Welcome to the Addtech Q3 presentation. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to the CEO, Niklas Stenberg, and CFO, Malin Enarson. Please go ahead. This call is being recorded.
Good morning, everyone, and most welcome to Addtech's third quarter result presentation. As usual, we will summarize the quarter and then go over to Q&A. Our third quarter can be summarized as stable at high levels, as we write in the report. Our net sales were up 7%, of which 2% organic, and we saw a continued high business activity in the quarter on the whole, but with variations between segments. EBITDA also grew 7%, with a strong margin of 13.6% year-on-year, and it's our focus on added value, product mix, and contribution from acquisitions being the drivers here. I would also like to highlight that we continue to deliver strong cash flow in the quarter and also in the period.
And finally, we have done three more acquisitions in the quarter, adding approximately SEK 350 million in annual sales with good margins. And again, I can conclude that our business model and strong culture with entrepreneurial focus is proving its strength. A bit more on the sales. As I said, 7%, of which 4% from acquisitions, 1% currency effect, and then 2% organic. And in my opinion, a solid delivery, giving the very tough comps from last year. As you can see in the lower graph, the growth was primarily supported by business area Industrial Solutions, where we have forest and the sawmill industry deliveries being strong in the quarter, and Process Technology with process industry in general and also oil and gas being a good market.
I will come back with more comments to the market development in each business area shortly. Overall, as I said in the beginning, the market situation was stable, but we saw variations both between and within market segments. So we see healthy growth in some areas, some are stable, and some shows a bit weaker development. And this is spread across the board, by which I mean it's some companies in all of the business areas. As you know, we have 150 companies, but it's more spread than that we can see it in a particular business area.
Very satisfying to see that despite the still uncertain market situation, a weak December month, and a normalization of customers' ordering, we had a positive book-to-bill in the quarter, and order book remains well-filled and good quality. Looking at EBITDA development, we grew our EBITDA in the quarter, primarily driven by continuous strong numbers in Industrial Solutions and Process Technology. The remaining three business areas, adjusted for one-offs, flattened out at a high level, which is acceptable delivery due to the circumstances. All in all, our company's ability to increase value add and improving product mix, and as I said, the contribution from acquisition, all in all, 7% growth.
Also pleasing to see that we improved the gross margin across the line, which is a clear sign of our strong niche positions and continuing price power in the companies. And EBITDA margin remain at a high level, moderately up from last year, and rolling 12 months, we have a margin at 14%, as you see in the graph. Positive development on operating cash flow. Malin will come back to this in a minute, but this is a combination of strong result and high margins, but primarily thanks to clear focus on the working capital improvement. We have had a strong focus on releasing inventory, and we saw good development here in the quarter. So a few comments on each of the business areas, starting with automation.
Slightly down on sales in the quarter, mainly explained by tough comps from last year and more extensive effects from seasonality, meaning a weak December, which affected a number of our companies here. Medical technology continued to weaken somewhat from high levels. We mentioned this already last quarter. It's destocking effects on a couple of companies in some certain medical equipment end markets. This is partly mitigated by a positive development in process industry and continued strong demand for companies delivering to defense. Electrification came in on the weak side this quarter, only marginal growth in sales.
For electrification, it's primarily hampered by a weaker development within the battery group, affecting several segments. This is a mix of short-term external factors, such as market overcapacity on some lead-acid battery products, and internal strategic and operational factors, such as our factory ramp up in Tampere, and also negative effects from internal restructure and destocking. So you could put it in the way that this year is somewhat the lost year for the battery group. That is how it is, no drama, really. And I certainly want to underline that our positions in the industrial battery market is very good and has good long-term potential. On the positive side, verification, good momentum in electronic production, and also electrification of special vehicles.
And also here, we have a positive development on defense. In business area Energy, overall market situation was good, solid net sales at high levels. As we usually talk about, the infrastructure products for transmission continues to be very strong on most geographies where we operate. But also as we also usually point out, that we will have a stable, continued performance here, but there are bottlenecks in the market more due to access to contractors and the permit process that is kind of limiting the growth. But also here, we have a really strong positions and obviously underlying strong demand for these products.
Market for building installation and mechanical industry continue to be stable in the quarter, while fiber optic network remains weak. We have wind power segment being a quite important part for energy business area, and here we can see some positive signs looking into 2024, 2025. We have mentioned this before, but I would say this quarter, we see a little bit more clear signs on an improvement here for coming year. Industrial Solutions, very good sales development in the quarter, especially towards sawmill industry with good margins. Low demand for new products in the segment remains. It doesn't mean there are no projects, there are, and we won a few during the quarter. But the market is still a bit on hold due to the high interest rates and the weak construction markets.
In special vehicle segment, business varied between different end markets, I would say, in the quarter. We saw a weakening market in primarily construction, while demand within forestry and mining remained good. So all in all, slightly negative development on special vehicles. Finally, Process Technology, a very good sales market situation, especially strong for companies within processing industry, primarily oil and gas and energy, where we provide different measurement instruments, but also various components and subsystems. Also, marine segment still continue to develop positively. This quarter, we saw a bit weaker development on aftermarket components towards forest industry, from very high level, I would add. So this aftermarket delivery has held up very good earlier this year, but was now affected by the weaker sawmill and wood markets.
Medical technology, biotech and pharma, and mechanical industry flattened out, also on high levels. Looking at acquisition, of course, an important part of our growth, and we have a positive view on acquisition. We continue to fill and execute on our attractive pipeline. There are plenty of possibilities in our main focus areas, where we put most of our efforts, which is primarily in the Northern Europe. And the financial strength gives us lots of firepower, and we expect to keep up a good acquisition pace, also going forward. So far this fiscal year, we still have one quarter to go here, but we have acquired nine companies, of which Kemic Vandrens in Denmark was completed after closing, so in the beginning of January.
In total, this adds an annual turnover of approximately SEK 800 million annual sales. This picture is showing some examples, and you can see the solutions that we provide in the three last acquisitions we made. All these three acquisitions are good examples of how we deliver on the strategy to focus on companies with more value add and more own products and solutions and with higher profitability. So I'm very proud to welcome these three companies, Control Cutter, a Norwegian world-leading provider to the global offshore market for decommissioning of oil and gas wells. Danish BV Teknik designs and builds customized high-tech production solutions to automation industry, where medical production being the main segment.
And as I mentioned, Kemic , also Danish, a high-end supplier of water purification plants and solutions to both municipalities and industrial customers. So very welcome to these three companies. Looking at the acquisition pace, and if you look during the nine-month period, it's important to stress our financial target to grow EBITDA with 15% yearly over a cycle, where half should come from acquisitions. And in practice, this means that when we are buying companies with high margins, we don't need the same top line to keep our targets. Of course, a healthy mix here is good, but the point is that when looking at the fiscal year acquired growth so far, we are above the target, looking from an EBITDA growth point of view. With those comments, a bit more details from you, Malin?
Yes. Thank you, Niklas. So, start looking at the left graph. It's clear that we have had a very solid cost trend for many quarters, and with a continued firm grip on costs, we keep our efficiency compared to sales at a good ratio in this quarter as well. Also, our margins remain at high levels, which is a combination of more value add in our offers, improved product mix, and good leverage from acquisitions. This quarter's EBITDA margin came in at 13.6%, when adjusting for the unrealized exchange rate gains, which had a net positive effect on profits by approximately SEK 11 million, and revaluation of earn-outs and one-offs that had a negative effect of SEK 8 million. We end up at a satisfying 13.5% for the quarter, compared to 13.1% adjusted margin last year.
A comment on group items. We have a revaluation of embedded derivatives that has affected group items negatively this year, where we had a positive effect last year. Adjusted for this group items would be in line with an average of Q1, Q2, I would say. It's very pleasing also to see the inventory levels in absolute numbers is clearly coming down in the quarter, with a continued organic decrease and an improvement in relation to sales. We still have the topic in focus for the management team, and we expect that the high attention in our companies will enable a positive trend also going forward.
Thanks to overall efficient management of working capital, as Niklas mentioned, profit growth and continued high margins, our profitable working capital continued to improve and ended at a record level of 68% and generated another quarter of strong operating cash flow. As we see here, we have a very strong financial position with a historically low, I would say, leverage of 1.5. So, this ensures comforting headroom to support our ambitions going forward.
Thank you, Malin. So looking a little bit ahead, even if some macro indicators are getting more positive, which should potentially mean that investment willingness should improve moving ahead, there is still uncertainty in the market and some hesitations on investment willingness and so forth. However, in general, we take a positive stance with three things to highlight relating to Addtech business model and strategy. First is, of course, the diversification, both in terms of the small scale business that we operate and in terms of spread over both different end markets and geographies. Second, we have over the last year focused on establishing strong positions in areas driven by structural underlying growth, mainly linked to the green shift that we can also see in the business areas, and you can also see the growth drivers in the bottom here.
And third, not least, our strong and well-proven ability to act quickly and adapt to new conditions. This is one of the core upsides with the business model and culture we have. And this also means opportunities, regardless of a general market situation. And as I've said now, we saw a continued high customer activity in the quarter, our order book is well filled, and the business climate, I would say, is all in all, generally stable, but with the variations I have talked about. And we are, of course, following the developments very closely, and as I usually say, we keep one foot on the brake and one on the gas, depending on the different situations in our companies.
Bottom line, the business model and how we look is always based on the long-term approach, and our everyday focus is on creating stable, profitable growth in line with our target of doubling the earnings every five years. That is a rolling target that we always focus on. From that point of view, and to summarize that, I'm very pleased with the quarter's development. That's a summary before opening up for questions. A stable quarter at high levels, high customer activity, a positive book-to-bill, and increased margins of 13.6. The cash flow and improved profitable working capital is generating a good firepower, and we have the strong financial position.
So we have the ambition to continue delivering on our acquisition strategy going ahead. So over to questions.
... If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Zino Engdalen Ricciuti from Handelsbanken. Please go ahead.
Good day, and thanks for taking our questions. I would like to start off on the order book, which you said strengthened. How did it look on the business areas, apart from Industrial Solutions, which I assume was negative? Was it kind of broad or anything standing out?
Hi, good morning. Well, I would say it's kind of broad, but where Energy had the most positive situation. But apart from that, it's actually been quite broad.
Okay. And going over to Industrial Solutions, which showed great margins, even when excluding for the FX gain, was it like last quarter due to a high degree of project completions or other good mix?
Yeah, I mean, Industrial Solutions, I mean, like all business areas, we have a lot of companies, and so the result we see is a summary of the development in all companies. But, absolutely, that has contributed, for sure, strong delivery on the projects with good margins.
Okay. And since you comment as last quarter as well, that the order intake toward for projects in forestry, in saw mill, being quite low still, and assuming then that the book-to-bill is below one, when would we see so these two, so to say, converge to each other or to converge to one?
Yeah, that's a very good question, which, unfortunately, I don't have the answer to. But, I mean, this market is affected by the construction market and also high interest rate, and that is relating to the willingness of the saw mills to invest. We do see some positive signs, and I also mentioned that in the quarter, we have had a number of project wins. And these are usually quite big projects, and we look in the pipeline of the projects, it looks good, but there is a hesitation for making the kind of final call on that.
It's really difficult to give a concrete answer to that, but yeah.
Understood. And just lastly, on M&A, you mentioned that you're filling the pipeline and have attractive targets. But is there anything so, like, slowing the process? Is it like if you or them are pushing it in the future due to the macro environment?
Yeah, I would say that, as I mentioned before, I mean, we have a clear focus now on a bit more looking at higher margins in the acquisitions, and as I said, we have acquired according to our plan. But with that said, during the year that has passed, it's rather we that has had a little bit of a hesitation. We have prolonged the discussions and processes in a number of cases due to, as you said, the kind of uncertain macro situation and our focus to ensure and safeguard the balance sheet. So, it's absolutely rather on our side that we've been a bit hesitant.
But that also means that we have a lot of projects ongoing. So, it looks good looking ahead here.
Okay, thank you. That's all for me.
The next question comes from Carl Ragnerstam from Nordea. Please go ahead.
Good morning. It's Carl from Nordea. A couple of questions. As you said, strength and backlog, positive book-to-bill, but a weaker month of December, you said. To what extent is it seasonal, and to what extent is it sort of...? Are the reasons behind the weaker December, and how would you say that January is looking versus the December pace? From an order point of view, that is.
Yeah. Hi, Carl. Yeah, I mean, December, we always have this seasonality. For Addtech, December is usually a weak month. This December was weaker than usual, and we get different answers to that. I mean, okay, one less invoicing day, a business day this quarter has some kind of an effect, but we also get signals that some customers closed down quite early, so it was kind of a short December. And also to some extent, customers also looking at their inventory levels, so kind of safeguarding the balance sheet during the quarter. I think these are the reasons.
When we look in January, without going into details, I would say it's a normal situation going into January. So we don't see kind of this negative December effect, as of now.
Okay, very clear. Also looking at the central costs, it looks a bit elevated in the quarter. Does it contain any non-recurring nature items or what's behind it?
No, I would say that, if you adjust for these, revaluation of the embedded derivatives that I mentioned, I would say that, the situation is quite normal. It's around the Q1, Q2 levels.
Okay, very good. Looking into, you said that med tech sales are a bit weak here. To what extent is it down to the market? And to what extent would you say that it's inventory reductions? And if it's the latter, when do you see more normalized inventory levels in the channel?
I would say it's a mix. When we look at medical, we have good development on some parts. It's more relating to kind of the end customer situation. Where we see a weaker development this quarter is on respirators, blood analyzers, and those kind of end markets. And I think it's a combination. It's both that during last year, some customers we have here probably had a little bit too high on the order intake, very long orders. So partly it's a destocking effect, but I think also to some extent, it's a normalization of the end customer demand.
So I would say that, and this is primarily affecting automation, that to some extent there is also a normalization.
Mm. Okay, sounds fair. And also finally, on the electrification side, volumes is a tad softer, as you said, partly due to battery companies. When do you see also their normalized inventory level? And also, what impact had the ramp of Tampere to the margins? And also when is that ramp finalized, would you say?
Mm-hmm. So on inventory, I'm not sure what you meant. You said the inventory reduction on the customer side?
Exactly, yes.
Okay.
Yes, exactly.
Yeah. I mean, all in all, I would say, I mentioned it's a part of a lost year in the battery group. And what I mean by that is that I think it looks good looking ahead into the next financial year. So I would say we probably face another quarter with effects of this kind of destocking or normalization of demand on these battery types. When we look on the cost we've had, it's we are doing a lot of things to make the battery group more efficient. We are closing down one production unit and focusing more on the Tampere unit.
So that has meant some cost this quarter, but also earlier in the year. And looking at the Tampere, what we're doing there is building up an assembly unit. We don't produce battery cells. That is important to stress. I mean, we are building customized battery packs, and the main focus for Tampere is the special vehicle market, the electrification of special vehicles. And that is a really interesting market. If you look on those customers, how they look on their progress on electrification, it looks very interesting, but it's long projects. And now we're more in the phase of building this up, which means that it's not contributing so much on the top line.
Again, it's long projects. So, without going into details, how much it has affected this quarter, but it has affected the margins. That is clear.
Okay. Sounds promising. Thank you so much.
Thank you.
The next question comes from Karl Bokvist from ABG Sundal Collier. Please go ahead.
Thank you, and good morning. My first one is on automation. Would you say there are any differences in demand between how you classify the kind of more linear motion and robotics and drives compared to industrial IT and connectivity?
No, not really. The short answer, not really. It's actually some companies in motion and drives have had good development, and some a bit weaker, and same in the industrial IT and sensors. So you can't really see that you can make a big difference between those two. The medical part is primarily industrial IT and sensors. So if you look on that destocking kind of effect, that is more relating to that.
Understood. And then defense, we hear this from several companies. I imagine it's for many from low levels, but right now, how large share of group is related to defense applications?
It's around, I would say, around 3%.
Understood.
Approx- approximately-
Yeah
... three, 3.5, somewhere there around.
Yeah. Okay, then just to follow up on a previous question, I didn't hear a full answer there, but within sawmills, where you now see good sales and margins, yet demand for new products are low. So is it that you're delivering on prior orders, or do you also have a kind of strong aftermarket business that can support sales also going forward, if we kind of arrive at a situation, as your prior question asked, like when the weaker backlog finally becomes visible in sales?
I mean, we do have some aftermarket sales, but it is primarily a project-based sales. We have order books still for a couple of quarters into next financial year. Let's say all in all, if you look on the whole market, two-three quarters. So, it's but yeah. So the short answer is yes, there is aftermarket, but clearly it will not be able to fill up a gap unless we do get some more products coming in. But it's important to mention that the project pipeline in the sawmill industry is really good.
So we just have to hope that the kind of macro situation continues in a positive way, that the willingness to invest will increase. Hello?
Hello, sorry. Can you hear me now?
Yeah, yeah.
Yeah. Sorry about that. My final one is just on M&A. It seems like this quarter, we at least when looking at the report, that margin of acquired units are about 20%, so very impressive. And I hear your comments about value add focus and so on, but can you say anything about the pipeline of acquisitions that you're evaluating? Was it perhaps like just a bit of like an occurrence that these high margin companies all came this quarter, and when you look at it as a whole, it can vary from one quarter to another? Or is it that this pipeline actually has quite substantially higher margins due to a focus on proprietary products and whatnot?
Yes, I mean , of course, it varies from case by case. Sometimes we decide to acquire a company with a bit lower margin because, for strategic reasons and a good fit. But it's clear also looking in the pipeline that the average margin level in the pipeline is historically high. So, it should continue, as you kind of pointed out, that the kind of average you have calculated around 20%. I mean, that is some kind of a focus we have to increase the margins.
Okay, understood. That's all for me. Thank you.
Thank you.
The next question comes from Johan Dahl from Danske Bank. Please go ahead.
Yeah, good morning. Just a brief question on this battery issue that you talked about. Can you just put it into context a bit for the full sort of last 12-month period? Sort of how big, how much sales is being impacted by this? Any potential sort of trying to quantify the impact on earnings in the last 12-month period? And just what makes you confident that this will recover as you talk about going into next year?
Yeah, hi, Johan. I'm thinking out loud here. So the second part of the question, you said, can you repeat that?
Well, firstly, I'm just trying to understand better the impact of the battery, you know, being a lost year, how does that impact group numbers? So I'm just interested in the last 12 months sales for that cluster in batteries. And if you can say anything regarding the impact on earnings in the last 12-month period from this sort of issue you're having there. And secondly, it was just what makes you so confident that this... You talked about your strong market position, but what makes you confident that this will recover in the coming 12 months?
Okay. So the first question, it's a bit too detailed to go into. But if I look on the confidence, I mean, that is based on... Again, the positions we have, the growth we see, and when we look on our customer base, and the discussions we have with our main customers, and also the projects that we are having, that is why I have the confidence that we have an underlying growth in batteries, that is something I feel confident of. So, yeah.
Can you say anything regarding last 12 months sales for these sort of affected areas in batteries?
No, no, I think that's a bit much, much too detailed to go into.
Cool. Thanks.
Thank you.
The next question comes from Johan Lönnqvist Sundén from Carnegie. Please go ahead.
Hi, Niklas and Malin. Thank you for taking my questions. A couple from my side, although there's been many good questions this far. The first one, it's a little bit of follow-up on the sawmill discussion we had. Just a clarification on the comments on a couple of quarters of order book. Do you refer to fiscal year or calendar year there?
Fiscal year.
Perfect. And then are you referring to the order book as it was closed end of Q3 or as of now?
As per end of Q3.
Excellent. Then I had another question. It is a big picture regarding the situation we had in the Red Sea over the last few months. Have you seen any impact, or has it impacted your clients' willingness to build up inventory again , or your client just continue as normal?
Yeah, I mean, the situation in the Red Sea is, of course, affecting us since we are working with international trade and business. So, it affects both on freight costs. I heard some examples about, like, more or less back to COVID levels on freight costs, and also, of course, a bit longer shipping times, like two-three weeks extra. So this is something that are affecting us as I would say any kind of customer, but I have not really heard that that would kind of hamper the willingness to continue to order and make business. It's more a question of freight cost and longer delivery times.
No indication that the inventory reduction period that we have been into can come to a quicker end?
Of course, it might be affected short term, I guess. We haven't seen it and we haven't really heard it either, but we couldn't exclude it if the problems persist I think.
Yeah, perfect. And then one small detail, Malin. It's on net financials. A little bit lower than I had expected this quarter. Are there any funny things impacting it in a positive direction this quarter that we should be aware of?
No, I think, I mean, if you look at the interest rates, of course, they are a lot higher than last year, but if you look at it sequentially, it's more flattening out. And on the other side, we have the currency effect also, which was, I think, I don't remember on the top of my head, if it was better or worse than last year, but it's nothing special there.
But some tailwind from FX, movements in the net financials?
Yes.
Yeah. Excellent. I think that was all from my side. Thanks a lot, and congratulations to good quarter.
Thank you.
Thank you.