Earnings Call: Q2 2017

Jul 13, 2017

Welcome to the webcast for the 2nd Quarter Financial Report for OSAB. Today's conference is being recorded. There will be a Q And A session towards the end of the presentation. And now I will hand over to Mr. Jonas Gustafsson, President and CEO of OFAB. Please go ahead, sir. Thank you, and welcome everybody to this webcast. Where me, this is Hugo Vasquezosso speaking, will, together with CFI, you're welcome, our CFO, present the 2nd quarter results for the work group. I will start off with a few slides on the overall level, and then Stefan will take you through some of the financials. We will have a look into each of the divisions and a short summary then. And of course, there will be time for questions after we have done the presentation. So again, welcome to this webcast. Looking on the first slide, summarizing what group for the second quarter, we ended up on a net sales of SEK3.2 billion, which was an increase with approximately 10% compared to the same quarter last year. And then we have to take into account that this quarter had a calendar effect that was very negative and CFM will take you through the details of that. So looking on the top line, considering the fact that we had a tough quarter from a working day effect, we think it's a good development also in this quarter, even though we saw some, some areas where we had a less organic growth for example on the infrastructure. But on the overall level, we are quite pleased with the development also in the second quarter on the top line. Also knowing that most of this is coming from, from acquisitions that they're done. Moving down to the EBITDA, we delivered just about SEK 300,000,000 on the EBITDA. That was an increase of 3%. And of course, this is the EBITDA, excluding the items that this one of, as you know, we have taken CHF 20,000,000 as one off costs during the quarter related to restructuring taking out cost and actually continuing to moving over in a direction where we should also have a positive and continuing improvement on our bottom line. 1 of that ended after margin of 9.4%, just above line, which, again, then considering the quarter that was quite a bit more challenging from a working day, we are quite pleased with that. An EBITDA margin, even though we, of course, always wish more knowing that we have a target in the group to reach a 10% EBITDA over a business cycle. So of course, a lot of the activities we are doing now is to strengthen our operational performance meeting the 10% EBIT as we have as a target. Next slide is zooming out, I would say, I'm looking again on some of the global trends that I, and as you know, I've been into the company only for 3 months, And I'm more and more convinced that these trends that we have on this slide, the globalization, digitalization, urbanization and repositioning of our customer it's really, in the favor of the development of Wharton. And in the strategic work we are doing now, we come back during the fall and be a bit more specific how we see ourselves playing in the industry, based on these big trends ongoing. That I think is very interesting. Next slide, that's just a business overview, where you can see on the right side that we have 1 third of our offers into the public sector while 2 thirds approximately goes to the private sector We have some big segments like real estate, rail and road, automotive, power, of course, and then there's a distribution of our other segments, obviously, this is mirroring the quite wide offering we have in Owa with infrastructure interview, and also industry application, including a lot of confidence into interesting areas like embedded systems and digitalization. Some of the 10 largest clients, of course, we have a lot of big clients, and you can see them below, not the least into the automotive industry, but also, of course, on the infrastructure side. Looking at more specific in the second quarter, a few of the highlights. We have, of course, booked a lot of new projects and assignments. We have listed a few of them here. We have won an assignment towards LKAD. For an industrial project with the, with the flexible production system. We continue to book new orders. In this case, it's a core system to Sewell. So that the paper industry, paper and mill industry, we have cost as one interesting area where we continue to book project. This is a renewing of a local hospital the Sweden. We have won the project in Norway. Actually project management of the police natural emergency unit in Norway. That's also in cutting project. We have won an assignment in Denmark to the highest residential building in Denmark, where we will take care of the technical installation in that building. And which I think is also interesting, even though, Europe is a quite weak market when it comes to big new energy project into the traditional large scale energy, there's a few ones that are still active and we are happy to see that we have actually won 2 owners in the nearing perfect for a new hydro power plant in Egypt, but also one in nuclear plant in Turkey. So we are very active. And the one where we see a project into that, we are successfully meeting them. So this is a list of some of the highlights in the second quarter when it comes to new profit and assignment. On the acquisition side, there's 2 companies that we have acquired that is moving into web. 1 is ConceptsUpcon that we also present during last quarter, which is our sector company in Firms in Sweden with some 7 employees on the sale of AT 5,000,000, and we are currently, bringing them into, and we see a great combination with Divay together with Sandals and some value as we have acquired before. And I'm also very happy to see that we actually acquire top end architects. And which is a part of our strategy that we want to really have the best companies into our portfolio. And we believe this will be an interesting combination with the overall offer we have an infrastructure moving forward. We also just announced that we have made up the of an automation business. This is a tech who has announced that they will release their automation part from that company. And this is an interesting base of competence 42 employees with a sales of around 90,000,000. So it also indicates that the sales is more than ours because on 42 employees, we have a 90,000,000 revenue, and this will strengthen our offer into automation, including industrial digitalization and robotics, which is actually one of the core competency in our work, which we are not delivering a lot into the industry, but interesting is also that we see more and more an increased demand that competence also into infrastructure solutions. So automation is really one of the core competencies in Europe. And by this we are strengthening our position into that. So two very important and interesting acquisitions moving into the Uber's offering. On the Slide 6, just an overview of the market. And obviously, we cannot say anything else that the general market it's very strong for most of the segments, that also is operating. Of course, the industrial segment in general in Sweden, but also in Europe, is very strong, and we see a good general market for industrial investment. Specifically automotive, pharma, pulp and paper, and German manufacturing, we see a growth and an demand on specific for speculating to Owa's offering. We also see movement in mining and steel even though these are from very low levels, and we feel maybe that this industry is still hesitating to make big investments, Obviously, going back to before the financial crisis, and these were 2 of the businesses that did a lot of investment, which they're not utilizing So if but we see some movements. In general, digitalization, this an increased demand across all industries. And as you know, we at work have an interesting base of competences into embedded system as well as on IT, especially IT towards industrial digitalization. And this is something where we see an increased demand. Of course, it's a continued high rate of investment in the infrastructure market, even though we at work to that and have a portfolio where we see that some of the big projects is we are closing them and trading out and we are ramping up new project. But generally, the infrastructure market is still very strong. Energy market in Europe is still weak. There's a few new plant bin. We have one example in Turkey when we booked 1 nuclear plant But we see an interesting market, as we have announced earlier also in Southeast Asia and Africa, and they're very active in booking the ones that is that is, ongoing in those markets. So in general, good markets across still a bit weak on energy and a few industrial segments, but a good market. With that, I will leave over to Stefan. We will take a bit more into details about the top line and also on the EBIT. So, Stefan, please. Thank you, Yuna. We are once again happy to report a continued strong and steady growth, amounting to 10% in the quarter, which means that we're running at the SEK 12,000,000,000 on the rolling 12 months basis at the moment. If you look at the split of the growth we report an acquisition growth of 11.2%. And basically, those are the effect from the acquisition of Westoskarno in Switzerland, Mid Consulting in Sweden, Denmark and the 2 R And Shiller Companies. And we have by those acquisitions, we have really created a good platform in Switzerland and Denmark for continued growth in those local markets. And adding the architecture companies, we have broadened our offering in the infrastructure sector in Sweden. The organic growth, we reported a decline of 1.3%. However, we should remember that we had a rather big impact of the calendar effect. Which we reported on in Q1 in which we had a positive effect. The quarter, contain of 3 3 fewer working days compared to the same period last year. And we have we have calculated, kind of, and we please keep it at a, consider that as an estimate a 2.1% growth if we adjust for currency effect and the less working days. This is, of course, a theoretical number since the order is also affected by the Easter and other holidays So don't expect us to continue to report this number because it's rather a theoretical So but the conclusion my conclusion is that they're running at the underlying organic growth close to 3%. In the quarter, adjusting for all those effects. If you look at the main Juneers will come back to the different divisions, but we have seen a little bit as declining infrastructure because some of the other large projects are declining on the positive effect, on the positive side, however, We have had a negative growth in international for several years. Now we are we have a positive trend in that division, having a number of new orders in the backlog. So we are rather cognizant that we could continue to see a rather nice develop at least a stable developing in that division going forward. If you look at the profitability, we report an EBITDA of 302,000,000 excluding items affecting the comparability of EUR 20,000,000. The EBITA EBITA margin 9.4% versus 9.9.9 percent last year. But all divisions, 3 out of 4 divisions reported the margin above 9%. So we can see a stable development in terms of margins in the company. And adjusting for the adjusting for the calendar effect, we can always speculate, but If you look at the year to date numbers, we are at 9.1% versus 9.3% versus last year. So as 0.2% units behind. And I will estimate that it will is the effect of the variance. It's almost the same in the second quarter and just before the calendar effects. Cash flow wise, we continue to report a stable cash flow from the operations the cash conversion rate is almost in line with last year. And On the outflow side, we can see acquisition of 265,000,000 based on the acquisition of mid consult and concepts to call mainly. But at a lower pace compared to last year, in terms of million stake. However, number of acquisition is rather high, but it's a number of small companies included in that number. And on top of that, we have made a paid out of the dividend of SEK 350,000,000. Ending out of a net debt of SEK 2,600,000,000, which gives the SEK 2.3 net debt to EBITDA ratio, which is slightly above our target, but, it not, not as, I'm not rather trade on that one. It should it's rather okay. So in line with our financial targets more or less Okay. Thank you. Then I will, yes, make a short view on each of the divisions starting with industry. And then here we are up on the EBITDA margin EBITDA on 180,000,000 slightly lower than the same period last year. CFM status, part of that is explained, but less working days I would say that in general, industry is doing very well, we see an increased demand from a lot of our areas. So I expect, and on the growth side, we have done good or stable organic growth if you exclude the calendar effect We are continuing to build on our competence basis. So I I mean, I'm coming from the industry side myself and obviously this is one of the areas where we should and we'll continue to see good growth. And I expect more from the bottom line for this division. And I believe we will be able to deliver that. But at this point, and the EBITDA margin is stable above 9%. But, down the road, we should be able to do even more. Moving forward. But that's so that's a stable continue to grow a bit lower on the EBITDA side. Moving on to infrastructure. We said it before, EBITDA stable, 10.9, so rather good level. What we are seeing here is that we had actually a negative organic growth in the quarter And this is not related to any weak weakening on the market. It's more of the fact that we have a timing effect in Iowa where some of this big project are are ramped down due to the fact that we are coming close to the end of the delivery scope for this perfect. And we are just about ramping up new projects. So it's more a timing issue than any, market or issues, even though We will of course work hard to make sure that we continue to grow since, of course, the infrastructure market is very strong, And we can see that's not only valid for Sweden and Norway, as CFM mentioned, our position within Switzerland of Editoskarno, local west to Skolnom is doing very well. So infrastructure is an interesting area, for a while, and we are doing good. And we also see that the additional concept build up a strong architecture design, which we think is very important to be able make even bigger projects moving forward. International, here we are happy to see that, on the energy part of its national, we have seen from, for the first time, in a long time, we have seen a slight growth on the annuity side of international. And we believe that we have bottomed out, on the end of the year. We have seen a decline part for over a period. And now in the ongoing repositioning of Urs Energy offering in Europe, but also make sure that we are active on the right initiatives in the overall energy market we will see a stable and continued improved operation from that part. We're happy with that. And actually we had an EBITDA margin of 7.3% and actually had an organic growth of 7.9%. And a part of that is coming from the energy side. Finally, that technology, well, here we see really 2 big areas better systems and IT. And of course, with the ongoing digitization, there's a quite big demand for this, capability we have in the web. We have delivered close to 10% EBITDA margin, which is stable compared to the same period last year. We have been able to grow 4.6 percent organically if you take away the calendar effect This we should remember is an area where there's a high competition for competence. But I, and we believe really that this content base. It'd be very interesting, moving forward, but we will move more and more into offering, through industrial digitalization offering into the traditional industry, and we will get back to that later on when we present the strategy during the fall. And this summarized on the next slide on Slide 14, the division of development, where you see the Fair of each division the growth we have had, on the installation, then as we said, quite a big part of that distributor from acquisitions, but also if you take away the calendar effect We have seen in 3 of the division and organic positive organic growth, and we had the infrastructure on a slight negative, which is related more to timing effect than anything else. And on the EBITDA margin, 3 of our divisions are just around 10% and infrastructure, yes, above. And it's natural 7.3%, but here, we need to say that they are coming from even lower levels. So we are quite pleased with the direction they are taking, but then they know, and we know that we need to continue to improve also that margin part. So the summary then is that, we see it as a strong result and we say continued growth obviously, you could, therefore, always hope for more, EBITDA 302. And then of course, we have taken this 20,000,000 as a restructuring, but Tier 2 is the 1, excluding net debt 3.2 It's an improved earning. We see the overall market continue to be very good. And it is still challenging in Europe, but we are pleased with the repositioning we are doing and we see a market in Southeast Asia and Africa is interesting. We are winning key assignments. We have brought in 2 new companies, Concess and ITech as a strong automation park And we are currently driving the ongoing strategy review with good pace, so we will get back to that. The target, you have to say that again, it's still as there are. So we are aiming for the 1,000,000,000 in 2020, and we should be a 10% company. And Stefan has talked about the net debt target and we are slightly above what we don't see any risk in that at all. And just a few words on the strategy process, then could imagine that you would like to have more details, but we are in the middle of that. And I would say, that we see we have had a good progress in that. We are following the plans that we were putting together. I see that being about 3 months into the company, we have a unique breadth capabilities. And there are very interesting trends, destructive trends, I mean, the utilization has been of course, ongoing prolonged period, but we see that it's continuing, especially in the industry, but also moving more and moreover into interesting digital application into the infrastructure, automation, of course, and of course, also this smart cities where transport solutions will be integrated in the overall infrastructure We believe here at Oahuac, where we have a big leg into infrastructure, a big leg into industry, traditional industry, but also a huge competence base in embedded systems and IT, we will be able to play a big part into that. And we will get back to that when we present some stress year. So when we look into our ongoing strategic review, of course, we look on growth areas where will we grow, how will we grow, but we also look on our operational performance on our cost base. And we have now, now $20,000,000 as one offs in the second quarter. And we also said that In the ongoing work, we have identified areas where we believe we'll be able to take out costs and make sure that we strengthen our operational performance coming up to the EBIT level as we have as a target. So the CHF 70,000,000 that we have indicated, it's really a part of the strategy to improve operational performance. So we are in that process, and we will be very clear when we when we come out in the third quarter. So this is really to make sure that the structural costs that you take out of the ore that support our ambitions to be a 10% EBITDA company that they actually are slightly below today. I know that we have done that in the past, and then we have had a bit of headwind in the energy market and so on, but we really see that this is a strategic important part to take out these costs that we have started and then identify And we see a roof of SEK 70,000,000 that we will have, but that should actually benefit our business moving forward. And that's why we announced further restructuring costs that will come up in the third quarter. And we also would like to ask, like, welcome you all then a Capital Markets Day that we've held here in Soa line or a third quarter in Stockholm on November 8, and we will come out with more details. After the summer, about timing and so on. But then we will be very specific in our overall strategic direction for a while. So with that, I would like to, leave it to the operator and open up for questions. If any. Thank you. You. We'll now take our first question from Johan Dahl from SEB. Yes, hi there. Thanks for taking my question. I was wondering, Jonas, this these charges of SEK 90,000,000 that you're highlighting, what exact activities are those for? Well, I would say that, the $90,000,000 contains the $20,000,000 that we have already booked in the second quarter. And these are very much related at the moment into maybe international division where we are continuing to repositioning international as very exposed to the energy part So I think one of the explanations why we see a continued stable margin development in National is also related to the fact that we are taking out cost the areas where we are not seeing a good development, so to say. And moving in and then CFM will complement it. But moving into the continued 70,000,000, we have now we are we started off the strategy process basically when I thought as we are 2, 3 months into that. And in that, as I said, we are identifying, and we will be clear on how and where OAuth wants to grow based on our current capabilities, but we're also reviewing the cost base of OAuth. So in that, we have identified areas in different areas of work where we see a need of taking off costs, basically, and recosiveting that should benefit our journey towards being a stable 10% EBITDA company. We are not completely specific into that because then we would have needed to take the cost in the 2nd quarter But we have identified areas, on the admin part, on different parts of our kind of offering today, in this maximum of SEK 70,000,000 that we will come back in the 3rd quarter and take. And that's be one of those areas that will support us up to a stable comparison. Sorry. I got your yes. So Randy, you want to as you know, I mean, if you look at the cost base cost base on a consultancy company, that's mainly personal expenses So we are talking about the employees, yes. Okay. So it's a payback within a certain period. It's not write downs as such. Is that correct, understood. No, it's mainly it's you are completely right. And I would say that we're up and meeting quite new. It's quite good in in kind of, kind of being flexible in using the confidence we have in moving into other areas, but there are some areas where we have problems really to make that the deep specialists in some of the areas. And here we need to So based on the strategy direction, take some of this, and as CFO said, that's mainly related to personnel costs and that will have a payoff that we will be clear on when we present that in the third quarter. Some of the plan is, of course, identified, which is a part of the 20,000,000, but of course, we had also some ideas where to take out cost in other areas as well, even though we haven't specified them at the moment very specifically. Got you. Just a question on the group level. I was wondering, I mean, you're delivering some 3% organic growth in the first half. If you strip away a little bit of price in that, which seems to be rising at the moment, do you feel that you're at the level where market demand is increasing, I. E. Some 2% or is the market really stronger than that? Well, I mean, I think we are growing at the moment in line with the market. Then you can debate about infrastructure with timing. So there you could say maybe that we have a bit of a more negative if you consolidate the first half year compared to the mark due to the fact that we are, our view is that we are in between a bit some of the big profit in infrastructure. Since we've it's a combined number, the 3%. Please remember that if we are growing in international compared to previous quarter and our rather flat at the moment. And if you look at the Q2 number for industry, we are actually increasing the pace in that division. But as Johan has mentioned, declining due to the the fading off of 2 major projects in the Infrastructure Division. Okay. Just finally then, could you just clarify any potential full year impact of this churn in the infrastructure division? Is this a really one off event or do you expect this to sort of impact the full year as such? We don't give you any forecast, but I mean, we have we've been running at the pace of 68% previously growth rates in infrastructure. And that might that might be, it could be hard to reach up to that number, but we will continue our growth rate. That's for sure. And I would say the good thing is that we currently, we see a very strong demand on the overall infrastructure. So we don't see any today. I mean, we don't guide for the for future, but today, we don't see any kind of signs on the market as such more that Of course, some of these peripheral on the railer road are quite big projects and sometimes you are in the flow of booking a few and starting up a few. And we are currently ramped paying down a few of the big ones. All in all, we are rather confident that we will continue to increase in our infrastructure division. Great. We'll now take our next question from Victor Lindbergh from Carnegie. Please go ahead. Yes, thank you. Hi, guys. A question on the price, wage mix, a few peers of yours have commented on that they are raising prices basically now. And, that will affect the growth rates going forward, but maybe not so much shorter term. Have you seen this effect and this is something that you're also executing on and how may this impact you in the second half, if anything? Obviously, in this required spot market, we are currently, reviewing the pricing in all other And if you have to look on the infrastructure, we also try to be quite selective and rigorous in when we are booking to make sure that we that we benefit from that. But I don't see we try, of course, always to balance that component towards the top line growth. But of course, in a market when you see an increased demand, you should make sure that you have a good eye on the pricing, so that we are also doing. I do not think that will be any, have any negative impact on the top line. But if you look at the numbers, yes, we are increasing the prices because we have been able to fully compensate the wage increase by price increases. And hopefully, weekly, we can we can and take actions to even broaden that gap. And I might comment on that because what we also see is that We are also what are step by step moving into more and more 6 assignments in different kind of project assignments. And then price becomes, you know, in the professional service business, prices and sector your salary, but in a business when we more and more offers a solution, price is more what is the benefit for the customer, what's the value proposition. And here we see an interesting thing. So as strong as we are in combining our competencies into solutions, that's more we have opportunity to make sure that we get paid for the value for the customer. And that is actually something that we will come back to during the fall where we see an interesting pace for who wants to increase the part of projects and combined competencies into solutions. And if I may add to that, if you look at the I mean, the client has been rather hesitating to when it comes to product development to give us packages or solutions. But we can now see, which we have talked about for a long time, slowly, but the steady growth in requests from clients asking Woolworths to take responsibility of packages also within the product development area. It's not a high it's not at the high rate, but we have noted that. Okay. That's quite clear. 2nd question on the Infra division, you mentioning you have some volumes on the back book now coming down. When you are replacing these volumes now in the second half and in 2018, is this with smaller projects or is it equally sized to bigger projects that you are entering and ramping up now, relative to what is ending? Well, obviously, we are always active in trying to book the project available on the market, and there will probably come up big ones also, but we see maybe in the second half here that we have we will compensate more with, I would say, smaller, maybe not, but mid sized portion of course, we booked a few big ones by postdoc, Westlink and all of that. And we see more now, a number of insights and if you look on the planning, it's not always that it's so much more negative to have more midsized because then you have a big, faster maneuvering and you don't see this phasing out of the super big projects. So it's 2 sides of the same coin, but we believe that we will be able to compensate with a bit more mid sized project in the 2nd half year. Okay. Because that was my, that's my follow-up question on that. When we have seen these big projects where you have basically 100% filling ratios and replacing them will bring some churn and lower utilization And that could, I guess, affect your margins in the second half, but you don't think that should be the case when we see this mix in the contract sorry, because big side to talk about in 5,000,000 dollars, $600,000,000, and of course, there are for us the midsize could be $200,000,000, $300,000,000. And that's a big enough and even more to make a good planning. So I personally don't see that we should have any problem with utilization due to that. And pleased to remember in a large project, you are assumed by the client to have a high billing ratio. So the price level could be less in large projects compared to midsize projects. So you have to also look at the other side of the coin, the pricing, not only to the utilization rates. Yes. Okay. That's quite clear. That's all from my side. We'll now take a follow-up question from Johan Dahl from SEB. Yes, thanks. I mean, we talked about, or Jonas, you alluded to on slightly margin potential in the industry division given its market position and we also addressed the cost in international What other sort of structural underperformance or underperformance are you seeing in the group that you may want to address going forward? Well, it's a good question. I promise you to get back in during the fall then, with that. But in general, I believe a company like what margins, I mean, we are a growth company and we have delivered a lot of shareholder value over the last year. So growing, but I also believe that we all do that, in a vertical company should deliver a strong margin So that's one of the focus areas that we will, that we will, talk about how to do that. But of course, you know, as well as me that it's a combination no top line and price activities and sourcing activities and the offer, the value proposition you have to your customers and for us moving more and more into projects and solutions, there are opportunities on this side. So I promise you that, at the Capital Markets Day latest in November, we will be a bit more detailed, specific on the journey for to also continue to improve the margin. But of course, cost performance is one of the areas. So that's why we also have indicated the SEK 70,000,000 that we think is needed as one step towards ensuring that we are operating on a 10% EBITDA margin a stable level as we have indicated. And we are slightly below that. So again, I will be more specific during the fall. I look forward to it. Thanks so much. As there are no further questions, I would like to hand the call back over to your host, for any additional closing remarks. Well, thank you again then for listening into this webcast. Again, we believe them, I believe they're 3 months into the company. It's a fantastic company with so much opportunities that we will talk more about during the fall. And I'm happy that we delivered a stable and good quarter. So that's a good closing, before there's a couple of of summer holiday for some of us, at least. And I'm looking forward to meet you again then during the fall when we will be more specific in what we mean than taking over to the next level. So thank you again, everybody for listening in, and I wish you all a great summer. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.