Sdiptech AB (publ)

STO:SDIP PREF

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to Sdiptech Q3 Report for 2024. [Operator Instructions]

Now I will hand the conference over to CEO, Bengt Lejdstrom; and CFO, Susanna Zethelius. Please go ahead.

[Bengt Lejdstrom, executive]

Thank you, and welcome to the presentation for Sdiptech's third quarter report. I'm Bengt Lejdstrom, and by my side, CFO, Susanna Zethelius, and we will walk you through a few things, of course, highlights from the quarter, but also some news when it comes to organizational changes. So let's start.

And as you are probably aware, Sdiptech is a niched technology group within infrastructure. We create sustainable, efficient and safe societies. That's our vision and mission. And today, so far, we are organized within 2 business areas with 6 different segments. Tomorrow, we will be 4 business areas, but I will come back to that.

And when it comes to numbers and in our report as well as in this presentation, we have excluded one of our operations, our business unit in Central Europe for elevator service, installation and production since we have decided to divest that business. And we will come back to that as well during the presentation. So, but all the numbers you see in this presentation is then excluding this business unit. And so excluding that one, we are currently 38 business units, and we're a little bit above 2,000 employees. We have had a 35% CAGR development in our adjusted EBITA since the listing of the stock exchange 2017, and which is very important for us that at least around 80% of our revenues are connected directly to one or more of the UN Sustainability Development goals.

Okay. So let's see some highlights from the quarter. On the overall picture, we see a continued stable demand in line with last year. We had tough comparisons last year because that was an extraordinary good quarter. We had a 20% organic sales growth as well as a 20% profit growth organically last year. So that was not easy to meet. But we did at least 1% organic growth this quarter. All in all, 7%, including the acquisitions that we have done so far during the quarter, up to quarter 3. But as some of you perhaps noticed, we sent out a press release only 20 minutes ago about our third acquisition this year, and we will, of course, come back to that one as well. So we see a pretty stable demand across all the business units. We had some that had extraordinary performance last year. Susanna will come back to that a little bit more in detail. So we're happy to be able to at least be in line with last year when it comes to the turnover.

When it comes to the profit level, our adjusted EBITA KPI, it was an organic decline with 8%. And that was mainly due to that last year, some companies have extraordinary high sales, connected also to an extraordinary high profit margin. So they are today operating at a normal level and more normal profit margins, which means that we are lowering the overall profit margin of the company and thus a negative profit growth. But still a very good performance in the major part of all our business units, which we are, of course, very happy with.

Cash conversion, good. We got in SEK 167 million in our cash flow from operations. For being a quarter 3, that's not bad in the seasonality. And we will tell you a little bit more about that as well.

We then have decided to divest our elevator business. We made a decision already 4 years ago and even longer to change strategy to go away from service -- pure service businesses. And already in 2021, we divested 7 business units within elevator service and roof maintenance service and such things. We had perhaps 1 or more 2 companies already then that we thought of divesting, and we have done that this year. We have divested our business within servicing of cooling units company we had that we divested in quarter 2. And now we have taken the decision then to divest our business for elevator service, installation and production in Central Europe. And -- since this has been decided, we must, according to all the audit rules and so on, according to IFRS, report this business separately. And in the report, we mentioned then that we took a hit of SEK 53 million this quarter, a major part of that being a write-down of goodwill, but also some restructuring costs in order to get things in order for the divestment.

Right. So looking at the sales split, it looks more or less the same as usual. We have about 60% coming from the sale of products. And then more or less 20%, 20% each when it comes to installation and services. And the geographical split is also pretty much the same as before. And the Swedish part is decreasing a little bit more, now 18% (sic) [ 19% ]; while U.K. is 40%, and then it's spread between different European and overseas is pretty much stable. But as we acquire more and more product companies, we get more and more export sales and less domestic.

Yes. And I hand over to Susanna.

[Susanna Zethelius, executive]

Thank you, Bengt. Yes. So some more comments on the numbers. And then just again coming back to the elevator business that we are planning on disposing of that. When we look at the numbers here as well as in the report, the comparative figures for last year, so 2023 and of course as well the numbers for 2024, they exclude the elevator business. When you have charts here that go back further in time, those numbers are the reported numbers, the historical numbers, just for clarification.

And then for net sales and adjusted EBITA margin for the Group, it's also been highlighted a few times before, but we did have a very strong third quarter last year with organic growth of 20%, both on revenue and EBITA. And despite those tough comparisons, we can still see that there is continued demand in our business units, and we are pleased with the results that we land on this quarter. So sales increased in the quarter with 7%, 1% of that was organic. Year-to-date, we had a sales increase of 17% and then 6% was organic. Looking at the margins, they were in the quarter, 19.1% and year-to-date, 19.6%.

And then moving to adjusted EBITA. If we look at the quarter, we were in line with last year, so SEK 231 million. Organically, however, it decreased versus the same quarter last year by 8%, the organic growth. Year-to-date, we had an EBITA increase of 13%. So we're now at SEK 751 million and 1% organic growth.

Then in these numbers we have some of the new acquisitions, JR, WaterTech, for example, they are performing in line with expectations. And just noting that if we look at rolling 12 months, adjusted EBITA is now slightly above SEK 1 billion.

And then some comments about the 2 segments, starting with Resource Efficiency. So our companies within water and sanitation, power and energy and bioeconomy and waste management. So for Resource Efficiency, this was a solid quarter. We had several of the business units showing strong or stable performance versus last year. So for example, IDE, our company within temporary power distribution; WTP, which is water treatment products; and then Rolec, our charging equipment for electric vehicles.

For some of the units within Resource Efficiency, it was a more challenging quarter where they had difficulties meeting comparables. And one example of that is our unit for replacement and renovation of electricity and water meters. But summing up then for the segment, all in all, this resulted in a sales increase in the quarter of 7%, adjusted EBITA increase of 1%, and the margin slightly decreasing versus same quarter last year and is now at 22%. The rolling 12 margin is at 23%.

And then our other segment, Special Infrastructure Solutions. So our companies within air and climate, safety and security and transport and logistic. So in our view, for Special Infrastructure Solutions, the third quarter was in line with our expectations. We had a few different factors, though, that affect the results in the quarter. So firstly, like you've seen and like we mentioned, we had the elevator business, which was part of Special Infrastructure Solutions, now being excluded from the segment's reporting as it is being held for sale in line with IFRS 5.

Then we had 2 of our major business units in this segment. So you have the names there, it's GAH, our unit for transportation refrigeration solutions; and then RDM as well, our refrigeration control and monitoring company. And those 2 did not manage to meet the comparatives for last year. The reasons for the challenges they had in the quarter, it's both timing of sales. So they had a very strong Q1 -- sorry, H1 where more of the revenue ended up. We could also see some inventory buildup at their suppliers, which in turn reduced order levels and affected revenue for this quarter. And they also had very strong quarters last year.

For both of these units, the underlying demand for their products remains strong. If we look at the majority of the other business units in the segment, they do perform better than or in line with last year. Then we also, of course, we have the acquisition contributing positively in the quarter. And then all in all, for the segment, all this together means that sales increased by 7%. Adjusted EBITA was flat versus last year. And then the margin decreased by 1 percentage unit to 20%.

Yes. And then we have the cash flow and cash conversion. We have mentioned a few quarters about the work that we do internally in order to improve cash flow and cash conversion going forward. And that work still continues, and we will continue to focus on that together with our business units. If we look at cash flow in the quarter, it was SEK 167 million, corresponding to 67% conversion. It's slightly down versus second quarter. We can see slightly higher capital tie-up during the quarter compared to Q2, but it's a temporary effect, and we still see the work paying off from our work with the companies. Then we have rolling 12 at 77% and year-to-date, 74% cash conversion. So if we look at those numbers, they're well in the aim that we have to be somewhere 90% in cash conversion in the long run.

Finally, then some additional metrics. If we look at profit after tax, it is down versus same quarter last year. Some reasons for that is the lower EBIT, then it's also increased interest cost. We do see interest rates starting to come down, but in comparison, it still affects the levels. Then it's also currency effect and tax. And looking at the decrease in earnings per share, it's the same factors that affects that number.

Then the debt leverage. And if we look at net debt over adjusted EBITDA to decrease, it was 3.13 in the second quarter and is now at 3.08. We've been mentioning that our long-term aim is to go -- to keep decreasing that number, just bearing in [Technical Difficulty] vary over time depending on the timing of our acquisitions.

And with that, I'm handing back over to Bengt.

[Bengt Lejdstrom, executive]

Yes. Thank you, Susanna. And talking about acquisitions then, we are happy then to present our latest and just completed some 30 minutes ago. We had, of course, preferred to be able to mention this one in our quarterly report, but sometimes parts of the process takes longer time than expected. And in this case, it was to get the security clearing from the U.K. government that we are a trusted owner of a high security solutions company.

So we welcome Eagle Automation Systems, a very nice company in the London area, bringing about GBP 2 million in annual EBIT to the table. It's really a one-stop shop for what's called physical perimeter security, especially for hostile vehicle mitigation solutions. On the picture, you can see some of their products. It's bollards, it's gates, different kinds of blockages to protect different type of buildings or properties that are of high security value. And this, of course, contributes to one of the UN Sustainability Development Goals, just pinpointing this to have a -- to prevent violence, safe and secure environment for people.

And while you could say, unfortunately, the demand for these type of solutions are increasing steadily. And this company started locally in the U.K., of course, but have also started to export their products to other countries as well. So we're very happy to welcome them into the Group, and we look forward to work together with the Managing Director, David and his team -- Dave and his team.

And looking then on how much we have done then so far this year [Technical Difficulty] could be translated into some SEK 27 million in EBIT, which means that together with the JR Solutions we acquired in January already and Swedish WaterTech, we are now up to SEK 92 million in run rate profit acquired this year. We have guided that we should probably be somewhere between SEK 100 million and SEK 120 million perhaps, and we're still comfortable that we will reach within that range before year-end. And for next year, that's also our ambition to be back again in the more normal span of [Technical Difficulty] perhaps up to SEK 150 million. We'll see.

We always have a very strong and solid pipeline of companies. The timing of those could depend on different things. And we also have a strong financial position, as Susanna was mentioning with our debt leverage, which is coming down [Technical Difficulty] be around 3x, all in all, including provisions for earn-out debts, earn-outs that depend or are assuming then a higher profit level than today in order for them to be payable, but we have to provide for them already at day 1. All in all, our acquisition processes and work run as always. So that's promising.

So talk something about our new organization. We released a special press release just 5 minutes before the quarterly report where we wanted to present that we are changing our organization to be more transparent and clear towards you and all the entrepreneurs that we are approaching for acquisitions. So we have then divided the 2 business areas we have had, Resource Efficiency and Special Infrastructure Solutions into 4, roughly speaking, cutting them in half, but also some minor adjustments between these business areas. We will present in detail in the coming year-end report is then belonging to which new business area, and we will also submit pro forma numbers for the full 2024 and all the quarters. But we think then going ahead, it will be much more clearer for us and for you that we can present the trends in each business areas and how the performance is doing, et cetera.

And if we look a little bit closer to these business areas, they are built upon the common drivers for growth that we have in each business area. New business areas will be from left to right here, Supply Chain & Transportation. As you know, we have a number of companies providing solutions for transport and supply logistic chain, and we see clear growth drivers with increased demand for volume and more sustainable solutions and be more efficient all in all in the whole chain from start to end. So we look forward to welcome more companies into that one.

Water & Bioeconomy is another then of the new business areas. As you also know, we have a number of companies dealing with water treatment, chemical water treatment, water sanitation and ultrapure water, et cetera. And we see still opportunities to find new good companies within that area. Growth drivers are, of course, increased use and consumption of water and more scarce resources of clean waters if we need to recycle them even better than before. So that's promising for us to be able to find new niched companies to solve these important problems that society is facing. Also within the bioeconomy area, currently, we have really only 1 company in that segment, our Italian Agrosistemi that takes care of the sludge coming out of sewage plants and make fertilizers out of that. But we see many other opportunities as well to find great companies within that area.

Looking at Safety & Security, we have our most recent done acquisition, Eagle Automation Systems being 1 typical company for that new business area. And we have many others within fire detection and information security with cryptified communications, just to mention a few. So here, the growth drivers are, of course, technological development, but also a need -- a stronger need to provide safe and secure solutions to different processes and habits around in the society. So we're sure we will find more companies as well within that segment.

And last but not least, what we call the Energy & Electrification business area. Here, we have companies then providing both temporary electricity or charging equipment or monitoring of the electrical quality in the grid, et cetera. We strongly believe in the electrification of society. There are some ups and downs in the progress of that. But in the long run, we clearly go to more use of electricity and electrifying many different applications, not only vehicles. So we strongly believe that we can find more very strong and the good profit margins within this area. Also to be more efficient in the use of energy belongs into this business area.

So we're very happy about this, and we strongly believe it will support us in finding new companies to run the company, support them and also present to you how this is all performing. So we will come back with more information about who is heading the different business areas, et cetera, and it will be all internally. The succession will be from internal staff already present.

Right. So some highlights then to sum it all up. So as we have said, we see continued solid demand, strong market positions, not really dependent on the overall economy, so pretty much resilient to cyclical changes. We don't see any big changes in the demand all in all throughout the Group, of course, being then 38 business units, 39 now with Eagle. There could be ups and downs in each and single business units and from time to time, depending on how many that could hit the Group as well. But the more business units we get, the less they affect the Group on a group level.

We see continued tough comparisons also in Q4. We also in Q4 last year had 20% organic sales growth. So that's pretty tough, but let's see how we can do compared to that. We don't give any forecasts, but just to remind you that it was a strong quarter also Q4 last year. The new organization will come into effect, and we strongly hope that, that will bring benefits to the whole group. And to sum it all up with acquisitions that we have a strong pipeline and many good dialogues with different types of companies. So we're sure that we will be able to present more acquisitions going ahead.

So that concludes our presentation [Technical Difficulty] for questions.

[Operator]

[Operator Instructions] The next question comes from Max Bacco from SEB.

[Max Bacco, analyst]

So perhaps starting with 2 on the elevator business. So here in the quarter, if I understood it correctly, it was minus SEK 18 million in adjusted EBITA for Metus, which is a clear deterioration compared to Q1 and Q2 of this year. Have you taken any additional restructuring costs or something similar during the quarter that has weighted on adjusted EBITA? Or is this actually the underlying performance of the company? It's the first question then.

[Bengt Lejdstrom, executive]

Yes, I'll try to answer that directly. No, we have SEK 10 million of costs that are not related to operations this year in the quarter. So clearly, yes, still some, call it, tidying up, still restructuring costs. We have split the group in 3 separate parts, service, installation and then production in order to find perhaps different buyers to the different parts. We already have discussions with part of the management to perhaps buy parts of this, and there are also other parties that could be interested. So we're pretty confident that we will be able to divest these businesses in the time frame of at least during next year and hopefully, in the earlier parts. But let's see. We will come back to that. But short answer, yes, there are extraordinary costs taken in the quarter.

[Max Bacco, analyst]

Okay. Perfect. And that partly answered my second question also. So basically an indication of interest from potential buyers, but that you already answered. I mean, what kind of price level do you expect for this given that it is actually a loss-making unit or at least parts of it, are you willing to sell for a quite negligible sum, I would say?

[Bengt Lejdstrom, executive]

It's different pricing on this. If you look on the service portfolio, it's more or less a trading price of a certain amount per service cost [Technical Difficulty], and that's kind of a market price like selling leasing stocks for cars or whatever, and we sell service stocks. So that is a given price more or less. And then when it comes to installation and production, we will sell it as a profit-generating business and then take a multiple on that profit level then, of course, then the expected profit level for next year. So yes, we will do our best to get the most cash in from the divestment, of course, but we don't want to put it at any discount here.

[Max Bacco, analyst]

Okay. Understood. And the final one, from me. So obviously, 2 key employees, Fredrik and Steven leaves the company quite soon. Do you see any risk that your acquisition and/or operational activities will be disrupted by this? Or do you expect to make a smooth transition?

[Bengt Lejdstrom, executive]

No, we don't expect any disruptions. And yes, and we presented that also in the separate press release this morning. So they're both leaving the company towards February next year. Our Head of M&A, Steven, has more or less done such a good job. So it's not really necessary any longer, you could say. We have a great team and many processes and structures in place. So the work continues as usual on the M&A part. We have decided to make an external recruitment of that position. So that has already started, and we will be able then to speed up that a bit now when it becomes public.

When it comes to the business area management and Fredrik Navjord, who is also then leaving in February. As I presented the new business areas, and they will be staffed by already existing people within the Group. So we don't see any disruption in that either. It will be an orderly fashion and manner succession. We are used to do successions in our companies, and we should also be able to plan and do a performance succession within our parent companies. No, it shouldn't be any effect because of this.

[Operator]

The next question comes from Albin Nordmark from Nordea.

[Albin Nordmark, analyst]

Albin from Nordea here. So you mentioned timing of sales for those companies that had very strong quarters in the last third quarter. But how should one think here about the Q4 and also about H1 '25? I mean you had a strong organic growth both in Q1 and Q2 for '23 and '24. So yes, how certain are you to deliver organic growth in '25 and especially in the first half?

[Bengt Lejdstrom, executive]

Yes. Let's take 1 quarter at a time. And our companies typically [Technical Difficulty] have very long visibility of their order books. We have some companies, of course, delivering projects that can continue for 6 months or so. But we have an underlying recurring business of service contracts on our own products. We like that kind of service when we service our own stuff. And of course, that's a steady income. We also have some, you could call it, recurring product sales where customers need our products on an operational basis on a daily basis. So that's a good foundation. So what makes turnover and profits go a little bit up and down from quarter-to-quarter is more of these shorter-term projects, one-offs type of sales. And yes, as I said, we must take it quarter-by-quarter. So I cannot really give you any good more insights into how next year will be. Just mentioning then again that last year Q4 was strong.

[Operator]

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

[Karl Bokvist, analyst]

Just the first question is on the divestment. If I read the report correctly, it had roughly SEK 240 million sales in 2023. So just to clarify, is this only relating to the Croatian business? Or is it also to the smaller Swedish construction units?

[Bengt Lejdstrom, executive]

No, this is the -- well, it's the company based out of Croatia. They have operations in Bosnia and Serbia, and they have their main geography is really Germany. But it's not Swedish operation. I don't know really which one you mean there, but...

[Susanna Zethelius, executive]

I think you might be thinking about Swedish...

[Karl Bokvist, analyst]

Yes...

[Susanna Zethelius, executive]

Not going well earlier. No, that's a separate company and it's not related to this.

[Bengt Lejdstrom, executive]

Yes. And that one is as expected nowadays.

[Karl Bokvist, analyst]

All right. All right. That was my follow-up question. So just to follow up the prior question a little bit. I understand the flagging of tough comparables this quarter with 18% organic revenue growth last year and also high profit growth. But like if we then look at organic profit in Q4 last year, it was only 5%. So I understand the revenue comparison, but the tough comparables on profits, I don't fully understand as well. So is it because of some of these high-margin units have a bit of a tougher period apart from tough comparables? Or is it that -- is there anything else here that we need to keep in mind just for the next 3 months to 6 months?

[Bengt Lejdstrom, executive]

Yes. Well, to just clarify the numbers as reported last year, Q4 was 20%, excluding currency effects on sales and 9% organic growth, excluding currency effects on the adjusted EBITA.

[Karl Bokvist, analyst]

Yes, but that was not Rolec. 5% was ex-Rolec and Rolec was brought a couple of year before.

[Bengt Lejdstrom, executive]

Yes. No, as we said, it's mainly a question of meeting the high comps in the turnover. And then as always, you have a sales mix. So as I mentioned, we have some companies that performed extra good last year and then with high -- very high margins. They are now performing more or less as usual. That means an organic decrease for them. And then if we then compensate that as we did in this quarter 3 with increased sales in many other business units, but then having a lower profit margin, still good, but lower than the ones that were extraordinary well performing last year. That means we lower the all in all profit margin on the Group, meaning it will be a decrease in the adjusted EBITA. So it's more that sales mix change that makes the profit growth being less than the sales growth. And as you said, 5% ex-Rolec is that's within our range, but we were referring then to the sales growth.

[Karl Bokvist, analyst]

Okay. Understood. Then just 2 more here. And the first one on the cash flow. If we just look at operating cash flow and so on, it's down year-over-year. And you did mention some temporary effects in working capital. Apologies if you clarified it and I missed it, but are there -- can these temporary effects together with seasonality help drive a bigger release in Q4 and improving cash conversion?

[Susanna Zethelius, executive]

Yes. So what I was referring to was versus the second quarter that this quarter is slightly down. If you look at the details of the numbers, inventory is flat versus last quarter. There is slight capital tie-up in remaining figures. I think like Bengt also mentioned initially, there is some seasonality to this. And of course, there is a range up and down between the quarters. I wouldn't say that there will be a massive release in the fourth quarter. I would just still go back to that we have an aim of being between 70% and 90%, and there will be some deviations between. We're still aiming to stay there, and we keep working with our companies. But there will always be some timing effects that can go one way or the other, and there are many companies that can have different directions.

[Bengt Lejdstrom, executive]

We paid our bills on time, but...

[Susanna Zethelius, executive]

Yes.

[Karl Bokvist, analyst]

Okay. That's good to hear. My final one is just Resource Efficiency continues to perform very solid profitability. And you mentioned that the EV charging business contributed nicely this quarter. So you previously highlighted the kind of difference that Rolec has compared to a standard B2C EV charging company. But are there any -- is it so that you still see a good market for EV charging? Or is it perhaps more about the company performing very well?

[Bengt Lejdstrom, executive]

As I mentioned before, we strongly believe in the electrification, and that will happen. It could take a number of years, of course, and just coming home from U.K. the other last week, and there is still a lot to be done in U.K. to set up more charging points, and they have great ambitions for that, as I understood and understand. We also see some other more or less giving up then because they have spent too much money on marketing and other things. And so we really then try to take those customers to us, the ones we don't already have. So our company in U.K. is working very efficiently and good in increasing their sales, and we see some good opportunities. So even though it's a bit slower pace right now, both in U.K., I guess, and in the Nordic countries with the expansion of charging points, all in all, we still see good opportunities to perform well in our niche for a long time ahead.

[Operator]

The next question comes from Niklas Savas from Redeye.

[Niklas Sävås, analyst]

So I have a question on the pace of acquisitions. You mentioned that you expect to get back to normal pace next year. Can you expand a bit on the question from before on Steven leaving? I'm just thinking that, I mean, the acquisition is a relationship game, so to speak. So no disruption from him leaving in those dialogues, I mean.

[Bengt Lejdstrom, executive]

We are already today and since a couple of years back, organized in 3 geographies when it comes to what we call the deal making. We have 1 guy in Italy. We have 1 in the U.K., and we have 1 other guy in the Nordics, running the projects, keeping the relationship with the entrepreneurs, et cetera. So that's already done by other people in the organization. Steven as a Head of the M&A team is, of course, coordinating stuff and supporting the processes, et cetera. But the field work, we call it like that, is done by other colleagues within the team, and they are still here and we'll continue to do that. And as well, our cold calling activity, we have 2 employee colleagues here that their main task is to call and keep up the relationship with the entrepreneurs in the very early stages. So that will be continued as always.

[Niklas Sävås, analyst]

Perfect. That's comforting. Do you expect to open up any new geographical markets during next year?

[Bengt Lejdstrom, executive]

Yes. We're looking at some. We haven't still -- we have been a bit opportunistic in the Netherlands, looking in Benelux type of countries. We are not able really to work the same way as with some of the other geographies, meaning we don't have access to all the data that we need to run our systems. But still, we have also looked into Spain and haven't really found companies there yet that we think is attractive enough. And there are other geographies as well that we're looking into. So we still have good pipelines in the existing geographies, but we're ready to step into 1 or 2 more European geographies sooner or later.

[Niklas Sävås, analyst]

And just a last follow-up question on that. I mean, do you see any -- I mean, is there more competition as you see it in any of the markets that you are more active in?

[Bengt Lejdstrom, executive]

We don't really feel the competition, but we have noted that more of our peers are active in the U.K. The U.K. is still greater than all of them, all Nordic countries together. So we haven't -- yes, from time to time, of course, we hear that entrepreneurs we're talking with have been approached perhaps by one of our Nordic peers, but it's not very common still. It's a huge space, if you use that term, all in all.

[Operator]

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

[Bengt Lejdstrom, executive]

Yes. And we don't see any questions -- written questions in the chat either. So I guess that will conclude our presentation, and we would like to say thank you and wish you all a nice weekend whenever it starts for you. Goodbye.