulty] we have these societal functions in our companies and contributing to the sustainable, efficient and safe societies. So that's really our vision and our strategy to acquire and operate those kind of companies.Also, the geographic spread, you can [Technical Difficulty] for you, those of you who have been following us for some time that the share from U.K. is decreasing in relative terms, but that's because other countries have been added through acquisitions. We have acquired 2 companies in Italy, 2 in Denmark and 2 in Norway, and we also have 1 in Finland since previous years and other strong geographies are the U.S. and Norway, and Netherlands as well has been added. So -- and some of these companies also have some substantial export revenues. So that is also increasing overall the numbers, not domestic sales.Having a look then on the profit development, and it has been 41%, as was mentioned in average since 2017. Now in the quarter [Technical Difficulty] resulting in a strong margin of 19.7% EBITDA margin in the quarter and 19.4% then in the last 12 months. And also, as with the sales, it was across the line, a good quarter. Most companies contributed to this growth; some, of course, more than some others, and some of the bigger units performed very well. So that's, of course, very comforting to see.And going further into the different business areas. Let's have a look on resource efficiency. There, we had an increase of almost 20% in sales and also there a contribution from most business units. Some of our smaller business units had some challenges with [ this ] and a few other things. So they actually had a bit less profit margin than previous year. So all in all, the EBITDA margin for the whole business area decreased a bit, but that number only corresponds to SEK 4 million actually [Technical Difficulty] when you look at the EBITDA margin, that's not any real big numbers. All in all, the EBITDA for the business area increased by 13% up to SEK 82 million in the quarter.The numbers you see to the right here is 12 months figures. So the margin is still absolutely decent for the business area of 21.2% looking at the last 12 months. And as was mentioned, Kemi-tech, yes, it was signed last quarter, but it was completed early this quarter, so it will be in the numbers as of July. We have also mentioned the EV charging units, Rolec, in many quarters now, and they performed according to plan with a stable and solid development, as expected. So that's, of course, also very comforting to see that they are on track.Looking at the other business area. Special Infrastructure Solutions had a very good development. Sales increased 50%. And since they increased their margin, not the least because of some of the [Technical Difficulty] units with very good profit margins typically increased our sales, we had a strong increase in the margins quarter-by-quarter. And now on a last 12-month basis, we're up to 20.8%, and in the quarter, 21.3%.All of that then summing up to an EBITDA profit increase of 63%. And as I said, it's across the line for our most business units performing very well. We also have some acquisitions counted in here in this business area as noncomparable units, the ones from last 4 [Technical Difficulty] for example and some parts of the quarter 4, companies acquired during Q2 last year. But all in all, a very good development, and we're happy to see that it also looks stable for the near future.Then turning to some additional metrics. These numbers is always a bit complicated, perhaps. But we, first of all, have our cash conversion figures, cash flow from our operations. And we have, as Jakob was mentioning, not as strong as we would wish in the quarter, 33% compared to 80% last year, but that is very much coming then from the increased sales we had in the quarter, but it's also coming from expected sales in the coming quarters since some of our companies need to procure different goods and materials to put on stock of course, before deliveries and much of that is for committed customer orders as well.So, building up of stock, not so much, however, but still. But most of all then, an increase in accounts receivables from invoicing to our customers because of the increased sales. We also have some companies that are selling projects which, over time accumulates to the quite big numbers and using the percentage of completion method of [Technical Difficulty] we need to provide for them in a similar way as for account receivables until we can actually invoice them and get the cash in. And they also had a good development in the quarter.So that's, of course, also building cash flow. But of course, there could be many reasons for the cash flow looking as it looks, but we are, of course, then are working together with our business units to bring this down again in the normal levels, around 80%. And as you can see for the last 12 months, we had -- 1 year ago, it was 85% in the last 12 months. Now we're at 60% roughly.Looking at the earnings per share, we had in the quarter, SEK 3.22 in comparison with last year, that was only 1 [ order ] increase, but then you should keep in mind then that last year had a very -- an effect coming from this accounting standards and that we needed to increase our interest rates, the discount interest rates for contingent considerations debt, which meant that that debt actually decreased and that was an income of SEK 38 million last quarter, tax-free income.If we would exclude that very extraordinary income, you can see as it's at -- seeing to the right that we actually increased the earnings per share with 50%. And over the last 12 months, we have SEK 12, a little bit more than SEK 12 per share compared with SEK 8.50 last year. So of course, almost a 50% increase in those numbers. So that is developing very well, we believe.And then to the right, upper right, we have our debt leverage. We have our net financial debt, that's the debt we owe to credit institutions compared with the EBITDA since we did not pay for any acquisition in the quarter, these numbers have been decreasing since quarter 1 this year. And when it was about 1.8, I think, now it's 1.76, slightly higher than last year, but we have done a number of acquisitions since last year. And then looking -- and this is also where we have our external goal of being at or below 2.5.Then if we include the conditional debt for the earnouts that we agreed with the sellers of companies and in addition, adding some other debt not owed to credit institutions but other parties, then we are running at 3.4% in the total net debt. But as was mentioned in the report, if profits would stay at the levels they are today [Technical Difficulty] of that would disappear, and that's actually the same number as 6 months ago. So you could perhaps consider that a rule of thumb more or less, but typically 40% of that debt is not payable if profits stay the way they are right now.So that's, of course, a very good thing about this debt, which is an important part of our financing that if companies don't grow as expected, that debt is decreased quite substantially. But of course, we hope and we like to pay up that debt in the future because that means that our profits will increase even further.Right. So, on outlook.

[Jakob Holm, executive]

All right, thank you, Ben. So, finally, just looking at the future. We see -- there's no obvious signs of weakening demand. Order books are solid. Same thing go [Technical Difficulty] units, and it's really going back then to that the customers are typically operators of infrastructure assets. The demand is not related to economic activities.So, from that perspective, things look stable, solid and also governments around EU, U.K. predominantly put in additional capital to develop infrastructure, what -- we can see that really in a positive way related to energy efficiency, water purification, traffic planning, traffic control, security solutions, also the EV charging, a lot. So there are many areas that also are getting extra support now in a good way.So it looks promising for the future also, as it is now. Profitability, we see no reason why the margin expansion shouldn't continue. Comparable units are stable in profitability. Our costs are in good control, continuing to contribute positively. So -- and that's really what we focus on when it comes to acquisitions. And then, as -- I think we've already said that the acquisitions pipeline and the target for the year is -- we are aiming for that, and everything is normal from an acquisitional perspective.So all in all, a very strong report, strong quarter and also a positive outlook for the future.And by that, we will hand over for any questions.

[Operator]

[Operator Instructions] The next question comes from Victor Hansen from Nordea. Open Bank.

[Victor Hansen, analyst]

Couple of questions from my end. First, a question on cash flow going forward. So you built quite a bit of working capital now in Q2 and in previous quarters, also in your existing units, so it's not just M&A related, as you know, of course. But would you say that there is a potential to release a significant amount of working capital here in the short to medium term?

[Bengt Lejdstrom, executive]

Of course, that is to be seen. But eventually, of course, it will stabilize. So we're not just increasing the number of outstanding invoices just because of increased sales, but we have had a very -- for us, a big increase in sales the last quarters in different units. It's not coming just from 1 unit, so that's good to see. And it's quite more or less straightforward mathematical with a number of increased turnover compared with the increased [ receivables ] but also for us, we mentioned for us, some other units having these longer projects.So, eventually, we expect and work for that that will even out and we will be back to the normal levels, not the least when it comes also to inventory levels since that has been building up for [Technical Difficulty] future.

[Victor Hansen, analyst]

Yes, okay. So you think that maybe your inventory to sales levels LTM is about 16%, I believe, which is quite high. Do you want it to stabilize around that level or could there potentially be some downside to that, in relation to sales number?

[Bengt Lejdstrom, executive]

The working capital all in all, of course, we were working for it to reduce, and it should be reduced as well as we're reaching a more normalized so say, level.

[Victor Hansen, analyst]

Okay, that's clear. And then, on CapEx for the rest of the year, is there a lot remaining or have we seen most of it? I know, for instance, the [ tilt ] is expanding its capacity both in Finland and the U.S., but other than that, are there any major ongoing CapEx programs?

[Bengt Lejdstrom, executive]

No, nothing unusual, so to say. So typically, we are about 4%. Last year, it was a bit more than 6% of turnover, but normal numbers for us now, considering that we have changed our product mix to more proprietary products is to be around 4%, 4.5% kind of turnover on a yearly basis.

[Victor Hansen, analyst]

Yes, great. And then, could you tell us more about how you steer your companies and local management in the right direction in terms of capital efficiency and cash flows? That would be very interesting to hear more about.

[Jakob Holm, executive]

Yes. Every company has its targets, not only regarding profit development and profit margins but also on return on capital employed. So that is, of course, then to be able to have a reasonable mix between expansion and all the working -- added working capital that expansion requires at least in the short term, with this buildup of inventories and sales. And then to -- also to try to reach the return requirements by bringing down the working capital. That's an important part of the capital.So they all have targets for this. So they have a, let's say, incentive in their own pockets to have these at decent levels. So that's the carrot sticks, so to say. But then, of course, we also follow them up closely and monitor and discuss with them how could they then reduce their working capital from -- in their daily operations. So we work very close to the companies for that as well.

[Victor Hansen, analyst]

Perfect. And then just a final question from my side. So your products represent about 60% of sales currently. I'm wondering, it's a dramatic number here or what you are aiming for or what are your thoughts here?

[Jakob Holm, executive]

We don't have a specific percentage as a target for us in the company. It's interesting for us, if they have their proprietary products for sale, but then also adding service offerings could be software offerings combined with our products, to monitor their products and also then installing the products. So we like that because that gets some customer stickiness.What we don't like so much is distribution business really. And of course, in some business units, still, we have service and installation of other party's products, but that's becoming a smaller and smaller part. The major part of all our installation and service work is on our own products.So actually, we are not aiming for 90% or 80% or 85% of own products because that would mean we don't have that much of additional offerings around our own products. So if the 60-20-20 split, which we have today, when it comes to own products, service and installation and that may, of course, change from quarter-to-quarter and year-to-year and perhaps a little bit even more with the own products, but we will have a good mix of the 3 of them.

[Operator]

The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is just on the transport refrigeration business. Nice to see it's good recovery. I was just wondering here if you could see some pent-up effects here on top of, let's say, a stable or growing markets driving growth for that business during the second half.

[Jakob Holm, executive]

Yes, the company you're referring to, the GAH Refrigeration for the last mile transport cooling solutions had a pretty tough year last year when their customers didn't get their vehicles. There's still a backlog for all their customers to receive their vehicles. And there is also a huge need for replacing this existing fleet. So [Technical Difficulty] to the overall economy, so to say, how much of the services of these companies our customers is demanded, but we also have a replacement demand, and also not the least, a more -- to have more sustainable fleets.So GAH has an offering of cooling units and equipment for EV for electrical vans, which are more or less the only 1 offering in an efficient way. So -- also, their customers are replacing existing perhaps diesel fuel-driven vehicles to electrical vehicles and then they, of course, need new cooling units for those vehicles. So, they have many different drivers as with all our companies coming from sustainable and efficient ambitions from their customers. So, we don't really see a weakening demand in the near future because of any overall situation.

[Karl Bokvist, analyst]

Understood. And then on the comment you made there about some lower profit margins in some of the smaller units within resource. Are there any particular factors here since you mentioned that price increases have caught up with costs and should we expect these to remain in the coming quarters?

[Bengt Lejdstrom, executive]

There was some one-off costs, some inventory write-downs and some other one-off costs taken in those. And I mean, in the smaller units, the sales can vary more in relative terms, which means also that your profit margin goes up and down. So as I said, it represents SEK 4 million of profit, all in all, which is not that much on -- so, we expect that to be back normal business soon enough.

[Karl Bokvist, analyst]

Understood. And then, on the EV charging business or Rolec, for the second half last year and also the full year, you separated the growth components due to a fairly significant divergence between the 2. And now you say that Rolec developed in a stable manner. So, what does that mean? And could you help us with some figures here?

[Bengt Lejdstrom, executive]

Yes, for -- they had an organic profit growth Rolec in this quarter. In Q1, they were flat versus last year, which was above expectations. And this quarter, they had an organic profit growth effects. It was [ mid-single ] digits and it was actually a little bit below the overall group achievement, but still very solid. And as you said last year, Q3, Q4, we explicitly mentioned or rather the difference if we would remove that company. So I guess, in Q3, Q4, we will [Technical Difficulty] to be fair, not only separate when things are not going as expected. So -- but they have an organic profit growth, and yes, we see a good stable outlook for them as well.

[Karl Bokvist, analyst]

Okay, good. That's helpful. My line was a bit poor there. So sorry, did you say we should think about it in a single-digit profit growth this quarter. Did I interpret you correct here or was there anything else?

[Bengt Lejdstrom, executive]

No, in Q2, it was that, yes.

[Karl Bokvist, analyst]

Alright, good. And then just staying with Rolec as my final question. If you say that it's delivering according to plan, and previously, this has had margins above group, shouldn't this be quite supportive for Resource Efficiency's margins during the second half?

[Bengt Lejdstrom, executive]

Yes, they have above group average for sure. So, we say typically around 25% sometimes more, even though it's not as high as previous year, but it's still very high. And so, yes, doing the math as you did, they should contribute pretty well.

[Operator]

The next question comes from Niklas Savas from Redeye.

[Niklas Sävås, analyst]

I was just thinking a good problem you have currently is the strong organic growth that we see. And I mean the tempo in terms of acquisitions have gone down and you signaled that in connection with the Q4 report. I'm just thinking now considering that you build up quite a lot of working capital, and that hampers the cash position. I mean, do you really need to ramp up the acquisition rate much more in the second half? I mean, I know that you have your goal, but how is your reasoning there between organic growth and acquisition growth. I think maybe investors would be happy to have a total growth of the level that we see in this quarter.

[Bengt Lejdstrom, executive]

Yes. Well, we have our set strategy and set plan to acquire according to our financial goals. That is based on our financial capacity, it's based on the work that we do every day to build our pipeline and [Technical Difficulty] work over year after year after year after year, and we see no reason to change that this year. Everything is working well for Sdiptech. The cash flow, we will fix that. It's related to positive growth.So, there's no issues, really, and we cannot see the reason why we should take a pause in the acquisition. We will just continue as normal. That's what we've -- that's our strategy. It's our promise to everyone. Everyone investing in Sdiptech and we will deliver on that.

[Niklas Sävås, analyst]

But at the same time, I guess, I mean, you won't push acquisitions just to make acquisitions. It's lumpy and if some acquisitions are delayed, that's not a big issue as I see it, unless...

[Jakob Holm, executive]

That's right. So we will not exceed our financial goals. We've been clear about that. So we will stay within them. And all our financial goals are calibrated. So if we are within our acquisition goals, then we will not need to add any additional equity either. So that's also something that we want to be clear about.

[Niklas Sävås, analyst]

Yes. Makes a lot of sense. And you mentioned that you made 1 acquisition in the end of the quarter of Kemi-tech, consolidated in July then. And you mentioned the similarities between Water Treatment Products. I'm just thinking in terms of the markets that Kemi-tech is active in, is it mainly Denmark or do they export as well?

[Jakob Holm, executive]

No, it's mainly domestic. Water Treatment Products is domestic in the U.K. and Kemi-tech domestic in Denmark. So -- but it's really -- they can really exchange experiences related to their recipes, if they sold their R&D to develop new products, their libraries or recipes. So, yes, this is really interesting actually to be -- interesting to follow the initial development there.

[Niklas Sävås, analyst]

And do you see any ways of expanding it? Or is this market typically local?

[Jakob Holm, executive]

It is typically local domestic, yes national. So that's also something that normally creates good barrier, but it also, of course -- so it helps you when you're on the inside of the market, but also makes it more difficult to expand. But this is typically what we like. We like very well protected niche markets.

[Niklas Sävås, analyst]

Perfect. And can you say anything about the sales level of the company and what multiple you paid and how you structured the deal? Or do we need to wait until Q3?

[Jakob Holm, executive]

Yes, you would need to wait. We don't rather disclose those numbers ahead of time, and it's only if it's a very big acquisition [Technical Difficulty] multiples and normal profit margins. So we would only mention it if would be something exceptional, either way.

[Niklas Sävås, analyst]

Okay. Perfect. And we stay with the estimates that we do.

[Operator]

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, I could perhaps mention we got a question here on the chat. But I think we have answered that already. It was relating to existing growth rates and Rolec spend year-on-year, rates going into Q3. But I think we have answered that already or at least what we can say.

[Jakob Holm, executive]

Yes, all right. So by that, we thank everyone for listening in and wish everyone a great summer going forward. Thank you.