Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2022-Q3

[Ludwig Sjöström, analyst]

Hello, and welcome to today's webcast with Sdiptech where CEO, Jakob Holm; and CFO Bengt Lejdstrom would present the company's Q3 report. My name is Ludwig Sjostrom and I work for Finwire. And with that said, I hand over the word to you, Jakob.

[Jakob Holm, executive]

Thank you very much, and hello, everybody. Welcome to Sdiptech's report for the third quarter. My name is Jakob Holm. And as always, Bengt Lejdstrom, our CFO, is with me here on this presentation. The agenda, we will look into the third quarter, of course, dig into the financial development of the quarter and then finally, an outlook where we look at what we see in the future for Sdiptech in specific. And as you know, we are an infrastructure technology group. We are focused in our acquisitions and how we develop our companies towards more sustainable, efficient and safe societies. About SEK 3.2 billion in net sales last 12 months now; increasing profitability margin at 19.4%, also over last 12 months; continuously growing at 38% over the last 12 months. And our compound annual growth is at 41% over the past year since 2017. And our business model is, as you know, associated to acquire companies with focus on infrastructure. We focus on high margin positions. We believe that is a key for our success, and we focus on strong growth drivers. We focus on infrastructure, but also, of course, as I said, more sustainable, efficient, and safe societies. Then moving over to the quarter. It's been a strong quarter for the group. We're very pleased to present the results. Growth in net sales up 33%. Profits are growing even faster at 43% in the quarter. Our profitability margin continues to increase, which is very positive to see, provided that we have an inflation surrounding us, 19.9% in the quarter. Cash flow is okay, it's decent at 59%. We will get back to that, and we've had some inventory buildup. So strong quarter. We've also had some other important things happening in the group. And one effect of that is that we've had lower results in our unit for EV charging. And the reason behind that is the delay in the launch of new technology. And we prepared a new technology to be launched this year. Unfortunately, we had some critical shortages in some of the components and the launch was delayed. And as an effect, net sales and profits, of course, are lower than last year. And provided that it's quite a large business unit for us, it does have an effect. Anyhow, ramp up is now underway. All components are in-house. We're ramping up volumes, and we're targeting to reach 100% production in the first quarter. We'll get back to some more details about that. But given the significance then of the happenings in one of our business units, we think it's justified to look at the development in the other 36 units. And then we could see that the overall, in general, the organic growth is really solid in the group. Sales up 2.8% and profits even more than at 9.3% in comparable units. Okay. So just the important -- most important aspects about the quarter, we can see that demand continues to be good. Net sales have a positive growth. On one hand, price revisions have, of course, had a positive effect on sales. But then on the other hand, we have had some hampering on our sales. We're not delivering according to the demand due to shortages. As before, there's lack of new vehicles in the market, that does affect some of our business units, and that's really lack on the customer side. We have the orders, but we haven't yet delivered all the products. So all in all, the net effect, if you say, so it's hard to say. The price revisions effect on the positive side, the hampering or the shortages effect on the negative side. But then all in all, the net effect is positive 2.8%. Forward-looking, our order book remains good. We see no clear signs that things are weakening. It's quite normal view on the future when we look at all the details in our companies. The profitability continues to grow, as we said. I'm really pleased to present that the profitability is improved in our existing businesses. Organically, then our profits have grown at 9.3%, then excluding the EV charging unit. And of course, if you grow profits at 9.3% when the sales grow at 2.8%, of course, the profitability margin is improving. So that really shows that what we're doing with regards to inflation is working well, and I'm really, really proud about all the key leaders in our organization. This decentralized model is really having an effect where we can make the right decisions in every single point of time with really skilled managers. We will, of course, -- the inflation has not been stopped. We all know that. So we will continue to work with this. But this is more and more coming as business as usual for us to work with these things. And then, of course, acquisitions have also contributed positively to the margin, and that's really in line with our strategy to acquire high-margin positions. So acquisitions add on the positive side and also how we develop our companies add to the positive side. Cash flow has been affected to some extent by building up of extra safety stock in the quarter. Underlying, however, our cash flow last 12 months is at 80%, and that is, what I would say, representative also for the group. And I think all of you that have followed us over the years know that sometimes, we build up stock, but then eventually, we will release the stock and so forth. So on an average, 80% is representative. Our acquisition pipeline is as strong as before. It's actually the highest level that we have ever had. That was the same situation in the second quarter. So we are expecting to exceed our acquisition target this year. We are finalizing some existing processes as we speak. So the fourth quarter, most likely, there will be some more closings. And as before, I would just want to repeat it. We focus on high [ margin ] positions, really qualitative targets only. And well, it's worth mentioning, but that's how we always have focused, as you know. And then just have a look at the important things going on in our EV charging unit. These are some investment highlights. Of course, we're not pleased with the reduced sales and the profits in the quarter, but the background is really positive. So we are launching a new technology platform. It's actually a total redesign of the controller unit. The controller unit mainly consists of the circuit board, the electronics, anything with semiconductors are really inside the controller unit. That's really the smartness that you can build into the hardware. And then on top of that, of course, we have our own software. But that's the total new redesigned hardware. It will -- we will be able to launch new functions, not available on the market today. We're really excited about that. Of course, we cannot talk about them here and now. Eventually, they will be presented to the market. And the new technology is also then compliant to the new regulation for smart EV chargers in the United Kingdom that was -- came into effect 1st of July. And really what happened there, the complication is when we launched a new controlling unit, we did a new design with new components, of course. But then due to shortages of components, we had to redesign, exchange one component for another. And then we had to recertify for the authorities. So a very delicate process to get this into place. It's actually a tremendous effort that has been done to -- that we now can say that everything is certified, approved, all components are in-house, production is ongoing. So really happy to see that. Also, we've actually moved the production of hardware out of China and home to United Kingdom to Nottingham. So really -- firstly, a really important is then that we are really taking out the risk exposure that we previously had in China. So all our hardware was produced in China, which a lot of -- the majority of our peers actually still have. But we've taken the investment to move in to U.K., which is really positive. By doing that, we simplified our supply chain. Transportation is really reduced and also our climate footprint as a result, of course. And thanks to the new design, the assembly is significantly easier to do. So lead times are shortened significantly, but also the capacity is doubled. It's actually more than doubled in the plant there in the U.K. now if compared to what we had in China before. So looking very positive. And as you know, future growth estimations are high, and that's really based on what the ambitions are in Europe, but also specifically in U.K. that the sale of new petrol and diesel cars are set to be banned in the U.K. from 2030. Even if that will not happen, it's still a significant growth that needs to be put into place. We all know that, in 2022 the growth in the market was -- is about 15%. It's really less due to lack of new electric vehicles. We all had expected more. So there is a backlog being built up in the market in addition. And then for 2023, while there would be a combination, the strong growth drivers are there. But then all -- we have these uncertainties in the prevailing economy, as we all know. So the net effect short-term is hard to say. But eventually, and in the long run, the growth is but for significant. And now we are prepared. So we're really happy about that. And then to sum up, about acquisitions, we've done 4 acquisitions so far totaling SEK 125 million EBITA. And actually, we've stepped down from 3 processes also. And the reason for that is that the projects they have -- or the company, sorry, have not really lived up to our quality expectations. And these are processes where we've just had to put ink on the paper. So we really stepped down in a very late stage. But it's really important with our business model that we only add excellent companies into the group. Short term, you could add anything. You could build the profits. But in the long run, you would just create problems unless the companies are perfect. So that's really the focus that we have. We have several ongoing projects, thanks to good work over many, many years to build up the pipeline, and we are expecting to exceed our acquisition target for this year, as we've already communicated, and we are comfortable to say that we can stick to that communication. By that, I hand over to Bengt for the financial developments.

[Bengt Lejdstrom, executive]

Thank you, Jakob. And then to start looking at our sales. As you can see on this picture that we have quite steadily been increasing our group sales with 26% -- 25%, 26% in total from 2017 all the way up until now. And that's, of course, a mix of acquired volumes and organic growth. But from quarter-to-quarter, that may, of course, be a different split between these 2 components. But all in all, it's a very steady sales growth over the years. And looking then on the right side of this picture, you see the split then between the different geographies where our customers reside. And this one perhaps looking a bit similar to last quarter, but the segment other geographies, meaning other geographies than geographies where we have our companies, then has been slowly increasing. Meaning, that we are exporting more and more since we have invested and acquired companies with product sales, which, of course, then is -- we believe, is a strong opportunity to increase sales over time that you have a product that fits also in other geographies than in your own domestic. So you will probably see that continue that development, that is, a black slice of this pie will increase, and still U.K. is our most important geography all in all. Looking at the profit. Also there we have a very steady increase over the years. Jakob already mentioned 41% since 2017, still holds. And last 12 months, we have the 38% also there, a mix year-on-year with acquired profit and organic profit growth. We had 3 very strong organic profit growth years, 2019 to 2021. And that trend continues this quarter actually, if we -- as Jakob mentioned, would exclude the EV charger business. Then we are at the same level as the previous 3 years with a 9% organic profit growth all in all. So this quarter has been really as we want and expect and our targets, as you know, perhaps, is that to have an organic EBITA profit growth of 5% to 10% on a yearly basis. And as profits have been growing more than sales, then, of course, also, our margins have been increasing. And as you can see here, it's roughly 2% increase per year since 2017 and not so much in the earliest 2 years perhaps, but we're now at 19.4% on the last 12 months basis, and we were at 19.9% in the quarter 3. And as Jakob said, that we think we are a 20% margin company. And so we're there by the quarter, and we still have a little bit to go on the last 12 months, but let's see then how this year ends. If we look upon the quarter, we had a sales growth. It actually says 3%. There should be 33%, of which we had a negative profit growth organically if we look upon all the companies. And if we exclude the electric charger business, EV charger business, it was positive with 3%. For the EBITA, it increased 43%, and that was then almost 9% negative organically, but on the other hand, 9% positive if we exclude the EV charging business. So for the group as a whole, we think it's a very healthy portfolio of companies delivering very well in this environment with cost inflation, et cetera, and this also proves that we have been catching up with the price increases towards customers. We have mentioned in previous reports that we have been -- it's a time lag between being able to raise prices at the same pace as your cost inflation, but we also said that our companies will catch up sooner or later, and now we can see that they are more or less there. So that's a very -- also the sound indicator of how our companies are performing. So very stable demand. All in all, we don't see any real downside of that. So customers, as we expect from our type of businesses that they are still there and the order books looks good. And yes, I think we have discussed the other things that are mentioned on this slide already. And so I will then change and go into the business areas. Looking at resource efficiency, here is the business area where we have the EV charger business. So that's also why you see the development is not as good as for the group as a whole, but still a 10% sales increase. Of course, partly driven by the acquired business unit in Italy, Agrosistemi, which develops very well, but also a solid organic growth in all the other units then except for this EV charging, so we're happy to see that. And we had -- the EBITA was more or less flat. If you look upon -- if we would added the decimals here, it would be a 1% increase. Also here, of course, a contribution from our newly acquired company in Italy, and then that's offset then by the EV charging business challenges here. They're still making profit, but not as high and as good as we expected. And since that business is a quite high margin business, it means that overall the EBITA margin for the business area has decreased from 25% to 23%. Today, there is 16 units in the business area and 1 acquisition during 2022 so far. Looking at the Special Infrastructure Solutions, there we have a bit more aggressive growth, you could say. We have sales increase of 48%. Of course, a lot of contribution there from the 3 acquired companies, TEL UK, RDM and ELM, but also from the already comparable business units. We see, for example, that our unit that deals with the road maintenance equipment, our Finnish company, they have a very good development during the year and with success with exports into the U.S. and North American market, which is very good. On the other hand, we have some units that have some challenges when it comes to their customers having access to vehicles since we have 2 companies then selling equipment to minivans and that sort for last mile transport and another one for forklift attachments. And both these types of vehicles have forklifts, and minivans have been a little bit long supply chains and delivery delays. So they have been hampered a little bit, but still performing well with the good profits. But could do even better, I think. But they will soon be on track since we see signs on that when it comes to our customers' possibility to get their vehicles. So we can then install our equipment into those vehicles. So all in all, a very good for this business area, and they also then had a margin increase from 17% up to 20.4%. As you see on the chart, the development has been not that aggressive since 2020. But as you may remember, we included here a year ago, the 2 remaining business units from our previous business area, Property Technical Services, which have pretty good large sales, but to a lower EBITA margin than the average in this business area. So that has, so to say, set the new level for this business area. So the 20% is very good. It's 19.8% on a last 12 months basis. Today, 19 business units and as I said, 3 ones -- 3 acquired during this year. Finally, when it comes to the financial details, we have some additional metrics. Jakob mentioned the cash conversion, 59% is not as good as we really want. It's typically around 80% to 90%. We were 80% in the last 12 months. But still during this quarter, we had some buildup in stock, but also some increase in accounts receivables, for example, for the increased sales in a number of units. But looking at the cash flow from the profits, so to say, before working capital cash flow, then it was very good, actually. So we think still it's a very good overall cash flow from the group as a whole, which is important since that cash flow then is invested in the new acquisitions or new companies. Looking at the earnings per share, we had an increase from previous year, and we now at the last 12-month basis have almost SEK 10 as a earnings per share. Looking at our debt ratios, that's always tricky KPIs, always a lot of questions around that because we have -- not perhaps when it comes to the net financial debt, that's debt that we always need to pay back to our credit institutions or leasing providers, which currently stands at 1.8. As you may know, we have a target of stay at or below 2.5. So there's still plenty of headroom there. And then we have our total net debt, which is a higher ratio, as you see, 3.7, slowly increasing, and that debt is including then our contingent considerations or conditional considerations based on future increased profits in our companies. Much of that debt is not payable unless the profit increase compared with today's profit levels. So it's not really a number that could be interpreted very much since you would have them to, sort of, say forecast how much profit is needed in order to pay out all that reserve debt, because we need to put a reservation for all that possible debt in the future on the earn-out structures we have in our acquired companies. So by being at the share of 40%, that conditional debt is, of course, a large part of our balance sheet on the debt side. But it's still -- it's a debt that if things would go worse or stay at current profit levels that much of that debt will actually just disappear. So that ratio will be lower. Yes, I think that's it. Yes.

[Jakob Holm, executive]

All right. So then finally, let's have a look at the future. We have a positive view on the future. We can see the demand is solid. The order books are good. Infrastructure is always needed as we know. So we have an unchanged view on that. We have no clear signs that we should have a different view. Every things look good and quite normal. And we will have -- and there are some lack of components and so forth. So as before, then we -- the demand is there, so we will build up a backlog as before, but then eventually, we'll catch up on the delays as before. So this is really becoming business usual for us since the pandemic really building up backlog and then delivering upon the backlog. So that's really what we're doing. And that's also what perhaps you could see the effect on the cash flow. But that also means that we need to take some extra safety measures in the inventories and so forth. But anyway, we have really learned how to manage that. Profitability is we will -- we still stick. We believe that normal profitability level for the group is 20%. So at the -- in the quarter, we're really there actually with some potential of quite higher profitability given that the EV charging units really didn't perform as it can. But anyway, 20% is good expectations. And I think we've really proven that we can achieve full compensation for cost increases. You can see that the organic profitability improvement in the quarter is a good example of that. Of course, the inflation will continue, but our work will also continue. So we have comfort in that. And then for the EV charging unit, ramp-up is really underway. Production is ongoing, and we can really see around the corner that the demand or pent-up demand is really significant. So we really positioned ourselves in a good way with a very good product line. Production capacity has really doubled and then we moved it home to our backyard. So we are in a very comfortable position there to take on that increased volume and growth. Our acquisition pipeline, that's business as usual as well, I would say, but it's really a strong position and it's not something just happened. It's many, many years of systematic work, and we're excited about that, of course. But as we've also said, we have really focused on only the best companies and we acquired 4 which stepped out of 3 processes. So that's really an evidence for that. We believe that we will close some additional before the fourth quarter has ended. So all in all, a positive view on the future for Sdiptech. And by that, we open up for questions.

[Ludwig Sjöström, analyst]

Thanks very much for the presentations. And as you mentioned, we'll now continue with the Q&A. The first question here is there's a lot of CapEx in the quarter. Is it driven by Rolec or what is the driver?

[Jakob Holm, executive]

Yes. As you mentioned, the CapEx spending in the cash flow this quarter was higher than normal. And when it comes to intangible assets, investment in that, that's -- yes, that's the charge in -- the new charging -- chargers, Rolec of the total of almost SEK 50 million spent in the quarter, and the cash flow about SEK 40 million of that comes from that investment. Then we also had some extra investment in facilities in some U.K. companies, also the tangible assets we're spending were a little bit higher than usual. But as a rule of thumb, we typically have about 1.5% to 2% of our turnover is our investment CapEx intangible assets.

[Ludwig Sjöström, analyst]

You say that you have stepped down from 3 out of 7 deals. Does this include the 4 deals you have made this year? Or does it mean you still have 4 processes in advanced stages?

[Jakob Holm, executive]

Okay. Sorry if that was confusing. We've closed 4 processes so far, and we stepped out of 3 processes. So total, we've, let's say, the 7 processes have been closed in one way or another already. But in addition to that, we have ongoing processes as well.

[Ludwig Sjöström, analyst]

Yes. Regarding acquisitions, have you seen any changes in the acquisition processes in terms of price and demand from seller? And has that been a factor in the processes you have ended?

[Jakob Holm, executive]

No. I know that -- well, we -- okay, the way we pursue our acquisitions work is that we really put a lot of effort to find the targets ourselves. So that means that we have exclusive dialogues with the owners. And from that perspective, we have our view on pricing, and that's really based on what is our calculation on how we can get our returns. It's not a reflection of what's the price point in the marketplace. It's -- we price our companies based on our decide returns. If you talk to other companies that do acquisitions, they are more focused on entering bid auctions. And there, of course, you can have a more up-to-date view on the price points. But we believe that's not the way for us to go because that's really competitive processes. So we find our deals ourselves. And from that perspective, we don't have the same insight on what is the actual price point in all those bid auctions because we don't really participate in that. And the reason why we stepped out of 3 processes is not based on price since -- when we sign a Letter of Intent, we already agree on price. And then we do a due diligence. We, of course, need to ascertain the quality of those earnings, but then other aspects in terms of legal due diligence, tax due diligence, commercial due diligence and so forth. So there's more of those aspects that would come to the conclusion that these are great companies, but not good enough for us.

[Ludwig Sjöström, analyst]

You have 10 operating business in the U.K. with around 36% of total sales. How is the challenge in economic situation in the country impacting your business? And what do you expect going forward?

[Jakob Holm, executive]

Yes. So I think there's a lot of -- or as we all know, there's a lot of political turbulence going on there. It's really nothing new for our British businesses. As you know, we've had the Brexit. The Brexit was on. The Brexit was off. It was on/off, on/off, really chaotic years from that perspective. And we really had to prepare ourselves for the Brexit. So that was something that really affected us. So I think everyone is quite used to political turbulence. That is not something that is we focused at all, I would say. It's rather than ordinary things that we focus on also in the rest of Europe. We are, of course, targeting a situation where we will have the revisions of salaries, for instance, but it's the same type of situation that we have in the U.K. that we have in other countries. So it's not anything specific, I would say. I think it's rather -- no, I just won't develop anymore about it. It's business as usual, I would say.

[Ludwig Sjöström, analyst]

What is your cost of financing? How much refinancing is due in the next 18 months?

[Jakob Holm, executive]

Well, as we mentioned in the report, we have a new credit arrangement since May this year, which is a 3-year committed headroom with additional volumes as well to ask for in our financing when it comes on the debt side. So we don't have any refinancing until -- yes, the earliest then in the spring of 2025.

And of course, when it comes to interest rate that we pay, I mean, you can see the numbers we present on how much interest rate we have compared to our debt. So of course, since the base rates of the central banks are increasing, so does our total interest rate spending, but our margins are still at the same level as before and at a quite decent low level as well. We have done some hedging for part of our debt financing. So we have kind of locked in a certain interest rate when it comes to those base rates, meaning that we have a fixed rate, all in all, or part of our financing during 2 years. And I can also perhaps say that when you look at that finance net and the interest rates booked as costs, we have some, call it, theoretical interest rates on our conditional debt that we need to put in the profit and loss, but that's nothing that hits the cash flow. It's just bookkeeping, you can say.

[Ludwig Sjöström, analyst]

What is the gross margin impact from sourcing Rolec in U.K. now versus China?

[Jakob Holm, executive]

We will not go into those details. Of course, it's information that our customers probably would believe is very interesting. So that's confidential information. But of course, we are very happy with the profitability that our EV charging business has is really the highest in the marketplace. And then, of course, that's something that we value and we want to protect.

[Ludwig Sjöström, analyst]

Moving on to the last question. Do you notice any sensitivity regarding prices towards customers given the current economic situation?

[Jakob Holm, executive]

Not really meaning that since we need to increase prices, we would lose volumes. But I mean, typically, our companies have products that, for one, is a very necessary product or service for our customers. So they need to buy this kind of product or service from us or, of course, from one of our competitors, if there is one in that very specific business segment. But it's typically a good or service that you cannot really be without. So there, we have a strong, of course, pricing power when it comes to that. And also typically, our company's products are a small share of the total wallet for this customer. I mean, we have both public institutions and companies and grid line operators in the electric networks and we have container ports and whatnot. And all these are very big customers with good paying capacity, so no loss of customer payments, so to say, no bad debt or bad receivables rather. So typically, it does not affect with net -- with lower, at least not as we have seen so far.

[Ludwig Sjöström, analyst]

Thank you so much for the presentation and for answering our questions. And we wish you good luck in the future, and we want to thank all the viewers for tuning in. Have a nice day.

[Jakob Holm, executive]

Thank you, everyone, for listening. Bye-bye.