Volati AB

STO:VOLO

Earnings Call Analysis

Robust EBITA Growth and Strong Cash Flow

Over the past five years, the company has averaged a 39% EBITA growth, with half being organic, driven by a net sales increase of 5% and acquisitions. The recent quarter saw a decline in sales primarily caused by Salix and platform communication, but the operational cash flow was up by SEK 100 million. Overall, a 5% hike in revenue to nearly SEK 8 billion and a 13% increase in EBITA to SEK 778 million improved margins. While the industry experienced sales and EBIT margin declines, on a year-to-date basis, sales were up 30% and EBITA margin improved by 1 percentage point.

Navigating Market Headwinds with Strategic Acquisitions and Solid Financial Performance

Volati, a proactive conglomerate with a focus on sustainable growth, has continued to thrive despite some market challenges in the third quarter of 2023. At the helm of the company, CEO Andreas Stenback and CFO Martin Aronsson have been steering Volati through the ever-changing corporate seas with a deft hand. Their adept governance is reflected in the company's commendable performance in five out of six business platforms, contributing to a remarkable growth story rooted in strategic acquisitions and robust organic growth.

A Tale of Resilience: Overcoming Sales Declines with Operational Efficiency and Acquisitions

While the group experienced a slight sales decline, the cause appears to be a challenging comparison to a previous quarter bolstered by post-strike demand, as opposed to a downturn in market interest. Notably, the Ettiketto Group stands out with a significant margin increase, confirming the success of Volati's acquisition strategy and ability to continually integrate and optimize new companies within its portfolio. Similarly, Salix Group showcased resilience by improving its EBITA margin to 10%, indicating effective cost management and adapting to market conditions.

Industry Segment with Mixed Results but Overall Growth

The industry segment did witness a decline in sales by 9% and EBITA margins by 2 percentage points over the quarter. However, three out of the four industry platforms displayed positive outcomes, resulting in an overall growth in sales by 30% and a 1 percentage point increase in EBITA margin year-to-date. Strong performances by Corroventa, Tornum, and S:t Eriks, particularly in the European market and the infrastructure segment, significantly offset weaker results from the communications platform impacted by a slowdown in the 5G rollout. The group fortified its position through an add-on acquisition of Gunnar Prefab, integrating it into the S:t Eriks platform—another move highlighting the company's adept adaptability and foresight.

A Strategic and Disciplined Approach to M&A

Volati's leadership emphasizes the importance of discipline in their merger and acquisition (M&A) strategy, striving for a balance between opportunism and caution. With a strong pipeline of potential acquisitions and ample financial capacity, the group is well-positioned to grow further. The acquisition of Gunnar Prefab illustrates this approach, adding strategic value to the existing platform and representing the sort of discerning and synergistic M&A activity that has been a hallmark of Volati's success.

Robust Financials Fueling Future Growth

The group’s financial targets reflect its ability to sustain and increase shareholder value, with an EBITA growth per ordinary share of 13% over the last 12 months—nearing the set target of 15%. The return on adjusted equity is considerable at 28%, considerably above the 20% goal, and the net debt to adjusted EBITDA ratio is at a comfortable 2x, at the lower end of the target range of 2x-3x, thereby ensuring ample headroom for funding growth opportunities.

A Vision of Sustainable and Long-term Value Creation

In conclusion, Volati's focus on the long term is evident from its average annual EBITA growth of 22% over the last decade, achieved predominantly through its internal cash flow. This dedication to generating long-term value is reinforced by the distribution of SEK 2 billion to shareholders since its IPO in 2016. With a strong foundation laid out by its visionary leadership, Volati is well-equipped to navigate future challenges and capitalize on market opportunities as they arise, all while maintaining a commitment to delivering consistent, superior returns to its shareholders.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to today's webcast presentation where we have Volati presenting the Q3 report for 2023. With us presenting, we have the CEO, Andreas Stenback; and CFO, Martin Aronsson. [Operator Instructions] And with that said, please go ahead with your presentation.

[Andreas Stenback, executive]

Thank you. So happy to be here today and talking about our Q3 report, and let's dig into it. To start with, Volati, we're a fast-growing and acquisitive group of 6 well-managed platforms. All 6 of our platforms are built upon an industrial logic. We have a market-leading position and the growth potential at least in line with Volati's overall goal of 15% per year, and we have strong cash flows.

Two of our platforms are the natural and integrated business areas, Salix Group and Ettiketto group, while the remaining 4 platforms are within our business area Industry. With these business areas and platforms, our continuous operations, we have shown an average EBITA growth of 35% over the last 5 years, of which roughly half have been organic.

On the next slide, you will see a bit more details about our growth in the last 5 years and broken up into the organic net sales growth and organic EBITA growth. I showed this for you already in Q1 when we had just had a quarter with strong organic growth. We have now updated it with the year-to-date figures. I want to highlight that when looking at this, we are best evaluated based on the long term.

During the period 2018 to 2022, meaning the last 5 annual years, we have shown an average EBITA growth of 39%. That fluctuates somewhat over time. It's, for example, dependent on the pace of acquisitions that we've had. Roughly half of our EBITA growth has been organic over that period.

Of course, that comes from our organic net sales growth, which has been 5%, but even more through our continuous efforts to drive operational improvement and our acquisition strategy, which means that we're focusing on value adding add-on acquisitions, where we realize synergies, which means improved margins.

The last year, we have showed slightly lower organic growth. That has mainly been driven by the development in Salix caused by the changing market environment there. And most recently and in our most recent quarter, it has been affected by our development in the platform communication, which we'll be getting into a bit more in detail later on.

Our other platforms have successfully compensated for the development, but in Q3, it didn't lead all the way. And also before digging into the most recent quarter, I want to take an even further step back and look at the long-term development.

Volati's overriding goal is to generate long-term value growth. That means that we are not best evaluated on the individual quarter, but rather long term. Our ability to create value over time. This graph, I think, summarize that in a very good way. Over the last 10-plus years, we have had an average annual growth on EBITA of 22%. This is something that we have been achieving with our own cash flow. So I think this summarizes our long-term performance in a very good way.

So with that said, let's discuss and get into our most recent quarter, Q3. It has been a strong quarter in 5 out of 6 platforms, where we have growth both our EBITA and margin in the quarter.

Ettiketto is delivering a very strong quarter. They are actually improving their EBITA margin from 16% to 21%, 20% if you adjust for the electricity support that we have received. That means -- so that shows me that our acquisition strategy, focusing on add-on acquisitions, where we can, over time, increase the margins in the companies that we acquire, is really successful.

Salix Group also delivers a good quarter. It's actually the first quarter -- first time in 5 quarters where we grow the EBITA in absolute numbers and that is despite that we still see a challenging market and the sales has been down somewhat in the quarter.

This shows that the colleagues in Salix are doing an excellent working -- actually working with the margins and taking cost measures to adjust the organization for the current environment.

Industry has had a good development in 3 out of 4 platforms: Tornum, Corroventa and S:t Eriks have all grown their EBITA and margin in the quarter. I'm particularly happy with the development in S:t Eriks. We have mentioned previously that we have seen a slowdown in the construction-related part of that business, while we actually see that the infrastructure part is holding up quite good and they do a very good quarter if you summarize that.

So our platform communication then. That's also part of -- that's the fourth platform in our business area industry, has had a tough quarter. We entered Q3 with a record year behind us, which actually started 1 year ago in Q3 last year, which was very, very strong.

We saw already in Q3 that we expected demand to flatten out from a very high level. But the slowdown has actually been stronger than we expected. It's mainly because of the slowdown in the 5G rollout, and we have taken measures to reduce costs as we foresee this slowdown to remain for yet some time. But over time, the volumes will come back. The 5G rollout will continue.

So looking into the quarter in a bit more detail on the next slide. One can see that, yes, sales and EBITA in the quarter is down somewhat. Sales, as described, is mainly due to Salix and platform communication, while the EBITA is mainly due to communication or solely due to communication.

However, the operational cash flow has been very strong in the quarter, and that's actually what we expected. We have been working hard with this for more than a year now, and we really see the results. So we increased operational capital with SEK 100 million in the quarter compared to last year. And that leaves us with a net debt adjusted EBITDA, which I'm very happy with.

Looking at the development. Over the last 12 months, we are almost at SEK 8 billion of revenue on an annual basis, up 5% compared to the same period last year. EBITA at SEK 778 million is up 13% compared to the same period last year, meaning that we are -- we have successfully improved margins over this period.

And again, looking at the operational cash flow. We worked hard with this for the last year. It's up SEK 460 million, showing that our efforts in reducing net working capital is really working.

With that, I'll leave the word to Martin.

[Martin Aronsson, executive]

Thank you, Andreas. So let's start with looking at our 3 financial targets and starting with the EBITA growth per ordinary share over the last 12 months. This period, we came in at 13% in this target and the target for this measure is 15%. But we should remember also that, that is measured over a business cycle.

Our second financial target is the return on adjusted equity, which is a target of 20%. This quarter, we significantly overachieved that with 28%. And so that really proves our ability to create shareholder value.

And looking at our last financial target, which is the capital structure. The target is to have a net debt to EBITDA, adjusted EBITDA ratio of between 2x and 3x and never exceeding 3.5x. And as Andreas mentioned, we are right now at 2.0x, which is a structure that we're happy with. It's in the lower range of our financial target and that also leaves us with substantial capacity for further acquisitions going forward.

So let's look at how our 3 business areas are performing in a little bit more detail. So let's start with Salix Group, where we're very happy to see that the EBITA in nominal terms increased for the first time in 5 quarters. And also the EBITA margin increased going from 8% in the comparable quarter last year to 10% in this quarter. And this is despite the sales decline of 5% in the quarter.

So this really shows that the efforts taken to counter the effects of lower demand is paying off. When talking about the demand, the demand in the quarter continues to be hampered and the currency effects are also working against us. So the market for Salix Group is tough right now, but they are handling this very, very well.

And we also are confident that there is a long-term demand for our products going forward. And given the very successful work with adapting the business of -- we really believe that Salix Group is well positioned to capitalize on the growth when the volumes return.

Moving over to Ettiketto Group. They are performing another solid quarter, and the margin development journey is continuing, where margins went up from 16% in the comparable quarter last year to 21% this quarter. And as Andreas mentioned, if you adjust for electricity support, it's around 20%. Also taking a little bit longer view on this, the last 12-month margins are now at roughly 18%, which is more than 2 percentage points higher than the full year of 2022.

So we're steadily working our ways towards historical margins, and we're doing that through realizing the synergies, continuing to realize the synergies in the acquired businesses, but also working with operational improvement in the business. The demand for the products continues to be good.

However, if you look at the quarter, there's a slight sales decline, but that's predominantly due to that we have a tough comparable from last year's quarter 3, where the demand was boosted in the aftermath of the strike at the material supplier UPM.

Constantly looking for further acquisitions, both in the Nordics and Europe for Ettiketto Group and we see significant potential to continue the growth journey in this business area.

So then lastly, let's talk about industry, which experienced a sales decline of 9% in the quarter and EBITA decline -- EBITA margin declined by 2 percentage points. But if we took a little bit longer view, the year-to-date sales is up by 30%, and the EBITA margin is up by 1 percentage point.

I also want to mention that the business area is a diversified business area. And if we lift the hood a bit on this and look at the platforms, 3 out of our 4 platforms in this business area performed very well and increased margins and results.

Corroventa, firstly, is benefiting from several late summer storms in Europe, which drives the demand for water damage remediation products. And also, Tornum continued to deliver another solid quarter with increased margins and results. Also, S:t Eriks performed well in the quarter, and they see a good demand in the infrastructure segment and which has this quarter compensated for the weaker demand in the construction segment.

But as Andreas mentioned, the quarterly development is affected negatively by a sharper-than-expected decline in the communication platform. And the main result -- or the main reason for that is the slowdown in the 5G rollout, especially in North America. But also you should remember that the platform is meeting tough comparables from last year.

In the quarter, we acquired 1 company to the business areas through Gunnar Prefab, which is an add-on acquisition to the S:t Eriks platform and Andreas will talk a little bit more about that later.

With that, I'll leave it to you, Andreas.

[Andreas Stenback, executive]

Thank you. So looking at our acquisitions that we've done since 2020. We've done 21 acquisitions and we've been active in all platforms, except Corroventa. And for the last 4 quarters or the last 12 months, we completed 4 acquisitions, of which Gunnar Prefab was completed in Q3. Gunnar Prefab is a very good example of what type of acquisitions that we want to do. It's been a company that we've been in contact with now for actually many years.

It's a good example of that sometimes, in particular, in this market, discussions take a bit longer. But as often the case, when we are the ideal buyer, we reach a conclusion at one point in time. And with Gunnar Prefab, we very happily reached that conclusion in September.

Gunnar Prefab is complementing our -- or is an add-on acquisition to our platform S:t Eriks. They are particularly strong in the Infrastructure segment, and they have their own traffic barrier GPLINK, which is complementing S:t Eriks offering in that segment.

Thus, the acquisition is strengthening our product offering in S:t Eriks and our position on the market. At the same time, we have synergies between S:t Eriks and Gunnar Prefab, which will add additional value over time.

Looking at the historical M&A pace. As can be seen, we've been slightly slower recently, even though we are in a positive trajectory in the most recent quarter. I want to point out that M&A work is very binary. Either you close transaction or you don't. And during the last 6 months, we've had a couple of cases that were closed, but unfortunately, we weren't able to sign to the right terms.

So some of these situations will come back to us at a later stage as it has happened with Gunnar Prefab, for example. But for us, discipline is extremely important. I don't want the organization to get too stressed up about the short-term pace. What's important for us is to remain disciplined, do the right acquisitions for the right returns and maintaining this discipline has been one of the core elements of Volati success in the past.

I'm happy with the pipeline that we have in our platforms. Activity is on the level which I would expect. And as can be seen on this next slide, we also have the financial capacity in place to act on acquisitions when they occur. As already mentioned a couple of times, we've had a very good cash flow the last year, leaving us with a net debt to adjusted EBITDA level at the lower part of our goal.

Also, since spring, we have had a new credit agreement, adding SCB alongside Nordea. So we also have the liquidity in place to act on acquisitions when they occur.

To summarize this. We had a solid second quarter into Q3. Five out of 6 platforms are increasing their EBITA margin. While, as mentioned, we're working with communication. Year-to-date, we're up 13% in EBITA for the group, and the cash flow is really there. We want to focus on long-term value creation.

I think we have proven that we have achieved that. We have a high average growth over time. We also distributed SEK 2 billion to the common shareholders since IPO in 2016. And our return on equity speaks for itself. And we are in a good position to continue delivering on our growth journey. I'm very happy with the 6 platforms that we have. They should, over time, be able to achieve a growth in line with or in excess of what we want to achieve with Volati, our financial goal of 15%, also through driving M&A in all these platforms. And we have the financial strength to support that growth.

So with that, we'll leave over for any potential questions.

[Operator]

[Operator Instructions] And we'll start with the first question here. What has been the main drivers for the improved margins?

[Andreas Stenback, executive]

Oh, that's hard to answer with the general question since we're actually improving margins in 5 out of 6 platforms. In Salix and parts of Industry, for example, S:t Eriks cost measures and margin improvement work given the market circumstances have, for sure, being part of the reason.

As a general answer, we're working with continuous operational improvement in all our platforms, and we see the benefits of those, I would say, more or less all over the line. And then we have our strategy with value-adding add-on acquisitions, which, for example, Ettiketto is a good example of where we acquire companies with lower margins but we could actually then raise those margins over time as we come in as a new owner, meaning that we actually increase then the overall margin as well. So I would say that that's a short answer to that.

[Operator]

And looking at Salix Group, where there is a long-term demand for the products, what has the response been like from the customers?

[Andreas Stenback, executive]

It's a very good question. I think it's very good that the person mentions that, yes, we also believe there is really long-term demand for the products that we have in Salix. And I'm really looking forward to the times when the demand is picking up again, of course then we're going to be in extremely good position.

With regards to the response from our customers. As far as we see it, we remain our strong position with the customers. We are rather gaining market share than losing. So I would foresee or I would say that our relationship with our customers within Salix Group is as good as ever.

[Operator]

And for how long can we expect any decreased demand in the communications platform?

[Andreas Stenback, executive]

Sorry, can you say that again?

[Operator]

Yes. So for how long can we expect a decrease in demand in the communications platform?

[Andreas Stenback, executive]

It's a tough question to answer. We expect the lower demand to remain at least well into 2024. And as a consequence, we're also working with the cost base in that platform. But similar situation as with Salix, we are confident that demand will come back, and then we will be very ready for it.

[Operator]

Have the unstable environment in the world impacted your organization? And if so, in what way?

[Andreas Stenback, executive]

Yes, it has, in particular. I already mentioned that in -- of course, we have some of our platforms where we have been forced to adjust our cost base and then it has, for sure, impacted.

[Operator]

And do you have anything in your pipeline that you could comment on today?

[Andreas Stenback, executive]

We never do that. I could -- just to reiterate what I said and I think activity is -- I assumed it's M&A pipeline, the question refers to. I could just say that the activity is at the level where I -- what I'm happy with. I just want to reach a couple of more completions or transactions and that will happen. It's just a matter of time.

[Operator]

Given that the economic climate remains the same going into 2024, would you say that Volati is well prepared to perform next year?

[Andreas Stenback, executive]

Yes. I think that's what we want to point out. And we've been very prepared, yes, for sure, in all our platforms.

[Operator]

Okay. We'll take the next question here. What should investors look out for in the coming quarters?

[Andreas Stenback, executive]

I think that's up to the investors. I don't have any good answer to that.

[Operator]

Okay. That was all the questions we have. Andreas, Martin, do you have any final concluding remarks that you want to say before we wrap this up?

[Andreas Stenback, executive]

Not from our point. I think what's summarized is what we want to say. So thank you for listening in, and see you next quarter.

[Operator]

Thank you very much.