Volati AB

STO:VOLO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to today's webcast presentation with Volati. With us presenting today, we have the CEO, Andreas Stenbäck, and CFO, Martin Aronsson. [Operator Instructions] With that said, I'll give the floor to you guys. Please go ahead with the presentation.

[Andreas Stenback, executive]

Thank you, and thank you, everyone, for listening in today despite the summer that we have outside, let's start by getting into the presentation. First, a short -- a couple of comments on our second quarter. It's a solid quarter, which I am very happy about given the circumstances.

We have sales and EBITA and thus also margins that came in line with last year's quarter, which is very strong in that we still see a challenging market environment with declining volumes, both in the construction market and the 5G rollout. However, we do see some positive signs on the horizon as the volume decline in our part of the construction market are somewhat lower in this quarter. And we do also see some signs of -- positive signs with regards to the 5G rollout in the North American market.

However, we do not expect any dramatic shift short term. Some short comments on the business areas then. Salix did a very good quarter in the challenging market. Acquisitions helped contribute to an overall 6% sales growth and slightly improved margins. And I think Salix is a very good example of how we now successfully balance short-term cost savings and long-term value creation.

Ettiketto had a very strong quarter. Organically growing top line with 7% and significantly improved the margins, and that resulted in a 30% EBITA growth. And Ettiketto being a great example of a platform where we see the strength in making add-on acquisitions because it is the effects of these add-on acquisitions that now gives us the good EBITA growth.

We are continuously improving margins as we realize synergies, and we implement efficiency improvements in the companies that we have acquired. Industry showing a decline in sales and EBITA, and that's mainly market-driven and it's attributable to the significantly slower 5G rollout pace that we have in the platform communication. And what we should keep in mind is that we had a very strong 5G rollout in the comparable quarter last year. So we're also meeting some tough comparables in that business area.

The operational cash flow in the quarter was down 26% improvement compared to last year. And last year, the operation capital was actually quite good as well. The net debt came in at SEK 2.7 million, which is a level which we're comfortable with and provides room for further acquisitions.

And lastly on this introduction, we have added Holmgren to our leadership team, which will strengthen and increase our efforts within strategic HR. So I'm very happy to welcome her here joining us of the summer in August.

Looking on the next slide with some more detailed numbers. As you can see, sales and EBITA in line with last year and also an operational cash flow coming in at around SEK 210 million, which is a 26% improvement compared to last year.

Taking a step back and looking at the last 12 numbers as well as some more historical figures. We're now showing a sales of -- on an annualized basis of SEK 7.6 billion and an EBITA of SEK 660 million. As I often mentioned, Volati is best evaluated over time.

And looking at the development from 2018, we have been able to show an average annual growth rate of 19% per year. So that's since 2018 in our continuous operations. However, which can also be seen on this slide since 2021, the growth for [indiscernible] our financial goal. So below 15% per year. And that has been market driven and it's something that we expect to compensate for with accelerated organic growth once the market we operate in start to improve and volumes start getting back to normal levels.

With that, I leave the floor to Martin.

[Martin Aronsson, executive]

Thank you, Andreas. So let's look at our performance in relation to our 3 financial targets, starting with the EBITA growth per common share during the last 12 months. And as Andreas mentioned, right now, we have a market headwind in a few of our platforms, affecting growth negatively. And we are now at minus 17% EBITA growth versus our target of 15%.

However, it's worth noting that our target is measured over business cycles and our 5-year average growth is 21%. Over time, we're also very comfortable with our long-term financial target. And our second financial target, return on adjusted equity came in at 17% versus our financial target of 20%, which is below our target, and that is driven by a lower EBITA growth.

However, taking a longer-term perspective also there, during the past 5 years, we have delivered on average 30% return on equity. And lastly, our financial targets regarding our capital structure, where our net debt-to-EBITDA ratio came in at 2.7x in the quarter, which is within the range of our financial target ratio of between 2 and 3x, which means that we have still a financial capacity left to act on the right acquisition targets that comes our way.

And so let's look at how our 3 business areas are performing and let's start with the Salix Group, who delivers a solid quarter. Sales increased with 6% driven by acquisitions while demand continues to be hampered due to a headwind in the construction industry.

The EBITA margin improved in the quarter and the EBITA increased with SEK 8 million in nominal terms. And during the past 2 years, Salix Group has worked proactively on -- with the cost control and also with realizing coordination benefits and synergies, while also working with the market development.

And this is really showing effect now with the last 12 months margins now being higher compared to 1 year back despite that they have a lower volume. And also with the measures that they have taken, we are confident that Salix is in a good shape when the demand recovers.

The integration of the newly acquired companies Trejon and Beslag Design is going well, and we are also well positioned for the acquisitions going forward. Our second business, Ettiketto Group delivers another strong quarter. Sales increased with 7% in the quarter fully through organic growth. Ettiketto Group, it is meeting a good demand with a solid order intake, and that is especially in the Swedish business, and they are now in the process of expanding our production capacity to be able to meet the demand that they see.

We're also happy to see that the trend of increasing EBITA continues, as Andreas mentioned, and we are now 4 percentage points higher EBITDA margin in the quarter compared to last year. And to us, this really shows that the strategy of acquiring companies with a lower margin and then working with synergies and operational improvements is really paying off.

And Ettiketto Group's last 12 months margins are now back at 20%, which is a fantastic achievement by the team at Ettiketto. The business areas are looking for further acquisitions, both in the Nordics and the rest of Europe, and we see a significant potential to grow going forward.

Lastly, we have our business area industry, where Q2 concludes a tough quarter with a sales decline of 12% and an EBITA decline of 19%. Our platform within the business area, so Corroventa performed well in the quarter due to early summer storms in Europe, which is driving the demand for water damage remediation products.

S:t Eriks performed a stable quarter despite the demand in the construction segment continuing to be weak. S:t Eriks also continuously seeing positive effect from the cost programs that they have implemented. As in quarter 1, we see a continued market headwind for the platform communications due to a slowdown in the international 5G rollout. And they also, as Andreas mentioned, meeting tough comparables from last year.

The cost programs that they have implemented in the platform is starting to yield effects and the comparable figures in the next quarters will be easier. In the quarter, our last platform, Tornum Group is making a slightly slower demand in the agricultural segment, which is mainly explained by timing effects.

But all in all, this concludes a tough quarter for industry with a few platforms performing below what we expect in a normalized market. But as mentioned, we are taking the necessary actions in communications in S:t Eriks, and we are confident that we are well positioned when the market presents. With that, I leave the word to you, Andreas.

[Andreas Stenback, executive]

Thank you. So let's get into our acquisition work. So as can be seen on this slide, so 2 acquisitions have been completed during the first half of this year. In total, since 2020, we have highlighted 24 acquisitions. So 22 out of those being add-on acquisitions to existing platforms and 2 of them forming a new platform within business area industry.

And for me, this really shows that our decentralized model with add-on acquisitions to platforms work. Looking at the activity levels right now, so during the last 12 months, we have made acquisitions contributing to almost SEK 700 million of yearly turnover. And we are in a positive momentum with regards to that because we had a slightly slower pace fall of 2022 and spring 2023.

M&A work. I was trying to remind about this, it's very binary, either you close a transaction or you don't. But right now, the outlook is positive. We have a good activity in the platforms, but the deal is not done until it's closed.

Discipline is extremely important for us. We do not want to either not want the organization to get stressed about the short-term acquisition pace. We're in it for the long term, and the return from the acquisitions that we do, that's the central piece of it. But as said, the pipeline in the platform product outlook look good and activity levels are on -- are good.

Important is also that we are in a good financial position to act on acquisitions when the right opportunities occur. And that can be seen on this slide. We have had a positive and a good operational cash flow in Q2. So we have -- also looking at the last 12 months, we have had a cash conversion of 103%, which is a level which I'm very happy with.

Short term, this year, we have the stronger cash flow quarters ahead of us. So from an acquisition point of view, that is good. And also, I think what we need to keep in mind right now is that once the markets come back and we will start seeing a positive effect on the net debt to EBITDA ratio also from the EBITDA expansion.

To summarize before opening up for questions. So very happy and proud about the Q2 that we were able to show. It shows that we were able to balance short-term profitability and the long-term value creation between Volati Group and our platforms.

It's still a challenging market conditions for mainly the platform Salix Group, S:t Eriks and Communications, but we are very well positioned for once the market comes back. Then we will experience an accelerated organic growth pace.

Finally, we do have with the platforms and in place and the financial position to act on add-on when acquisition opportunities occur. So with that, I leave for any potential questions.

[Operator]

[Operator Instructions] And we've got the first person calling in with a phone number ending in 2616.

[Albin Nordmark, analyst]

It's Albin here from Nordea. So a couple of questions from me. You mentioned some negative timing effects for Tornum. Can you give us some sense of how large these effects are and if they're going to affect Q3 in a positive way?

[Andreas Stenback, executive]

Thank you, Albin and good to have you on the call. One thing that is important to keep in mind because Tornum is that -- it's a project business, most of the revenue recognition occurs once those projects are delivered. So when we talk about timing effects in that platform that simply relates to how the projects are planned throughout the year. Typically, you have more deliveries of projects in -- before summer than we've seen this year. A number of reasons behind that, but that's typically -- what we typically see, where with this year, we expect to have done relatively more deliveries actually in the second half of the year and mainly actually Q4. We don't give any detailed guidelines with regards to volumes, unfortunately. But that's the main dynamics in Tornum.

[Albin Nordmark, analyst]

Okay. And therefore, Corroventa, which was positively affected by fluids across Europe. Do you expect that this will impact H2 as well? Or is it early to tell?

[Andreas Stenback, executive]

It's -- as you know, it's hard to predict but there are floodings out there right now. We started to see some effects from those late Q2. Typically, that -- some of that effect will also see in Q3. But then the main driver will be how the rest of the summer and the fall ends with regards to summer storms and rain throughout Europe.

[Albin Nordmark, analyst]

Okay. Perfect. Thanks a lot. And the carryforward for Communication lastly, you have still a tough market with a slow 5G rollout. You mentioned some light on the horizon at least in North America. But how is communication working with the compensating for the loss of the 5G rollout?

[Andreas Stenback, executive]

Yes. So it's a very good and relevant question. Of course, Communication is not only dependent on the 5G rollout, even though it's an important driver. So I would say that the other segments that we are providing products to has been fairly stable or even good throughout the last 12 months. So the main shift that we've seen has been in the 5G rollout phase. And that's a demand that is still there. It will come back. I think everyone is comfortable about that, but we can't foresee the timing for that return. However, as I said, we do basically -- the North American market was slow throughout most of last year. And now we see -- have seen a slight improvement there.

We're actually building order book in North America. I do not know if that's a sign for the overall market coming back, but at least we see some good signs in the horizon. We do. And also lastly, it was last summer. So in Q3, that the real slowdown hit Communication. So we will meet easier comparables from Q3 and onwards.

[Albin Nordmark, analyst]

Okay. And lastly, for Salix, I think you have now 8 quarters in a row with negative organic growth, meeting easier comps here as well. But do you see any light in the demand for Salix here?

[Andreas Stenback, executive]

Yes. We see some lights there as well. I think what -- a couple of comments on that. Firstly, there has been an overall market decline and all external statistics supports that. I believe when we look into it, we are rather increasing our market share. So we are rather declining slightly lower than the overall market, so slightly less than the overall market, which I think is very important for us that we follow up and see how we position ourselves and I would say that we have rather strengthen our position.

Looking at the statistics for Q2 in relation to Q1, we don't have the new numbers yet for the overall statistics, but it shows that the decline has somewhat slowed down, but it's still a decline. So we're going from a fairly tough declining numbers to still a decline, but a bit slower. External statistics shows that the market will get back to growth in 2025. I don't know if that's -- the future will tell if that's the truth. But if that would be the case, I think the trend that we see now will continue. So we will get better and easier and easier market conditions. But we do not expect any dramatic shift. It's still going to be tough for yet some time.

[Operator]

[Operator Instructions] We'll move on with the question here. What are the main drivers behind Ettiketto Group's strong earning growth and improved margins? And how sustainable are these rates?

[Andreas Stenback, executive]

As Martin pointed out, these are the sorts of us getting back to the margins that we have been able to show historically within Ettiketto Group to have been at these levels historically, what has happened is that we have added on acquisitions, added on companies to that group, which then typically operate with lower margins and through realizing synergies through improvement efficiency in the acquisitions that we do. We increased the acquisition profitability to the levels that we have been able to show in the past. So -- and now we're getting there.

But what will happen is we are looking for further acquisitions and the acquisitions that we'll do in the future will most likely also operate under lower margins. And the same logic will apply to that, but we will then improve those margins also over time. But yes, so that's the logic behind the margin improvement in Ettiketto Group.

[Operator]

Okay. I'll take the next question here. How do you balance the focus between short-term profitability and long-term value growth in such a challenging market?

[Andreas Stenback, executive]

It's a relevant question. So for all -- it's all about the long-term value creation. And that means that you sometimes have to leave some short-term profitability on the table. If you believe that over the longer term, that will benefit you. So for us, in practice, that means that our cost measures focuses mostly on long-term measures, structural measures, which we feel that we could still benefit from in -- when the market gets back.

So efficiency improvement, coordination benefits between companies within a platform, realizing synergies from the acquisitions that we've done. So all those kind of cost measures, which will also benefit us when we get the volumes come back, those are the type of cost measures that we focus at. I would say that that's there. That's the main answer to that.

[Operator]

And can you elaborate on the cash flow development in Q2 compared to last year?

[Martin Aronsson, executive]

Absolutely. I can quite answer that. So we had a strong cash flow in the quarter. So I think it was 26% higher than last year. And the main drivers behind that is, of course, a lot of hard work, and it's mainly from that we are now trying to hold on to our money a bit more. So we are having less investments than in previous quarter last year. And also, we have improved the relationship between our receivables and our short-term liabilities also which is affecting us positively in the quarter. And overall, when we look at our cash generation of 103%, we're very happy with that number. So that's good results from a lot of hard work in the organization.

[Operator]

Okay. That's all of the questions that we have. Do you have any concluding remarks, Andreas?

[Andreas Stenback, executive]

Yes. So before finalizing this call, I would just want to thank -- start by thanking all my colleagues who are doing a fantastic job. And they are the main reason why I'm very happy about the position that we're in. Overall, Volati is in a good shape. We are ready to capitalize on our position whilst overall market returns. We have the platforms in place. We have the financial position in place and we have a active acquisition pipeline, which will contribute to our long-term value creation. So very happy where we're at. And I'm wishing all my colleagues and the ones listening in a happy summer holiday and the months to come. Thank you very much for listening in today.