Welcome to the Addtech Q1 report presentation. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Today, I'm pleased to present Niklas Stenberg, CEO, and Malin Enarson, CFO. Please begin your meeting.
Good morning, everyone, and welcome to this webcast and presentation of our quarterly report for the first quarter. With that said, I would like to start with a brief overview. We have started this financial year in a very strong way. The positive development we've seen in earlier quarters with very strong underlying demand across the board and high activity in all business areas continued also in this quarter. Net sales up 33%, of which 17% organic. I'm very proud in the way our entrepreneurs continue to handle the operational challenges, primarily continuing value chain disruptions and price inflation. The outcome on sales growth and how they have defended the operating margins on record high levels, 13% in this quarter, is very impressive.
The acquisition pace during the quarter have been high, five successful companies acquired during the period and one more after closing, with a total annual sale of a bit more than SEK 500 million. Taking into consideration our long-term target of acquiring approximately 10% top line, we have clearly started this year strongly in terms of acquisitions as well. The high activity and customers' willingness to invest continued during the quarter and our order books strengthened. I will come back to what trends we see in the market, shortly. The macro situation is uncertain, clearly, and we, of course, follow the development closely. In the first quarter, we see no clear signs of a slowdown in our operations or any changed customer behaviors during the quarter.
Yeah, you see in the top right graph on this picture, the strong growth, 33%, as I said. All business areas continue to deliver strong organic growth, and the growth is really across the board, as I said, and on most market segments and geographies. It's also clear that we have strong momentum in areas with structural growth and driven by mega trends such as electrical transmission, electrification of equipment, fiber material, and energy efficiency solutions, driven by environmental legislation. It's clear to us that the focus on positions with sustainability angle is giving results here. Just, as I said, supply chain challenges continues, component shortages and long lead times. At this point, we don't see any clear indications of an improvement.
At this point, we foresee that these challenges will remain throughout this calendar year, at least. Despite another quarter with high level of invoicing, we continue to build our order books. Again, strong positions in niches with the underlying growth that I mentioned, and well-established relations are key success factors here. If we look at the quarter deeply inside, month by month, it was sequentially improving, so ending on a strong note in June. Go over to EBITDA development. The positive margin trend continued in the quarter, and due to active efforts to offset price increase. In parallel with keeping a firm grip on the cost base, we have managed to increase EBITDA with 42%, with record high margins.
OpEx are increasing in line with our expectations, but our cost of sales is decreasing, meaning that our sales growth is higher than the OpEx increase. That is good. Malin will come back to this a bit later. Also, I can mention that the acquired companies have contributed in a good way during the quarter, both on EBITDA and margin. A very brief comment on each of the business areas. Automation delivered a very solid quarter, marked by a continued good market situation in the key markets, such as process industry, mechanical industry, and medical industry. That is the largest segment for Automation. During the quarter, continued increase in demand from defense sector is noted. We mentioned this already in Q4, but it is clearly developing here.
In total, it generated an EBITDA growth of 63%. Electrification also began financial year in a strong way. High organic growth due to continued favorable market situation. Here we have the key segments, a lot of input components to electronics, energy, special vehicles, and telecom. All of these markets is still good. Also here we see an increased demand from defense industry. The positive trend in sales of battery modules continue also this quarter, of course, a favorable contribution from the recent acquisition of SAI. It all boils down to top line growth of 54% and EBITDA growing 57% with high margins. Energy continues to leverage on their strong position in attractive segments. The highly favorable markets for infrastructure products continue to improve from already high levels.
In addition, demand from construction side, OEM, and industry customers remains favorable as well. EBITDA increased 34% with high margins despite a somewhat increased price pressure in certain segments. Industrial Solutions also another strong quarter, and investment in sawmill industry continued to develop positively, and strong earnings and profit growth in companies within waste and recycling. Demand for ergonomic products and hydraulic solution to the vehicle market was stable. Finally, Process Technology also delivers a strong fourth quarter or first quarter, forest and process industry being key drivers. The positive trend within marine segment continued still from low levels, but we do see increased activity here and a good margin development.
As I said, we have started the high acquisition pace in this quarter, SEK 500 million of very fine companies and one additionally after. In terms of geography, we continue to increase acquisitions outside Nordics in accordance with the ambitions, and also increased activity on selected markets. I would like to take the opportunity to mention a little bit more one of the important acquisitions that we have made outside of Nordics, Arruti Group, a traditionally family-owned company established in the middle of the 1960s. They are a leading supplier of electrical transmission lines and substation based in Spain, but is also a well-established supplier to grid operators in Europe, parts of South America, and Canada.
This company complements our business very well and elevates us from being a Nordic player to a global player in this area. Electrical transmission lines that these companies are working with is a clear growth segment with huge potential. We have now, as you can see in the picture, in total five well-run companies in this area. Talking about acquisition, we continue to take a positive view on the acquisition market, working actively both to fill and process the attractive pipeline with companies that fits into our selected niche segments. We see a continuous strong market for acquisitions, and we can continue to be selective in what we acquire. That's a very positive position, I would say. Yes, over to you, Malin.
Thank you. Yes, as you heard Niklas say, we have seen very strong growth in sales as well as in profits in the quarter, and the development in sales has again come from a very good demand situation in mainly all of our important market segments. Our gross margin has decreased somewhat, but the development is overall in line with our expectations. The same applies for overhead costs. High marketing and sales activities during the quarter led as expected to a slight increase of costs. All in all, as you can see, thanks to our company's active efforts to offset price increases and ability to deliver on the good demand situation, combined with continued overall good cost control, we managed to keep our operating margin at a high level of 10.9% on rolling 12.
This is a proof of strength in these challenging times with unpredictable price increases from suppliers and high transportation costs. We had good cash flow during the quarter, contribution from higher profits and continued strong margins, partly offset by an increase in working capital. This increase is a well-known pattern where our working capital is bound to rise for the moment, both due to increased volumes, that means more capital tied up in accounts receivable, but also due to the fact that we need to allow inventory levels to rise somewhat due to component shortages and long lead times. Our profitable working capital remains on high levels, thanks to good working capital efficiency overall. Our financial position remains very strong. Our net debt has increased mainly due to high acquisition pace, but our key KPIs are still at satisfactory levels.
During the quarter, we have secured a new increased credit facility, and therefore, we obviously have comforting headroom to support our ambitions going forward.
Yeah. Thank you, Malin. If we are to look ahead, recent years increased focus in Addtech on sustainable technical solutions and a high acquisition rate has put that in a strong position, as I talked about earlier, in areas with structural underlying growth. As always, I'm fully confident that our position and the areas we chose to focus on will continue to create long-term profitable growth and sustainable shareholder value. Our focus is to continue to create organic growth and acquiring selected companies to strengthen our position. Our strategic direction is clear, and with highly engaged and skilled teams, we are well prepared to take on the continuous part of this financial year.
To sum up, before we go to Q&A, continuous strong customer demand in most of the key segments. We have been able to handle the inflation pressure, and we keep up the high operating margins. Looking in the outlook, as I said, certainly we keep an eye on the macro indicators and especially keeping our ear towards the ground with close contact with our companies and with our end customers. We so far this quarter don't see any signs of a slowdown in the operations. That is the situation at the moment. We are very satisfied with this quarter. Now over to Q&A.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial at zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. There'll be a brief pause now while your questions are being registered. We have a few coming through. The first is from the line of Max Scheffel of ABG Sundal Collier. Please go ahead. Your line is open.
Good morning, Niklas and Malin. As always.
Morning
I have to say good morning. Congratulations once again on a very strong report, beating our expectations. A few questions from me, and I think the first one is to you, Malin, and it is the usual question, if you can give a hint on the split between price and volume in the 17% organic sales growth, if that's possible.
Yes. It is possible, at least as good as it can be. We have, of course, discussed this a lot, and we also talk a lot with our companies about this. Our view right now is that you have to correct me here, Niklas, if I'm wrong, but we say that 20%, around 20% of the growth is actually prices, and the rest is volume.
Yes. Correct.
Okay. Perfect. Thank you. The next one, I think you mentioned this, Niklas, but just to ask again, did you see a sequential improvement of demand during Q1, or was it stable throughout the quarter?
No, it was sequentially increasing. A little bit slower in April. Again, we have Easter period. May and June, sequentially improved.
Okay. Perfect. We are halfway through July now. Have it continued on par with June? Can you say anything about that so far?
Yeah. I mean, we don't see any clear changes in development. Of course, we are in July now. July is always a bit weaker.
Right
If we compare to the level we went out of June and then compare to the level we were in July, it keeps the development it should, if you.
Yeah. Yeah. Fair enough.
If you get my point. Yeah.
Yeah.
Yeah.
The order books were further strengthened. Can you say anything about the book-to-bill ratio in the quarter or how the order intake developed during the first quarter?
Yeah. We definitely have a positive book-to-bill in all business areas.
Mm.
Yeah.
Okay. Perfect. Just two final questions. As you mentioned, the changes in working capital was SEK -236 million. It's like a tailwind on the cash flow.
Yeah.
What do you see going ahead? It, of course, depends on organic growth, but do you expect an improvement in cash conversion going forward, or should we expect working capital to rise going forward as well?
Should I?
Okay. Yeah, you go.
If you have something going, you can go.
No, I can just start by saying that we have been talking, I think, for almost a year saying that when supply chain disruption is getting a bit more back to normal, that should give a positive effect on that side. We still see these challenges. Of course, from that perspective, we continue to see this development, and in parallel with the strong growth.
Yeah.
I don't know if you want to add something, Malin.
No, that is, of course, true. It's a combination of things that makes the working capital rise right now. It's both the necessity of letting inventories rise a little due to the supply chain situation, but also because of our growth. As you said, it depends a bit on the growth situation.
Mm-hmm.
-also.
Yeah. Okay. Finally, you mentioned this also somewhat, but we saw very good operating leverage in Automation and Industrial Solutions and somewhat softer in the remaining segments. Was it due to price pressure or dilutive acquisitions, or why didn't we see the same positive operating leverage in the three remaining segments?
Yeah. I mean, the way I see it, we have good operating leverage in the others as well.
Mm-hmm.
I mean, if you look on Process Technology, for instance, I mean, they have increased the margins from Q4. Last Q4 was exceptionally high for Process Technology, so you shouldn't really look into that.
Mm.
In my view, that has developed. Energy, I mean, Energy have had a very stable, good situation on the margin throughout the last two years. I mean, Energy had a very good situation throughout the COVID period and also last year. Yeah. I don't know if you want to add something, Malin. In my view, we have good operational leverage.
Yeah, I would say that, too. We have very good operating leverage in all the business areas.
Yeah.
Rather it's extremely.
Yeah, yeah.
Good in the two you mentioned.
Okay.
I think if we can't be satisfied with this kind of leverage, it's
Yeah. Yeah, that's fair enough. That was all from me. As usual, thank you very much.
Thank you.
Thank you. Our next question comes from the line of Herman Eriksson of Danske Bank. Please go ahead, your line is open.
Yes, thank you. Just going back to the working capital again. We have seen now for the past five quarters that the inventory levels as a percentage of sales has increased quite rapidly. I was just wondering, at the levels you are right now, are you at all concerned, especially even if you haven't seen any weaker demand yet, we're seeing the macro outlook is weaker. Are you concerned regarding the levels you have now, and do you feel like you need to decrease the safety levels you have?
Maybe I should start with commenting on the inventory levels, and you can maybe fill in with the macro. I would say that it's not that we have safety stock. I mean, we have very good growth and very high demand, so we need to, of course, in the same way. I mean, we order our components, of course, at the same pace as the customers are ordering from us. It's not that we have safety stocks lying around. I think that as long as we have this growth and demand situation, we have to allow our companies to have that we have to trust them, that they do what they have to do to have the components ready for their customer orders.
No worries there, even though of course it is very important to keep track that it is firm orders from all customers, so we don't sit here if the macro outlook will actually hit the fan. There you can maybe.
Yeah, I mean, I think when talking about macro, the most important thing to remember is that one of the big strengths in our business model is our ability to adapt quickly when things are happening in both good times and in adverse climate. As long as we continue to be very adaptive, which we have proven over and over again, I'm not so worried about that.
As you mentioned, Malin, we have good quality in the order stock, and it's relating to firm orders. We know from history, of course, that you never know if customers start taking back orders even if they are bound by agreements. That can happen. Again, we are working very much into this and looking in the order stock to ensure that it's good quality and also as you mentioned, Malin, that the companies don't order unless there is a firm order from a customer.
Okay, perfect. That was my only question. Thank you.
Thank you.
Thank you. We currently have one further question in the queue. Just as a reminder to participants, if you do wish to ask a question, please dial star one on your telephone keypads now. Our next question comes from the line of Johan Sundén of Carnegie. Please go ahead. Your line is open.
Thank you. Hi, Niklas and Malin.
Hi, Johan.
A few questions on my side as well. First question is on net financials in the quarter, a little bit higher than it used to be. Can you just, I guess, Malin, can give some highlight of what's driving that and how to think going forward?
Yes. That is, I would say one of because it is setup fees for the new and extended credit facility first, and then it's also we have unrealized exchange rate losses from revaluation of forward contracts. We have forward contracts on our dividends from our subsidiaries. We have to revalue them, and that was also quite the hit in this quarter. I would say that both maybe around SEK 30 or something, SEK 20-SEK 30, you could consider as rather one-off.
Excellent. That was good clarification. Niklas, when you discussed the various segment, you highlighted a sub-segment in the energy side, which saw price pressure currently. Seems a little strange in my view given where we have inflation in the world, but can you give some more color on that comment, please?
Maybe price pressure actually was the wrong way to put it. It's in the energy segment we have quite a lot of electrical installers, so wholesalers, as customers. There, we have fixed contracts for a certain period. We have a price increase now from first of July, for instance. It's more relating to that, I would say, than actual price pressure. I think I revise my comment in that perspective. It's been difficult for some companies to keep up the price increases during this period because of that.
Excellent. That's much clearer. Another question I had, you touched upon the defense sub-segment and much exposure as a growing piece of the pie. How big is that exposure? Is it more than 5% or it's less than 5%? Just to get the kind of sizes.
Yeah. Yeah, I mean, as per end of March, because we are valuating the sizes of the segment every year. If I remember right, it was some 3.5% to defense sector. I mean, it's still a quite low exposure. It's less than 5%. It was less than 5% end of March, I put it that way.
Excellent. On the gross margins, I noted that the gross margin came down slightly if you compare to Q1 last year. Is it mix effect from new acquisitions coming in, or how is that impact? Or is it just purely the this kind of pricing effect you refer to in the electrical installation sub-segment that is impacting? How do you think we should view your gross margins going forward if the kind of cost pressure eases a bit, we see raw material prices coming down, et cetera?
Yeah. I think that it's both the explanation that Niklas just said about these fixed price lists and that kind of business. It's also a mix effect of acquisitions and product mix, of course. I would say that it's all in line with our expectations so far. I would expect. I mean, I would say that overall throughout the year, I would say that rather this is maybe a bit low, even though it's as expected for this quarter.
Yeah.
Mm.
I think at this point what we feel at the moment we don't see any alarming development on the gross margins. Our view is that we still have the pricing power necessary.
Excellent. Let's see if there's more, if we had any more questions. I think I'm happy there. Thanks a lot for good answers, and congratulations on the results.
Thank you, Johan.
Thank you.
Thank you.
Thank you.
Thank you. There are no further questions from the phones at this time, so I'll hand the floor back to our speakers.
Thank you very much for listening in and posting your questions. I wish you all a nice summer with hopefully some nice weather. We speak again later on. Thank you very much.
Thank you.