Volati AB

STO:VOLO

Earnings Call Analysis

Quarter Overview: Steady Yet Challenging Environment

In the latest earnings call, Volati reported a moderate increase in group turnover of 4%, reaching SEK 1.9 billion, highlighting the resilience of their business amidst challenging market conditions across most of their platforms. However, the EBITDA showed a slight dip, coming in SEK 6 million less than the previous year, with an EBITDA margin maintained at 10%. Despite these hurdles, operational cash flow stood robust at SEK 177 million, translating to a remarkable 94% cash conversion over the last 12 months.

Ettiketto Group: A Bright Spot with Strong Growth

Ettiketto Group emerged as a standout performer, showcasing a significant organic growth of 15% during the quarter. The segment's margins have notably improved, reaching 21%, a milestone surpassing levels achieved before their acquisition strategy. Since 2019, EBITDA has almost quadrupled from SEK 50 million to nearly SEK 190 million in the last 12 months. With solid demand especially from the Swedish market, Ettiketto is extending its production capacity to further capitalize on this growth, indicating a strategic focus on sustainable expansion.

Salix Group: Narrow Growth under Declining Market Conditions

The Salix Group contributed to a 5% increase in sales driven primarily by acquisitions, though it continues to grapple with a generally declining market. Even so, the company has adeptly maintained its EBITDA margins at last year's levels, achieving SEK 4 million above previous figures. Industry analysts anticipate a rebound in the overall infrastructure market by 2025, suggesting room for recovery. This optimism is fuelled by Salix's thorough management of costs and successful synergy realization over the last two years.

Industry Performance: Mixed Results Amid Market Pressures

The industry segment faced a mixed performance, with Corroventa reporting a strong quarter, particularly benefiting from European funding for water damage remediation. However, Tornum Group struggled due to a lack of demand in the agricultural sector, coupled with anticipated lower contributions from the Spanish market. Similarly, S:t Eriks experienced headwinds in the construction market yet found partial stability in infrastructure demands. Overall, the industry segment's EBITDA dropped from SEK 91 million last year to SEK 50 million this quarter.

Future Guidance: Optimism Amidst Caution

Looking ahead, management does not foresee a rapid market recovery but holds a cautious optimism. They expect external indicators to predict a shift towards positive growth by 2025. Additionally, while current net debt-to-EBITDA stands at 2.8, within the preferred range of 2 to 3, the upcoming quarters promise to deliver the highest cash flow seen this year, which could facilitate further acquisitions.

Acquisition Strategy: Ongoing Focus on Growth

Volati continues to pursue its acquisition strategy with three acquisitions made in the past 12 months and a total of 24 since 2020. The company aims to maintain this momentum, expecting to finalize one or more transactions in the coming two quarters. There is a sense of urgency within the team to seize opportunities as they arise, while ensuring a disciplined approach to prevent unnecessary pressure.

Conclusion: Strong Foundations for Recovery

Despite the current headwinds, Volati’s strong operational cash flow, strategic acquisition planning, and focused business areas position it well for future growth. The successful performance of Ettiketto and the potential for Salix group recovery create a base for optimism. As the market conditions gradually improve over the next 18 months, the underlying strength of its diversified platforms and management’s proactive approach may well translate into substantial upside for investors.

Earnings Call Transcript 2024-Q3

[Operator]

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

[Andreas Stenback, executive]

Thank you very much, and thank you for listening in to this quarterly presentation. Let's go directly into it. And -- just to start with Q3 in brief. This is another quarter in line with last year, which, of course, leaves me with a feeling want more. But I also feel that we are doing a very good job in our platforms given the circumstances that we're operating under. We saw challenging market environments affecting four of our six platforms. But a very positive exception is that the Ettiketto Group where we saw a strong organic growth with 15% in the quarter and improved margins up to 21% last 12 month. And that means now that the Ettiketto has come from -- basically reached the same margins as before we started our acquisition journey with that platform. Meaning that we have gone from an EBITDA of SEK 50 million in 2019 to almost SEK 190 million in the last 12 months.

Our second business area, Salix Group. They delivered yet another strong quarter given the circumstances. They are still operating in a declining market. However, they showed an acquisition-driven growth of 5% and margins in line with last year. And that means that for the second quarter now in a row, they have shown a stronger or improved EBITDA compared to last year.

In industry, we have seen a mixed development. Corroventa had a strong quarter, and Communication showed growth from a very low level in the yet slow market. But -- and then we have S:t Eriks. S:t Eriks experienced a challenging construction market while the Infrastructure segment is holding up well. So in Q3, we still had relatively strong comparables from last year, which we will ease up the coming quarters.

And then our final platform, just briefly give my words on Tornum. They had a very tough quarter. This is a platform that can show quite some variations over time. And currently, we're affected by the slowest market in Europe for farmers in many years. And basic communication with slower-than-anticipated deliveries in Spain on the back of a strong order book there that resulted in a very weak quarter.

We do not expect any rapid changes to the market environment in the short term. But thanks to our long-term focus, we have a good cost structure and maintained or strengthened our market position in our platforms. So whilst markets improve, we will really see the effect from those market positions that we have achieved.

Now digging into the more detailed numbers. On the next slide, we can see that in the quarter, group turnover increased 4% to SEK 1.9 billion. The EBITDA came in slightly behind last year, so SEK 6 million behind last year, but we maintained EBITDA margin of 10%. The operational cash flow came in at SEK 177 million, which means that we are now operating on a 94% cash conversion during the last 12 months.

And then finally, the net debt. We're now at 2.8. It's still within our range. And if you take that into consideration in combination with that, we have the strongest cash-generating quarter ahead of us, that provides a solid foundation for continued add-on acquisitions.

On this slide, we take a bit more long-term view on Volati, and I tend to say to you fairly often that we should be evaluated over time. And which can be seen, we're now operating under SEK 7.7 billion of turnover and almost SEK 660 million of EBITDA on an annual basis. That means that we have grown on average 18% per year since 2018, which is, given the poor growth the last couple of years below what we could be expecting of us. Since 2021, the growth has been below our financial goal of at least 50%. That's been mainly market-driven, but we also expect the next year to compensate for that -- the next years to compensate for that with accelerated organic growth whilst the market to operate in -- start to improve and volumes start getting back to normal level.

One way of looking at it, I mentioned in the quarterly report. In 2021, we showed revenues of some SEK 7.3 billion with an 11% EBITDA margin, which could then be compared to what we're currently showing. And if you then also take into account that we have acquired SEK 1.7 billion of annual turnover since then that should leave us with a potential of at least [ SEK 5 million ] on improved margins. So that is something that we're really looking forward to capture whilst market starts normalizing.

With that, I leave the word to Martin.

[Martin Aronsson, executive]

Thank you, Andreas. So let's start with looking at our performance in relation to our three financial targets, starting with the EBITDA growth per common share during the last 12 months. And as Andreas has mentioned, right now, we have a market headwind in the few of our platform affecting the growth negatively. And we are now at minus 16% growth versus our target of 15%. It's worth noting, however, that our target is over business cycles and our 5-year average EBITDA growth per common share is 19%.

Our second financial target is our return on adjusted equity, which came in at 15% versus our financial target of 15%. So that is below our financial target, which is driven by lower EBITDA growth during the year. However, during the past 5 years, we have delivered on average a 34% return on adjusted equity. And lastly, we have our capital structure where our net debt-to-EBITDA ratio came in at 2.8, which is within the range of our financial target ratio of between 2 and 3x. So that means that we still have financial capacity left to do the right acquisitions when they come.

So let's move to our business areas, and let's start with Salix Group, who delivers a solid quarter. Sales increased with roughly 5% in the quarter, driven by acquisitions. And they continue to see a challenging market situation in the industrial and professional segment. But we do see some green sprouts in the consumer-related parts of the business, even though we must say that early days are still. And I guess that the one of the million-dollar questions that we have is when the market will start to show growth. And what we see now is that the external sector estimate point towards an overall infrastructure market growth in 2025. And for Salix Group, despite lower organic volumes, they managed to keep the EBITDA margin at the same level as last year and EBITDA in normal terms came in at SEK 4 million above last year.

For us, this means that this is a result of 2 years of Salix Group working actively with cost control, coordination benefits and synergy realization and also working with the market. So with the measures that we have taken or the Salix Group has taken, we are confident that Salix Group is in a good shape when the demand recovers.

So moving over to Ettiketto Group, who delivers another strong quarter, and sales increased organically with 15% in the quarter. They see a good demand with a solid order intake, especially in the Swedish business when they -- where they are now expanding their production capacity to meet the demand, and they...

[Technical difficulty]

[Andreas Stenback, executive]

Can you hear us now?

[Operator]

Yes, we can hear you.

[Andreas Stenback, executive]

So Martin, where did you lose us?

[Operator]

Yes, roughly a minute ago. So please go ahead, and we're sorry for that disturbance.

[Martin Aronsson, executive]

So let's maybe -- I'll repeat what we said about Ettiketto Group, and then -- sorry for it, there is a little bit of a double thing then. So Ettiketto Group delivers another strong quarter. So sales increased organically with 15% in the quarter. And we see a good demand in the business with a solid order intake, especially in the Swedish business, and they're expanding the production capacity to meet the demand, both through investing in new machines, but also through increasing the utilization of the current machines. And we're happy to see that the upward EBITDA margin trend is continuing with a 4 percentage point higher margin in the quarter. And the last 12-month margin is now at 21%, which is a little bit of a milestone for Ettiketto Group because that is now higher than the previous record year in 2019.

And to us, that really shows that the strategy of acquiring companies with a lower margin and then working with expecting synergies and working with operational improvement is really paying off. And as Andreas mentioned, the EBITDA has now almost quadrupled from the SEK 50 million in 2019 to the roughly SEK 190 million that we have in the last 12 months. And the business area is well positioned for further acquisitions, and they are looking for acquisitions, both in the Nordics and the rest of Europe, where we see a significant potential to grow in the business area.

Let's move over to industry, who concludes another tough quarter with an EBITDA of SEK 50 million versus SEK 91 million last year. The performance of the platform varies, but the drop in EBITDA is explained by Tornum Group and S:t Eriks.

So starting with Tornum Group, who is meeting a tough market due to low demand in the agriculture segment. And in this segment, Tornum Group is dependent on the farmers, who in turn are dependent on favorable grain prices and new contributions, which both are not working in the favor at the moment. Tornum Group also saw a lower contribution than expected from the Spanish business due to lower than anticipated deliveries.

S:t Eriks continued to face a challenging market situation in the Construction segment, while the demand in the Infrastructure segment is quite stable. This market situation is not new. And earlier in the year, S:t Eriks has implemented cost program that increasingly give positive effects for the platform. And also, as Andreas mentioned, last year, its quarter was quite strong. So S:t Eriks meeting tough comparables in the quarter. But from Q4 onwards, the comparables will be easier.

As in quarter 1 and quarter 2, Communications is meeting a slow market, but the platform improved EBITDA in the quarter compared to last year and will continue to meet quite soft comparables in the next quarters. Our last platform, Corroventa is performing well in the quarter, both through a strong performance in the base business, but also driven by fundings in Europe, which then as we have talked about before, drives the demand for Corroventa products for water damage remediation.

So all in all, this concludes another tough quarter for industry with the two platforms performing below what we expect in the normalized market. But we're confident that we are taking the right actions to position our companies for when the markets return.

And with that, I leave the word to you, Andreas.

[Andreas Stenback, executive]

Thank you. So then we'll go into the acquisitions. So we've done three acquisitions during the last 12 months, and 24 acquisitions since 2020. And that shows that our decentralized model of doing add-on acquisitions to our platforms really work. And we have a couple of times earlier today mentioned our exceptional example at Ettiketto where we over this period of time are actually taking that company from SEK 250 million to SEK 900 million in turnover. We've maintained margins or even slightly improved margins than through another acquisition journey.

Looking at our acquisition pace over time. That has been okay the last 12 months from a slower pace for '22 and spring '23. We want to finalize one or a few transactions within the next 2 quarters in order to keep this pace or maintain this pace. And right now, it looks promising. But as always with M&A, it's very binary. A deal is not done until it's closed. So -- and it's very important for us to maintain our disciplined work. I do not want the organization to get stressed out about the short-term acquisition pace, but we're in it for the long term.

Looking at our -- then financial position, which, of course, is linked to our ability to do acquisitions. We already touched upon this a couple of times, but I think that -- our cash conversion is at good levels. Short term, this year, we'll have the strongest cash flow quarter ahead of us in Q4. And once the market comes back, we'll see a positive effect on net debt-to-EBITDA ratio also from the EBITDA expansion.

So just to summarize, performance in Q3, roughly in line with last year. And we still operate under weak market conditions in a number of our platforms. But our long-term focus, the cost structure that has even improved in recent years. And the fact that we have maintained or strengthened our market positions speaks for accelerated organic growth once the market returns. And then the M&A work and the M&A model is in place. So we have a good foundation for continued growth through acquisitions.

So with that, I leave the word for any potential for questions.

[Operator]

Thank you so much for that presentation, Andreas and Martin, and we'll start with the first question here. You mentioned that a market turnaround is getting closer. Could you elaborate on this?

[Andreas Stenback, executive]

As Martin pointed out, one of the main markets that has affected us negatively the last couple of years is the construction market. And when we look at external sources that we follow now, they are pretty much in line with all of them that we will see a slight growth in 2025, meaning that during the course of the next 18 months or so, at least those external resources see that we will turn from a negative to positive growth.

[Operator]

Okay. And we've got a person calling in. [Operator Instructions] We've got a person calling with phone #2616, please go ahead, you have the word.

[Andreas Stenback, executive]

I think you need unmute again. I can see that from here as well.

[Albin Nordmark, analyst]

Albin here from Nordea. Can you hear me.

[Andreas Stenback, executive]

Yes, we can hear you.

[Albin Nordmark, analyst]

Perfect. I was kicked off of the call several times. So sorry if you answered my questions already. But looking at the margins in the Ettiketto, obviously, very impressive. How should one think here? Is this sustainable? Yes.

[Andreas Stenback, executive]

No. I think that's something that we've been clear about already from the start that this was the level that we wanted to get back to. And this is kind of the main logic behind our own acquisition journey with Ettiketto, that our mature operations in Ettiketto, which is now basically all -- including also the acquisitions that we've done so far. They are able to operate under this, but then we also want to add new companies to the group and that will, in the short term, then dilute the margin again because we know that we are operating under industry-leading margins. So most likely the next acquisition that we do, is going to dilute the margin short term and then our value add as an owner is to start the work with increasing those margins.

[Albin Nordmark, analyst]

Yes. Perfect. And for Tornum here, we know it's volatile. Is it just a weak market or anything special in any timing effects that will make Q4 particularly stronger than usual? Or yes, is the market just challenging overall here?

[Andreas Stenback, executive]

It's -- if one turns to industry reports, you can see that it's a weak market in basically all parts of Europe. And that is going to be with us in the next coming quarters. Having said that, we still have a decent order book. And I mentioned Spain explicitly in the call earlier, where we have a strong order book. Part of the reason for not reaching kind of profit that we wanted in Tornum in Q3 were that we weren't really able to deliver on all those order that we wanted to. And that is something that we're going to see -- able to do in Q4. But overall, we don't see a dramatic shift in the market short term. And then Martin also mentioned, basically Tornum is operating under two segments. So we have the farmers and the grain farmers. That's really the segment that is suffering. We also have an industry segment, where Lantmännen, it's a big contract that we took late last year. And that is something that's going to help us mainly in 2025 and 2026. And industrial customers are generally doing better. So that's helping us somewhat.

[Albin Nordmark, analyst]

All right. That's very helpful. And then lastly, for Corroventa, had a good quarter here. Do you see Q4 and Q1 also be good in terms of the floodings in Europe lately?

[Andreas Stenback, executive]

It's an impossible question to ask. It's -- those situations tend to come on a short notice. So last year, we had some good deliveries to U.K., which I think some of you might remember. So we have some products in U.K. over winter time, which helped us. Whether something similar will happen this year, it's impossible to foresee. But where we are right now, we still see a good activity. We just read the newspaper to see that they are a floodings throughout Europe, which we are then helping, supporting and being a part of the solution for.

[Albin Nordmark, analyst]

So if it was a long-term damages from the floodings that already happened that you see will continue to need support from Corroventa. Yes, that may be not possible to answer.

[Andreas Stenback, executive]

It's also impossible. But of course, it's always -- you need to keep those machines for yet some time after the floodings. But in order to get that to hold into Q1, for example, that you asked for, then you also need new occasions occurring.

[Operator]

We'll take the next question here. Can you provide more information on the new project for Tornum Group with Lantmännen? And how it will affect the platform?

[Andreas Stenback, executive]

So that's -- actually the project that I mentioned while answering, [ Albert ]. So it's one of the biggest projects of its kind in Sweden in many years. I think it's a strength that that we -- with Tornum whilst invited, actually won that contract. That shows the strengths of the group that we've built. Typically, those kind of contract has come to international and larger players, and we now see ourselves as you know, a very good competitor to those. We've had some small deliveries this year, but the main effect of that, we will see in 2025 and 2026. So yes, that's were a few words on the Lantmännen project. And sorry, Albin for calling you Albert. I know it's Albin.

[Operator]

Okay. Thank you. And that's a wrap of the Q&A section here. Andreas, do you have any concluding remarks?

[Andreas Stenback, executive]

I think I just want to stop by thanking all colleagues. I think they're all doing a fantastic job and are the main reasons why I'm confident about how we handle the position we're currently in. And then I know that all of us are really looking forward to see the full potential of our group once the market start normalizing. So I think that's what I want to -- I leave with myself, and I want to leave with you. Thank you very much.