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Earnings Call Analysis
Q3-2023 Analysis
Sdiptech AB (publ)
Sdiptech's third quarter showcased solid financials, with Jakob Holm, the CEO, and Bengt Lejdstrom, the CFO, at the helm. The company observed a substantial 40% growth since 2017 with a keen focus on infrastructure segments, driven by increasing consumption, stringent regulations, and the pursuit of sustainable and efficient societies. The quarter recorded net sales just shy of SEK 4.5 billion, a robust operating profit (EBITA) margin of 19.3%, and impressive year-over-year growth.
Sdiptech experienced a net sales increase of 41% during the third quarter, out of which half was organic. This is a testament to the company's capability to not just benefit from past investments but also to sustain and grow its market base organically. The organic profit growth paralleled the revenue increase, maintaining profitability. Cash flow saw a significant rebound, reaching levels of 94%, up from 45% and 33% in the previous two quarters, indicating efficient management of receivables and inventory.
The current market dynamics, characterized by increased uncertainty and rising interest rates, have led to cautious acquisition moves by Sdiptech, with acquisitions amounting to only SEK 50 million against the target range of SEK 120-150 million. The company intends to sustain its quality-centric approach to acquisitions, placing emphasis on high-margin market positions. This prudent strategy is poised to see Sdiptech making fewer but more strategic acquisitions in the near future.
Sdiptech's Special Infrastructure Solutions business showcased similar growth patterns as the group, with a 41% sales growth and 38% profit increase. Contributing to this growth were larger units focusing on automation solutions, insurance claims, and cooling solutions, among others. Despite this, profit margins in certain units like construction and real estate experienced a slight decrease due to underperformance, reflecting the need for careful management in specific sectors of the business.
The company demonstrated financial prudence, resulting in a reduction of the debt ratio from 1.8 to 1.68 over the past year. When accounting for the full debt, inclusive of earn-out debts, the debt ratio currently stands at 3.22, down from 3.7 last year. Continual focus on debt management is a strategic objective for Sdiptech, with an aim to reduce the leverage while maintaining business growth and profitability.
Looking forward, no signs point to a weakening of demand in Sdiptech's infrastructure market segments. Anticipated societal trends such as electrification, regulatory focus on water treatment, and heightened safety and security measures bode well for sustained growth. A confident outlook is further bolstered by the company's solid EBITA margin of 19.5%, aiming to reach 20%. Financial stability remains a cornerstone, with strategic measures in place, such as a SEK 1.3 billion liquidity pool, to support Sdiptech's ongoing and future ventures.
Thank you. Hello, everybody, and welcome to Sdiptech's report for the third quarter. Yes, my name is Jakob Holm. And as always, with me, we have Bengt Lejdstrom, our CFO. And as always, the agenda is easy, simple, introduce the highlights of the third quarter, Bengt[Audio Gap]The details of the financial development, and we will end looking at the outlook for the future. And then after that, questions.So as you know, our focus is on infrastructure, certain segments within infrastructure that we believe have significant good trends, drivers being increasing consumption, increasing regulations and also drive for more sustainable, efficient and safe societies. So good underlying growth trends.Sales at slightly below SEK 4.5 billion net sales over the past 12 months. Operating profit EBITA at 19.3%, and the year-over-year growth rate is 40% since 2017. And our business model, you all know, it's very much geared towards to increase profits every year. We have been doing so, 40% as we saw on the previous slide. And for us, it's also important not only to use our cash flow to acquire, but also to acquire companies that are high quality and that we believe will be also profitable and grow in a good way for many, many years to come. So we focus very much on high margin -- market positions, well-protected position versus competition.So some highlights then for the third quarter. The demand has been strong over the quarter. Net sales increased 41%, of which about half is organic. So that's, of course, important message. To some extent, that was a catch-up from last year, but more important, the demand continues to grow.And we also think it's fair to mention Rolec, since we presented that separately last year, and Rolec grew in a good way and delivered according to plan. And that's really on the back of the business-to-business customers for Rolec in the EV charging industry. That's really where we have the important position and also the growth and also the future for Rolec. So that was really paying off in the way we expect it to be. Overall, if we exclude Rolec, then our overall growth without that was also 18%. So that's also important to mention.And sometimes we get the questions, how big is really Rolec, and it's about 10%, slightly less than 10% of our overall. Also just to put it into context, sometimes, Rolec has a little bit too much attention. But anyway, so good demand.Operating profits remained stable on the back of good cost control. We have been between 19% and 20% on our operating profit for about a year now, and we are there still, but also happy to see that the profits grow at the same organic pace as revenue, which, of course, means then that the majority of our business really remains in profitability in a good way, the way we want it to be.And then also very happy to send message #3 that the cash flow is back to normal levels. 80%, we say is a normal level for Sdiptech. We were at 94%. It's really up from 45% to 33% from the previous 2 quarters. And so what we are -- we are putting a lot of[Audio Gap]Now because, of course, it's important that we can translate the profits into cash. So we are really managing down the growing receivables since we're growing organically very much. So really managing the receivables and inventory level, and it's paying off and the work will continue. It continues now and will continue. So just to ensure that the cash flow generation is where we want it to be, at about 80% or better.We also, in August, issued a sustainability-linked bond, and that's the reason why we did that is really because we have been aiming to do this for quite a long time, actually, and we've got a good window in August. So it's really part of our long-term financing strategy. We believe bonds will become a cost-efficient part of our financing mix. And really, our bond was priced low versus other first-time issuers. So that's a good sign of good creditworthiness set by the credit market and perhaps the credit market are experts in analyzing financial risk and so forth. So that's also an important message that we want to share to other parts of -- for some other stakeholders from Sdiptech.And sometimes we get the question, that's a very expensive financing to bring in bonds at this point in time. Our average financing rate is at 4.75% and the bond added 0.25% to that. So it didn't make a big change. That's also important just to know. So we're adding this very important financing source without any significant cost increase to Sdiptech.All right. And just a final note then, I think everyone looking at our debt. The debt ratios decreased during the quarter, thanks to growing profits, of course, good cash flows, but also that we've had a lower pace of acquisitions than normal. We'll get back to that.Acquisitions, yes, okay, getting into that already now, SEK 50 million so far this year. Our target is at SEK 120 million to SEK 150 million acquired profits. So we are below that target. Yes, we can also mention Kemi-tech, a great company that we acquired in Denmark, but it was actually part of our presentation of the previous quarter. So we will not develop into that company, particularly now. But it is a fantastic company that we're happy to bring into the group.Our pipeline is good. Our financial position is good. The reason why the -- our acquisition pace is slower than normal is really that on the back of the macro situation, higher uncertainty, higher interest rates that also brings higher requirements on our return on capital. So the way we see it, the price expectations in the market are, in general, still too high. So that means that there are fewer acquisitions for us to be made at least to the high-quality companies that we target, the price expectations there are -- there's higher integrity, let's say so, from the owners of those companies. So -- and we -- so we will continue to acquire because there are always good deals to be done, but it will be done at a slower rate, as long as the macro is the way it is now and interest rates are the way now. So expect a slower acquisition pace from Sdiptech going forward.And by that, I hand over to Bengt.
Thank you, Jakob. Right. So yes, now we get the right slide. Right. The group sales have developed, as Jakob was mentioning, very well over time. And at this quarter, it was actually increased then by 41%, all in all, and 20% of that was organic. We have gotten the question how much of that was really currency effects then on top of that and how much was acquired sales increase and also profit increase. And it's possible to calculate that backwards from our report. So you can say that 10% was from the currency effect and about an additional then 10% or 11% from acquisitions. So actually, the organic sales increase was higher than the acquired sales increase. That's not always the case for us since we have been acquiring over the years.Of course, very satisfied with that strong organic sales growth. And as Jakob mentioned, that was also turned into the same EBITA profit increase as well. And it was really a strong contribution for most of the companies, all of the comparable units and also the ones that we have acquired since last year. So it's a strong demand. And as always, our different business segments, they really offer solutions that contribute to more sustainable, efficient and safe societies, and that should bring a good[Audio Gap]Increased sales.Looking on the split over the countries, we can see that Sweden is actually still decreasing a bit since we are acquiring companies outside Sweden. We haven't acquired anything in Sweden in the last 4.5 years. And the part that's really increasing is what we call the other Europe and other rest of the world, which is now 20% all in all. And that means they are outside our home domestic market and represents then a quite fair share of exports from our product-based businesses.Going into the EBITA slide. We see that the profit has also increased very steadily. And as I said, it was almost the same profit increase as the sales increased this quarter, 38%, 20% was organic. So that was the same number. And also here, we had about 10% of the currency effect on top of that. I could also say that for the year-to-date, the 3 quarters, we have had a 41% increase and a 14% organic profit increase, excluding the currency effect.The margin in the quarter was 19.5%. And yes, this EBITA margin graph was actually on the previous slide was 19.3% in the last 12 months. So we have been very steadily since last year on around 19.3%, 19.4%, but it's still our ambition to get up to the 20%, which we think represents the situation in our companies. Also here on the profit side was most comparable units that contributed very strongly as well as required units. Now, we'll then come back to that in a little bit more in detail.Looking at the different business areas, so start with the Resource Efficiency. It was actually the same as the group average of 40% increase both in sales and profits, and they also had a similar profit EBITA margin as last year at 23%. You can see on the graph on the right side here that they're been at 21.3% and was mainly driven from most comparable units, especially in the power and energy and water and sanitation areas, where some specific units had really good sales.Jakob mentioned about Rolec, which increased sales significantly compared to what they had last year, even though last year, they did sell products, and they did have a profit. But of course, this year has been significantly better. And of course, acquisitions have contributed as well to the business area. The acquisition also we did, Kami-tech in July belongs to the Resource Efficiency.Taking then the Special Infrastructure Solutions, they obviously also then had the same[Audio Gap]Both sales and profit as the group, 41% and 38%, respectively. And there were specifically in this business area, the larger units that really contributed to the increase. So for example, companies that we have that are handling insurance claims, automation solutions for container handling in ports and terminals, cooling -- monitoring and control of cooling equipment, and also cooling solutions for smaller trucks. Those are examples of our bigger companies who contributed very well during this quarter. But of course, there were many others as well. So in general, very good demand and sales and order intake.Acquisitions then again have contributed a little bit since last year as well. The margin decreased a little bit compared to last year. It was in the quarter 19.9% compared to the 20.4% last year. In the last 12 months, this business area had 20.6% EBITA margin. So it was a little bit lower than average last year. That was mainly driven by some units -- some smaller units that mainly are operating within construction and real estate that had some lower profit margins during this quarter. All in all, then our scalable business model makes our sales increase to turn into profit increase, which, of course, is very good.Turning to some additional metrics. We typically share these ones with you. These are numbers about the cash conversion, the earnings per share and also some debt ratios. And to start with the cash conversion, as Jakob was saying, we had a better -- this quarter was much better than the previous quarters this year. And looking for the last 12 months, we were at 70%. We should be around 80% during the quarter[Audio Gap]Represent cash conversion compared to 59% last year.Looking at the earnings per share, has also developed well during the last 12 months. We have increased from a little below SEK 10 to SEK 11.84 now. And -- but in the quarter itself, it was a bit lower than last year [indiscernible], and that is mainly driven by, of course, the increased interest rates. If we compare the development of the EBITA profit compared to this profit, we lose some of that increase due to the increased interest rates that we pay on our debt.There were also some currency losses in the balance sheet this quarter compared to a profit a year ago. So that also makes a difference. And we have an increased corporate tax rate in the U.K. from 19% to 25%, which, of course, makes that our profits in the U.K., we get a little bit less of that into our bottom line and into our pockets. But it's not dramatically, but a couple of percentage points on the whole group, this tax increase in the U.K.Looking at our debt measurement, you can always discuss how you measure this. It's done in many different ways. And the acquiring type of companies like ourselves, serial acquirers, compounders, roll-ups, whatever name you would like, have reported this in many different ways. We don't think we differ very much from most of them, apart from one characteristic, it's that we use our average debt in this ratio because we are have been acquiring quite a lot. And then, of course, we get the full debt at the moment of acquisition, but we don't get the profit we have acquired into the profit and loss. So that's why we use the average debt and then rolling in the profit as the months and quarters go by.And we are, of course, as a bigger group, these different types of measuring the debt ratios become smaller and smaller gap between the different methods. So we are analyzing how we perhaps should change this until the year-end report for the full year. But that we will come back to in the year-end report in that case in February.Anyhow, the way we always have been calculating this. We have decreased our debt ratio from 1.8 last quarter a year ago to 1.68 this year. And that's counting our financial debt, that's banks and now today is also to the bondholders. If we then take the full debt, including our earn-out debts, which have a specific characteristic that if profit doesn't increase as expected, note that full debt will become due to pay. So as a rule of thumb, we will say that 40% of that debt will not be payable if profits stay at current levels. So in that number, we have estimated the future profit growth, which means a certain earn-out payment to be done in the future up to 5, 6 years ahead of time.And taking that full debt into the picture, we have the 3.22 now in our debt ratio. But as I said, if profits really stay at this EBITA level, we will get below 3 instead. So it's always tricky with these measurements. But it has reduced quite a bit since last year anyhow from the 3.7 to the 3.2.Another way, and I suggest as a comparison, if we would count our debt as of the balance sheet, we would then have a debt net financial debt of 1.85 and the total net debt of 3.4. So the difference isn't that big as you see if we would to calculate this debt in another way. So -- but again, we will come back to this in the year-end report. And the main conclusion is that our debt leverage is going down because of what Jakob just mentioned.And now back to Jakob and the outlook.
Okay. Thank you, Bengt. Okay. Looking ahead, we have -- we see no obvious signs of weakening demand. The infrastructure is always needed. That's an easy way to put it. But if you think about it, it's about electrification, it's about increasing regulations on water treatment, it's about increased safety and security and transportation and so forth, and it continues to grow the demand and so forth. And so -- and then we are exposed to things, to some extent, to some smaller pockets within construction and some consumer-related areas, but that has already gone down, and that's part of our numbers, and our numbers are growing fantastically. So it's not really significant.So all in all, we have a good outlook for the future in terms of demand and growth. And we've repeated this for many times. We are now at 19.5% in the EBITA level. We believe that we are a 20% company. And so that is really what we are aiming[Audio Gap]Working to create and also to continue to work with our cash flows so that we really can translate the profit into cash in a good way to continue to do acquisitions, perhaps at a slower pace, but also to bring down our debt ratio in a healthy way.And I think we've already talked about this, that we will have a slower pace. So I just -- I don't need to repeat it. It's just written here. We also get some questions. Did you do the bond because you cannot really get the funds needed from banks anymore? No, that is not at all the case. We have a great relationship with the banks and we have credit facilities that are easily accessible, and we have our own cash at hand.So approximately SEK 1.3 billion in liquidity, that's easily available to us. So that's not the reason why we brought in the bond. It's really because it's a strategic part of our future financing mix. So we just wanted to mention that also that our balance sheet and financial stability is definitely there in place in a good way, in a healthy way. So all in all, we have a very -- we have a positive outlook for the future in terms of growth, demand and profitability and cash flows.Yes. So finally, as all of you know, I will hand over to Bengt as the CEO from January 1. And the succession is very easy[Audio Gap]To take the leadership team, not only Bengt, but the entire team around Bengt is very strong and the entire organization, so the succession is easy. And I know that they are very committed to continue to develop Sdiptech, always some focus on that possible shareholder value.So by that, I thank everybody for participations in these kind of sessions. It was a 35 -- 35th presentation for me, and I'm happy to hand over to Bengt eventually.All right. And with that, we open up for questions.
[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.
My first one is on the commentary you make about slower pace of acquisitions. It's something we've also heard from others regarding different reasons why, but we've heard that others are also flagging a bit lower pace. I was just curious, when you assess the landscape and the discussions that you have, based on your current kind of best guess, is this more like something that you will see happening in the short term or that for the kind of next strategic period, be it 3 to 5 years, this will be a lower pace of acquisitions?
No, it's more related to the macro situation. So it's not a strategic change for us. It's just the way it is with the uncertainties in macros and the increased interest rates that really puts higher -- high requirements on the return on capital. So that will eventually change.
Understood. And is this something that you see across all of your divisions and the regions, this kind of macro uncertainty and that good quality assets are still priced a bit too high?
Yes, we see it in all geographies and so forth. So it's not specifically related to geography or segment. It's more the general macro situation and interest levels.
All right. Understood. And then on the organic growth, 20% acceleration versus last quarter and organic earnings also grew 20%, so in line with sales. Just overall in terms of pricing and cost inflation and so on, do you think that you can continue to -- well, at least match growth in profits with growth in sales so that you -- there are certain companies within the business mix that means you could potentially even grow earnings faster than sales in the coming quarters?
Yes, perhaps when it comes to price increase, we think we have caught up with the inflation that has been this year. I think we have mentioned that, that we typically have a bit of a lag. And this year, it has been a lot of cost increase when it comes to staff costs and personnel and that, perhaps not as much on goods and materials. But we think now we're in line with that. So we have a good price/mix, if you say so, for our products and services.And when it comes whether how much the different companies business model scales so that more sales give even higher percentage of profit increase that's, of course, depending on their business. So we have a number of those companies that could sell more and earn even more, so to say, in percentage because of the business models, but not all of them. But -- so of course, and as we have mentioned, we strongly work for that -- getting up that last 0.5% in profit margin up to the 20%. So let's see if that comes from both sales or more the business mix in the near future.
Understood. And then on Rolec here, you say it grew significantly. And so yes, well, significantly in terms of profit, I would guess. But could you give any kind of comments on the profitability here? Just trying to do some backwards calculations here. Would it be fair to assume that profits are good, but perhaps not back to the kind of previous 25% plus levels that you've commented Rolec has been running before?
Yes. We said -- I mentioned also in report that this quarter is typically a little bit slower for the Rolec business, selling the EV chargers specifically. So they have typically a bit lower profit margin in the Q3. So it was below what they typically are, but it was still around more or less the group average. So it's a very decent profit margin for that type of business.
Okay. Great. And my final one is, you said that acquired units had earnings in line with or above expectations. So my question is just what is the positive earn-out revaluation in the EBITA related to in this quarter?
Well, that is[Audio Gap]Connected to a more book keep exercise according to IFRS that we have increased the discount interest rate for these debts. I mean we don't pay any interest on earn-out debts, but we need to calculate an interest rate and do a discounted backwards counting of the debt. And since we increased the rate, the debt becomes lower. So it's not that we have released any earn-out debt values. It's just that we have changed the interest rate from 3% to 4% because as we see, this interest rate environment will go on for a little bit longer than perhaps expected a year ago.
Okay. Yes. Okay. So -- but the discount rate change on continued considerations, that is what you look in net financials. So what's the difference there between...
It's not[Audio Gap]Financials. It's other income. So that's really on the top of the P&L.
Yes. Okay. All right. All right. I hear what you're saying.
The next question comes from Niklas Savas from Redeye.
So I want to ask, Q3 is typically not like a seasonally strong cash flow quarter, but you delivered solid figures in the quarter anyway. I just want to ask about Q4, which is seasonally a strong quarter from a cash flow perspective. Do you expect it to continue this quarter?
Yes, we were -- as Jakob said, we work very closely with the companies to improve the cash flows because that has been a bit weak earlier this year for some time. So we really work hard to get that back to the normal levels. And this quarter was good. Above the average where we took Q4 has been very often a very good cash flow quarter because we have some seasonality in the businesses where they deliver out pretty much during this quarter. So let's see what happens. But yes, we could say, on average, typically, it's a pretty good quarter from a cash flow perspective.
And from a capital expenditures, it was a bit elevated this quarter. Is there something else planned for Q4 that will bring them to a similar level? Or should they revert back to the normal 3% to 4% of sales?
Typically, we are between 3% to 4% of our turnover in CapEx, both material assets -- any material assets like research, development, IT systems, and [ so on]. And yes, this quarter was a little bit more, but that -- it doesn't always be exactly the average quarter-by-quarter. It depends a little bit on when that investment is installed or finalized when it comes to hardware, for example. So for the year, we should be at our normal levels. And we are right now slightly below 4% compared to our turnover so far.
Yes. And a follow-up on the previous question about the acquired EBITA per year. So in Q2, you signaled that you will -- you still intend to meet the target, SEK 120 million to SEK 150 million in 2023. But now you signaled a slowdown in acquisitions. And as we only have 2 months left on the year, should we assume then that you won't meet the target, that you will actually come in below the target this year? And also, if you could say something around your thinking around that target in 2024?
Yes. Well, as you know, we've acquired about SEK 50 million so far and the target is SEK 120 million to SEK 150 million, and we're saying that we're slowing down. So it would be perhaps a fair assumption to say that we would not significantly acquire over the ending months before the year-end. But as always, they sometimes come with a period of time connected to each other or it can take several months [indiscernible] between acquisitions. So it's always a little bit up and down. But I think if you want to make an assumption, it's probably not so big likelihood that we would hit the target this year.I think what we're trying to communicate is that we will have a slower pace of acquisition than what we normally will do, and that will also be the same way also over the next year. It's related to macro interest rates.
Okay. Understood. And Jakob, good luck with your future endeavors.
There are no more questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.
And we have got some questions here on the chat. I think we have answered the one about reaching but not exceeding the M&A target. And then there was a question about how much of the organic -- 18% organic growth, excluding currency effect and also excluding Rolec is pricing. We don't have any exact number on that. So it's really hard to tell. But as I mentioned, we have been increasing prices during the year in order to catch up with the increased costs.So of course, part of the organic sales growth is pricing, but it's not huge. Typically, even though we are in very strong positions, but it's -- since our products are necessary for our customers and typically a small share of wallet, but it's also customer relations where we cannot just boom up too much. And so it's always a balance between the very long-term relationships we have with our customers for 5, 10 years, and yes, to compensate for the actual inflation. So a long answer, but to say that I cannot give you an exact number of that, but it's -- a large part of this is volume or pricing.And then we had also one...
Question about should we eliminate the M&A target so that we shouldn't be forced to acquire, but we've never been forced to acquire.
Exactly. No, we have the targets for M&A, but of course, it's a target. It's not a must. So we always value every situation on its own merits, if we should do an acquisition or not. And as Jakob was saying, because it's macro and interest rates and everything, we -- our return calculations and that makes our walkaway price lower than previously and also means tougher discussions with people who want to sell their companies.So when it comes to targets all in all, we still have our 3 targets[Audio Gap]We'll update those. But it's not -- we will not eliminate our ambition to acquire companies.
Yes. So that was all the questions that we -- that were published. I guess and by that, we thank everybody for dialing in and until next time.
Yes.
Thank you. Bye-bye.
Thank you. Bye.