Vestum AB (publ)

STO:VESTUM

Earnings Call Transcript 2024-Q1

[Simon Gothberg, executive]

Hi, and welcome to our presentation of Vestum's report for the first quarter 2024. My name is Simon Gothberg, I'm the CEO of the company. And together with me, I also have CFO, Olof Andersson. And also have a look at some highlights from the first quarter. Demand remained relatively stable throughout the quarter, however, with a slightly negative organic growth of 3.5%, reaching sales of SEK 1.24 billion.

Adjusted EBITA came down a bit to SEK 100 million in comparison to SEK 119 million in the same quarter last year, and the margin in Q1 2024 came in at 8.1%, in comparison to 9.3% last year. And this drop was mainly driven by seasonality effects from an early Easter, strong reference figures from last year and a somewhat weaker market in some of our segments.

That said, the strong development in the Water segment continued, and we have now successfully delivered increased sales and profits for 5 consecutive quarters in this segment. Cash flow generation was strong in the quarter with operating cash flow amounting to SEK 210 million with a cash conversion of 151% and while free cash flow per share grew by 96%, which is quite outstanding.

This means that leverage remains at 2.5x EBITDA, which is within our financial targets. We've also completed the strategic review and successfully refinanced the outstanding bond of SEK 900 million with bank financing and existing cash. And this could be done, thanks to a very strong cash flow in the last couple of quarters. And we have now an improved capital structure with lower interest expenses of roughly SEK 30 million, while significantly reducing risk.

So after spending the last 2 years focusing on the balance sheet and ensuring that we have the right capital structure in place, it's also great that we're now back at pursuing acquisitions again and now mainly with a focus on the Water segment. Let's have a look at the segments and starting with the Water segment.

As mentioned, demand remained strong for our products, especially in the U.K., which is our largest market. The quarter generated sales of SEK 215 million and an EBITA of SEK 43 million with a margin of 20%. And this means that we generated organic EBITA growth of 39%. On an LTM basis, we're now above SEK 150 million in EBITA with a margin of 20%, and the underlying market here is driven by underinvestment in water infrastructure and climate change, and we're expecting continued stable demand going forward.

As mentioned, we are now actively pursuing acquisitions to the segment. Moving on to the Services segment. Here, we're exposed to the installation industry, mainly in Sweden, which continues to face a tough market with lower demand from property owners. Sales is now at historically low levels, but should also mention that the first quarter was impacted by the early Easter that occurred in March this year compared to April last year, which meant 3.5% less working days in March.

The first quarter generated sales of SEK 415 million and an EBITA of SEK 32 million. As with the previous quarter, I think it's fair to say that we've done a good job in defending our margins, as we managed to generate 7.8% EBITA margin in Q1, which is basically in line with the same period last year.

On an LTM basis, we are still at a double-digit EBITA margin of 10%, which stands out in comparison to the industry as a whole. Lastly, let's have a look at the Infrastructure segment. We experienced continued stable demand with sales of SEK 610 million, although EBITA decreased to SEK 37 million, and this was mainly due to the early Easter and strong reference figures from last year.

And we have, during the quarter, won several new projects, which will generate profits throughout the year. On an LTM basis, the segment generated sales of SEK 3.2 billion and an EBITA of SEK 323 million, corresponding to a margin of 10%. And as for the Services segment, we are humble about the short-term development, as we're facing an uncertain market. But we think that we are very well positioned with high-quality players and growing niches of our infrastructure. Now over to Olof.

[Olof Andersson, executive]

Thank you. We'll proceed to have a look at our net sales and EBITA development over the past couple of quarters. And we begin with the chart on the left, which shows net sales, where we were down slightly compared to the same period last year. And this graph also clearly shows how Q1 is a seasonally smaller quarter, driven particularly by the Infrastructure segment.

If we move on to the chart in the middle, showing EBITA development, you'll see that EBITA was weaker than last year, driven by the Services and Infrastructure segment, as Simon mentioned earlier. And finally, in the chart to the right, the EBITA margin followed the same pattern as EBITA decreasing by 1.2 percentage points compared to the same period last year.

Looking at net sales growth. Q1 decreased by 3% compared to last year, and the organic growth was negative SEK 45 million, corresponding to a drop of 3.5%. Moving on to operating cash flow during the last 12 months, we continue to see strong operating cash flows and cash conversion and the development in Q1 was driven by a positive net working capital development. So that was operating cash flow.

Now let's look at free cash flow. And we define free cash flow as cash flow from operating activities. So that is including interest and taxes paid and then change in net working capital, and then we subtract CapEx spending, i.e., investment in fixed assets, and we also subtract leasing amortization.

So basically, free cash flow is cash that can be used for dividends, acquisitions and repayment of debt. So for the last 12 months, the free cash flow amounted to SEK 496 million. That was an increase -- a sequential increase, up from SEK 421 million in the previous quarter. Let's move on to net debt and leverage development. The net debt is represented here by the pink bars and amounted to SEK 2.0 billion, down from SEK 2.5 billion same period last year, which corresponds to a decrease of 20%.

Leverage remained at 2.5x sequentially from last quarter. And it is worth noting that when taking into account earn-out debt, the leverage multiple actually decreased from 2.8x to 2.7x. As Simon mentioned earlier, we've revised our capital structure by -- in April, redeeming the bond that was maturing in the autumn of 2024, using our cash, but also by increasing and extending our credit facilities. So we don't have any remaining bond or credit facility maturities in this year or the next. And by that, I hand it back to you, Simon.

[Simon Gothberg, executive]

All right. Thank you. Let's summarize. So the quarter generated stable volumes and profitability, however, slightly lower EBITA margin in comparison to last year. And the Water segment continues to generate high growth. And I think with our market-leading product technology specialists in Water infrastructure, we feel confident in continuing to deliver strong growth and profitability going forward.

And cash flow has been very strong. We have now generated an LTM free cash flow of SEK 0.5 billion, thanks to a solid cash flow. We remain within our financial leverage target of 2.5x EBITDA. The strategic review has been concluded, and we managed to significantly improve the capital structure leading to lowered annual interest expenses of roughly SEK 30 million.

We've also streamlined operations with the divestitures, meaning that we have reduced operational risk, while also strengthening the financial profile for remaining operations. And in addition to this, we have completed a reorganization and office move in January 2024, leading to annual cost savings of approximately SEK 10 million.

As mentioned throughout the presentation, we are now actively pursuing acquisition opportunities, and this will be focused on the Water segment, as this is where we are expecting highest growth and where we have extremely well-positioned platforms that are keen to grow with acquisitions. A final note, economic cycle uncertainties remain high, but with a strong focus on efficient capital allocation and well-positioned businesses in the growing infrastructure sector, we feel confident on delivering profitable growth over time. And with that, we open up for questions.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is on the cash flow progression, which has been very strong recently. And how we should think about it in the coming quarters, given seasonality patterns, the effects of how the current group's cash flow management looks compared to how it looked a year ago? And also what other internal efforts you are taking. I'll start there.

[Olof Andersson, executive]

Karl, this is Olof speaking. Yes. So cash flow -- as we've mentioned in our previous presentations, cash flow is a very high focus for us, especially when it comes to optimizing the net working capital development. However, we should, of course -- I mean, as previous -- as we have said previously, from quarter-to-quarter, the net working capital will vary quite a bit.

But over the long term, we hope to see a steady positive trend. And I think we're seeing some positive signs here because we've had a couple of quarters now with strong cash flow development. So to some extent, of course, that is a seasonality effect, but to some extent, that is also reflecting a positive development, i.e., effects from our work with optimizing the net working capital.

However, it's -- I'm going to be honest and say that it's quite difficult to identify exactly how much is due to seasonality effects and what is basically underlying improvements. What we have said is that we're trying to achieve -- we're aiming for an operating -- for a cash flow conversion of 100% over the long term. And that's a very challenging goal for us to achieve. And we might not be there every single quarter, but that's what we aim for. I can't give a much more detailed answer than that, I'm afraid.

[Karl Bokvist, analyst]

No, understood but it's also clear, you've done a lot of good work on the working capital side, if we just look in terms of working capital in relation to sales and so on. It's been coming down for quite a couple of quarters now. And yes, this one might also be difficult to answer, but do you have a sort of based on how the current group looks, what's -- if there is a level where you feel the group should be at when it comes to working capital based on how it looks today, might be a range as well?

[Olof Andersson, executive]

It's difficult to say, but 8% to 10% wouldn't be too far off.

[Karl Bokvist, analyst]

Understood. That's helpful. And sticking on the financial more short-term oriented question, the timing and the financial impact from the Easter effect, how much or how do you feel that this could reverse in the second quarter?

[Simon Gothberg, executive]

Yes. Sure. Karl, it's Simon here. Yes. Well, I mean -- so March is definitely the biggest month for Vestum in the first quarter, right? It's basically the same size as January and February put together. And then April is roughly the same as March. And now obviously, Easter fell in March and up in April. So there should be some sort of rebound, right, in April versus March, but it's super difficult to quantify that in terms of sales and profits. But we can say that there has been an impact for sure, but it's difficult to give more details than that, I'm afraid.

[Karl Bokvist, analyst]

Understood. And shifting to Water, strong performance there. And you mentioned the U.K., but how are things progressing in other regions or verticals if you -- whether -- how you would like to distinguish them?

[Simon Gothberg, executive]

Yes, sure. Thanks. So I think as we mentioned in some of the comments on the segments and in the report, the Nordic region is growing as well, right? So we're seeing growth in essentially all of our core markets here, but the U.K. market stands out. And that is due to 2 factors, really, one being the U.K. water infrastructure market is heavily underinvested.

And I think we're expecting record amounts of investments going into that market in the next couple of years. So that's one thing. And the other thing is, obviously, climate change, right, with the floodings and droughts. And for us, it's -- it doesn't really matter whether it's a flooding or a drought, as long as the duration is long, it's good for our products.

And there's been a bunch of floodings in 2023, which means that the water levels are still too high, meaning that our equipment is still being used. And now I think 2 weeks ago, there was a new flooding in the southwestern parts of England. And whenever this occurs, it's quite disastrous for societies, which means that customer behavior has almost shifted towards using these type of products for a longer period of time. And I think that's what we're seeing now. So that market is progressing very well, and I think we're expecting that to continue.

[Karl Bokvist, analyst]

Understood. I have a couple of more, but I'll get back in the queue first.

[Operator]

The next question comes from Johan Lönnqvist Sundén from Carnegie.

[Johan Sundén, analyst]

I have 2 actually. We can stay here at the Water segment. And just to get the feeling for getting the expectations right for the rest of the year, how much of a one-off should you say that kind of growth and the margin in Q1 was? And -- or how much of the margin improvement should we extrapolate in the expectations during the rest of the year?

[Simon Gothberg, executive]

Yes, sure. Johan, thanks for that question, Simon here. So I mean -- as I think I mentioned before, the sort of cherry on top or sweetening the cake is always the extreme weather, right? If there's a lot of floodings or droughts or of the sorts, that's going to help our businesses and the margin.

And that's what we saw in Q2 last year, right. We had a margin of 22%. There was a lot of drought going on. And that really helped our companies in the Nordic region. And now in Q1, there hasn't been a ton of flooding, but there were a lot of floodings in 2023. And as mentioned, the water levels remained high. So that helped. But this is only, again, the sweetening in the cake.

There's also -- a huge part of the driver here in the sort of underlying growth driver is the water infrastructure under investment. And this could be investments going into nuclear power stations or what have you, wherever you need to move water or clean water. So it's difficult to say if 19.8% is abnormally high. It is a high figure. And I think what we're expecting is along the lines, as we're showing in the slide here between 17% and 22%, we should be between that going forward as well, as we have been in the last 6 quarters.

[Johan Sundén, analyst]

Okay. Perfect. Still a pretty wide range, but -- I guess what you mean. And then the similar question on the Infrastructure segment and basically on the margins there. How -- given the projects you won, as you highlighted, how kind of confident are you that the margin should not drop with a similar amount in Q2?

[Simon Gothberg, executive]

Yes. I mean we're not going to guide on Q2 figures, right? And -- but what we can say is just to repeat what we said in the report, Q1 was affected by, the early Easter was affected by [indiscernible] between product completions and starts, which basically means that I think 6% is a low figure and 10% last year was a high number, right?

So maybe somewhere in between is a good way to start, looking into the first quarter at Vestum going forward for the segments. And I think for the remaining part of the year, what we can say is that we have won a couple of new products that they're about to start now for many of our businesses. It's not 1 or 2. It's several in several of the companies, if you will.

[Johan Sundén, analyst]

And the price levels on those projects are there -- as it should be or have you cut on prices to safeguard utilization and kind of add-on projects? Are there good scope for that, which can be good for margins ahead? Or any different comparison used to be?

[Simon Gothberg, executive]

I mean I think that's a good question. We don't communicate order book because we think it's really all about the profitability in the order book and also when those new products are about to start. So without more information, it doesn't give a lot of information, right?

So we are very keen on taking the right projects to the right margin. That's more important than utilization, although utilization remains at solid levels, right? So I think profitability is definitely -- it is of the highest essence.

[Operator]

The next question comes from Jakob Marken from Danske Bank.

[Jakob Marken, analyst]

So some of my questions has already been answered. But I was wondering if you look at your projects that you have in your pipeline and if you look into H2, how are you seeing H2 compared to how you saw H2 last year. So when you stood here last year, do you think the market condition and your pipeline looked the same? Or has anything shifted in how H2 looks from here?

[Simon Gothberg, executive]

Yes. I mean -- Jakob and thanks for that question. Since we don't communicate order backlog or order intake, we're not going to do that now either, right? But what we can say is that we don't really have a changed view on H2 now in comparison to the last couple of months. So I mean, I think that for a business like ours with Infrastructure, Water and Services, the first quarter is obviously the smallest one, and then it picks up throughout the year.

And if there are any changes now in comparison to the last couple of months, it might be that there are some more sort of [indiscernible] like limes going forward. But I mean, it's too early to say the market uncertainty remains relatively high. And I think visibility is now in comparison to 2 to 3 years ago, it's more limited, and that's what we're seeing really. We don't really see it in the figures so much, but we do see it in a more limited visibility, I think.

[Operator]

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

[Karl Bokvist, analyst]

Yes. Some of my follow-ups have been answered now. But sticking on well, all segments, but perhaps especially infrastructure. If we look into the future quarters and just compare to the numbers you've provided now for last year, is there anything worth highlighting from your side, apart from water being at a very high or good 22% level, I mean the 9% in service and the 12-ish in infrastructure, are those fairly representable profitability levels? Or would you say that, for example, infrastructure could also be a bit on the high side last year when we think about how the market is this year?

[Simon Gothberg, executive]

Yes. Thanks again for that question, Karl. Yes, I mean, we're getting very close to guiding on specific figures. I mean what we can say in terms of last year, right, if we were to focus on 2023, I think for the Infrastructure segment, 12% in Q2 is a high number. That's not to say that it's not reachable this year, but 11.8% in a given quarter for the Infrastructure segment is a high number.

Q2 should be a good quarter for us. I mean in Q3, there's July and in Q4, there is December. So in Q2, we don't really have those holidays or vacations that disrupt the quarter. So I mean it should be a good quarter, profitability-wise. That said, I mean, 12%, yes, it's a high number. And then looking at the services segment, I think -- I mean looking at services overall, right, we're exposed to the installation market, which is expected to, I think, see a negative organic growth of 6% this year.

And I think first half would have a higher negative impact than the second half. So I think what we're seeing is really just that, right, the same as the installation market is seeing. The first half should be a little bit tougher than the second half of the year.

[Operator]

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Simon Gothberg, executive]

All right. Very good. Simon here again. Yes, there's been a written question, and it sounds like this, can you elaborate a bit on the acquisitions you are pursuing?

Yes, sure. So I think what we are pursuing now is really acquisitions in the Water segment. I mean, the Water segment performed 39% organic EBITA growth in the first quarter, a margin of 20%. And here, we have super strong platforms that are all sort of eager and keen on growing with acquisitions, and they have also some very solid structural capital, which means that they could absorb more volumes in terms of an acquisition.

So this is where we will allocate our capital going forward, towards the Water segment. And we are seeing some really interesting activities going on in the U.K. market where would like to add some more aspects that would give us more connectivity, that would give us a sort of higher technology height to that business.

So I think we are expecting to be able to complete just a couple of acquisitions this year. All right. I think that was the last question. So with that said, thanks, everyone, for listening in, and thanks for all the questions, and wishing you a great weekend once we get there.