Earnings Call: Q1 2020

Apr 24, 2020

I'll come to the presentation of Annual Group's first quarter 2020. Let's start the presentation by moving to slide 2. Me speaking, it's Johan Anderson, CEO of Amel Group, and later you will also be joined by La Peyodenate, our CFO. And together, we will present our Q1 report for 2020. So we're much welcome. Let's move to slide 3 in the presentation. This is an order cost that we will present the result for Q1. And you will be able to mail questions and there will be a Q and A session later in the presentation where we will pick up your questions and we will address address them in the later part of the presentation. So please mail them to Lotayolre@arnotgroup.com. Let's move to Slide 4. Before we get into the presentation of the Q1 result, I would like to give a short production to Adnav Group for especially if you are new to the organization and the company. Adel Group, we acquired operate and develop cutting edge enterprises that digitalized society. And we'll introduce that a little bit further if we move to next slide, slide 5. We have a strategy that we have essentially been following for the last 10 years. They we've provided it to a solution to several different customers and different sectors. We create growth by over time by new companies and actually supporting our subsidiaries to drive organic profit growth. We acquire mainly complementary businesses, We are looking for value based leadership and we tried to do our acquisitions at attractive valuations. And then organic growth is mainly handled in the divisions. And we believe in the decentralized responsibility and the Fortis structure, We deemed strategic support to our companies, and we look for synergies collaboration where possible. That has made it possible for us to have a compound annual growth rate of about 15% the last 15 years and above our group target rate of 10%. And we have a target for our EBITDA margin of 10% and we almost made that in 2019. And That's the journey we are on. That means that we have been able to double our business every 5th year, the last couple of years ago. So that's sort of our aim. And that made it possible for us to be the Europe's leading provider of software and services for design and engineering activities. Market leader for digital beam collaboration solutions, leading provider of facility management software, and a market leader for documented case handling solutions for the public sector in Sweden. So if we move to slide 6, Our operating structure is 3 divisions. We provide software and digital solutions. 2019, we had a net phase of 3 point 4,000,000,000 Swedish crowns. And, as I mentioned before, approximately 10% of EBITDA profit, Martin Design, and the 3 dmissions are designed PLM and process. In design, we have 3 companies, cemetery and exciting who are world leader, within design and beam software and the partner to Autodesk, trivia, providing beam collaboration solutions, and, service products group that provides facility management software. In PLM, we also provide the signs simulation, product data management, and column product life cycle management solutions, and we are a partner to, Dassault. And that's the company and the brand is taken out. Process Management is our 3rd division, mainly providing software and digital solutions to the public sector in Sweden, and we do that in 10 different companies. So if we move to slide 7, and the group, we are an international group, we are, our operations are in 19 different countries. We are predominantly active in Northern Europe, but we have an international offering. So moving on to slide 8. What we would like to cover today is a short introduction and summary to Q1 2020, elaborate on the group performance in Q1. Then go further into our free divisions, also provide some insights on our financial position and also give some insights and, provide you some more details about how we are handling the COVID-nineteen pandemic. Moving to slide 9. Q1 was a very strong start to challenge here. And the group has never before had a single quarter where we had have had higher net sales or EBITDA. The growth rate was quite fantastic and Lotte will tell you a little bit more about that on the next slide. But before that, we could see that we had a small effect on COVID 19 in the first quarter. And what we will see that it will have an effect going forward, and we'll discuss a little bit more on that. And we have taken measures to handle that and we will elaborate on that as well. But before we do that, let's move to slide 10, and I will hand over to Lautam who will elaborate on the group performance. To the P and L for the first quarter. Net sales increased to SEK 1234,000,000. That was an in total growth of 4% to 4%. 10% was organic growth and currency adjusted growth was 9%. The growth is mainly driven by the strong growth in division design. Based on the Q1 numbers, we now have a rolling 12 month net revenue of 3810,000,000 program. EBITDA for the period was $108,000,000. That was an increase by 32% from last year. That gave us an EBITDA margin of 8.8%. Compared to 9.6% last year. Division design and division process showed both a good growth and and a good earnings improvement during the quarter, while division PLM was hurt by challenging market conditions and 2 high cost simulation to the lower rate to growth. That gives us earnings per share of SEK1.71.3 compared to SEK0.45 previous year. Then I turn to page 11. As I said before, the revenue growth was 44%. And after that, recurring revenue constitutes the largest part And we had an increase of 62% in the quarter, from 545 to 882. The recurring revenue then accounted for 71% during the quarter, and that could be compared to 64% for you this year. We have a 7 percentage units increase compared to last year. And this high, proportion of recurring revenue gives us stability in a very certain times that we have now. I turn to Page 12. Thank you. Thank you, Laura. Going a bit deeper down into the division design management. Was a very strong quarter, posted a near doubling of net sales, 95% during the first quarter, and the net sales to SEK 722,000,000. Organic growth was strong 24%, adjusted for currency effects, organic growth was 23%. And what added also to the growth was the acquisition of Exciting that we did in January. In, this quarter. And I will give you some more insights on that later. But in in total, it was a very strong quarter. EBITDA almost doubled and was 76,000,000 compared to 43 last year. Demand for the Autodesk offering in the company's inventory with our own complementary products and services as well will very strong, both in the UK market and the Nordic market, especially in the AAC segment. Excited that I mentioned that was acquired in January has also added to that. The offering on prior to software surrounding team and collaboration portals was stable, and the share of our recurring revenue in this division increased further from 81% to 86%, predominantly driven by the acquisition of exciseTech and also the good growth in Symmetre. We soon was able to secure several new agreements with customers such as Aetos, Tancia Consulting, Lakeclicks, Green Beach University, Heathrow Airport, and some regions in Sweden with regards to the facility management offers. So in total, a very strong, quarter for the division. And, in this division, we have not yet seen any, effects of the corona in this quarter, but we can see that there will be effects going forward as there are especially in the oil and gas sector and also from the part that is doing business with the discrete manufacturing part as well. So we are expecting, that we will be affected in Q2 and going forward. But we also have some business that we are expected to be stable. And I think it's important going forward to see who is the customers' customers because there are customers here in the public sector as well. So with that, I would like to move forward to the next slide, slide 13. And I said, explained earlier, a big part of our strategy is to do value added acquisitions of complementary offering. The acquisition of Xitec meant that we were able to, so be able to to do any further more business with regards to our OpenText offering. We have a very strong offering in all the countries with the company's inventory. We have since 2013 been building in the UK as well, and now we were able to acquire Citec, meaning that we will be the leader in both the Nordic countries and in the UK market. And there are synergies as well on both the services side, and we will them to get a bigger stage channel for our own, proprietary software that are in combination with the Autodesk products. And, so far, that started out well. And then we all know that we will have the effects of the lockdown and the corona, but look into Q1 and the start of it, it has been very good. Also, in an acquisition of a small company called Human Site. It's more of a technology acquisition, meaning that we are adding to our beam portfolio. And this is a product you are able to both, sort of, get the information from the construction site into the digital systems that we are providing, but also the other way around providing the information on-site our system. So it's a technology offering that adds to our portfolio. So that's just an example of the type of acquisition that we're doing. So with that, I would like to move on to slide 14, even some insight on the PLM division. Net sales increased by 4%. The organic growth was though negative. And adjusted for currency effect, it was 3 percent negative. And, we had a decrease of, EBITDA to 10,000,000,000 compared to 19,000,000. We have been hit by the recession in Germany and cutbacks in the Automotive And Manufacturing Industries. To reduce the customer's willingness to invest. And we've said that we could only see some smaller implications of the corona in the first quarter. And here in this division is where we have seen those small effects. So as you all know, and we have an impact from the automotive industry in both England and, Germany. So And that has sort of been, manifested as well going forward with the corona. And, but then we have some still some good growth in the Northern Countries and Benelux where our demand for consulting service and simulation solutions are still stable. And we are working with Adapting the organization, and we will continue to do that as part of our mitigation of the COVID-nineteen pandemic. We were able to launch some new customers as well. From, doing, like, with B. Brown here, like, doing his services to all our fields as well. Currently, say, go to motive. Who's gone out later group, Saudi Ray and Sandovalently Industries. So we're still doing business, but it's a much tougher market. And if we move to the next slide, slide 15, I just would give you an introduction to that. In these type of days, it's very clear that if you're able to work distributed and on a digital way, then you can sort of reach your customers as well. So next week, Tekna is hosting a fully virtual customer event with presentations live session and speaker reaching out. So this is the the major PLM event this quarter because I think it will be the only one in the world at this session because everything else has been canceled. And we are doing it virtually instead. So if you're able to join, please go to Technia's website and I think you're able to get an insight of that, and it will be opened by the Sol Systems, chairman and vice president, Mister Bernard, who will give an introduction to that. So it will be a good session and it will be a good example of how we are able to reach our customers in these times. Can we recommend that? So moving to Slide 16. The Vision Process Management had a very strong Q1. I was able to than an organic growth of 2% and a growth of 6%. And we also increased the margins from 14.9to16.9. Our digital solutions for case management for authorities and, state agencies in Sweden for had a very good, quarter. We were also having a good situation with our system for healthy care activities. Alloha. We're also working with pharmacies. So this is, one of the divisions that we are expecting a fairly stable situation. Compared to the situation that we have in the world in 2020. And, we were also able to land some new customer agreements with the Swedish Energy Agency, City of Mandal, the local municipalities. And, The majority of the customer base is the Swedish public sector. Local authorities, local municipalities, state agencies, working with case management systems, planning system for infrastructure in the local municipalities. So a very strong quarter from process management. So moving to slide 17. I just wanted to give you an example how, the companies in the division process management are able to help our customers in this time. One of the customers that they are working with is a, company called dynamic code, who are providing different type of test is. They are using, and we are providing them with our iPix based case management system. And having that as a mode today, I've been able to set up new system in a fairly short time to be able to provide COVID 19 test in his lab. So it's just an example of the type of customers that we're able to serve in these times. So moving on to slide 18, I would like to hand it over to our CFO, not biology. Thank you, Johan. As a consequence of the uncertainty regarding the pandemic's progression, the board of directors decided to withdraw the previously communicated proposal for dividend of $2.5 per share. And instead, it proposed that no dividend will be paid for 2019. This was communicated on March 30. Turning to Page 19. I would like to give you some highlights on the condensed balance sheets. As you can see from the table, there was an increase of intangibles fixed assets. During the period period and also from, the year end, and that is predominantly relating to the purchase price allocation from the acquisitions of Excitec and UniSites. And that, of course, correlates to the increase in long term short term liabilities. We have paid one chance charge so far, and that was financed through our credit facility. And we will make the, second payment, by the end of June. In terms of accounts receivables, we have not seen any changes in the and the customer's willingness to pay so far. And in terms of cash, you can see that we have a very strong cash position by the end of March, 559,000,000. And, that has a considerable increase from year end. And as many of you know already, the first quarter is the best quarter in terms of cash generation since we have a lot of renewal of maintenance agreements. Paid during the first quarter. I would also like to mention that, the net debt is $175,000,000 by the end of the quarter. And that is, thanks to strong cash position, of course. And during the quarter, we have we have also increased our credit facilities by 250,000,000. And we haven't used any of that yet, which you can see that we have an unutilized credit facility of $510,000,000 by the end of March. A lot of years ago. I probably should mention that exciting is fully consolidated from January 1st. That's correct. Turning to Page 20. Here you can see the operating cash flow for the quarter. And as I said before, it was very strong, and it was 50,000,000, more than the corresponding quarter previous year. And, besides the large share of maintenance contracts being invoiced and paid during the first quarter, we also have a good earnings performance, of course, that contributed to that cash flow. Turning to page 21. I'm handing over to Johan again. Yes. We want to elaborate a little bit on what actions we are taking and our positions with regard to what is happening with regards to the COVID 19. I would like to say, looking at the lot I just mentioned and the discussed our balance sheet. I think we are well equipped both operational and financially to handle this. Of course, we had initial focus on our employees, health and success change over to homework routines. We are, as I mentioned before, we are active in 19 different countries. Some of them are in lockdowns here in Sweden. We are fortunate to be able to sort of move on in a fairly, totally weigh, but there are com countries that are more in the lockdown. And most of our employees are working from home, and I would like to say that are working very well. We are actually optimizing what we can enhance ourselves. And we are adapting our capacity and having cost with a focus to be able to retain our confident, employees during the time of the week in the month, meaning that We have a planning, and I think most of it are planning for a q 2 effect and an affecting q 3, and we are going for a better Q4. There will be some employees that we will unfortunately have to be given notice But most of this will be handed through a different short term working programs, furloughs, reduction in working time, salary cuts, fewer consulting and general cost cutting. It's just one being traveling. And we will see an effect from that in the second and going forward. I think it is important to understand for you are new to the annual group that we are diversified business. I believe this is a strength in the times going forward. As I mentioned before, demand, we are expecting it to be relatively stable in the process management division. With the overwhelming majority of the customers in the public sector in Sweden, meaning that we don't expect that they will cut the use of the software. So that will be fair to say going forward. In the design mentioned PLM divisions who are more active towards sort of the classic industry sectors, meaning discrete Manufacturing, automotive, oil and gas except that we are expecting new sales to be impacted. We still have a lot of the recurring revenue And, a lot of that has been prepaid in the first quarter, but we're expecting a new sales of, licenses of software and also new sales of services and recurring revenues to that will have an impact on the business going forward. And we are mitigating that with furloughs, and I mentioned with the reduction in work time and salary cuts. And of course, we are actually looking at it and we will adapt the situation as it moves on forward. But I think we are as prepared as we can be for this situation, and we are analyzing it going forward. So with that, we are looking at questions and There are some questions that have been put forward here. And for the Okay. So the first question is What was the reason behind the significant increase in recurring revenues? If I would start with that, the impact of that is, of course, the acquisition of Xitex that we did in the 1st quarter and exciting has a business model with a majority of the, sales and the income going forward is, recurring revenue. So the acquisition of that added, to the existing portfolio of recover revenue that we have. And then we also had a growth in SUMETRI, who has the similar offering as XITIC by itself. So we're both in organic growth in Sumitry, but, the majority of the information is, that we acquired Xitec who has a business model with a lot of recurring revenues. So that's the majority of that. Question number 2, what was behind the very strong margin uptick in process management? Yeah. Process Management has several different, companies organization on that, but we could see that we were able to have a very strong demand with regards to case management systems to the public sector and then added to that, and that was predominantly with our sort of more consulting offering based tailor made solutions that who had a very strong impact. And also, they say, as process management are several different companies, as all those companies are able to deliver a good quarter, then the comp, the whole division will have a good quarter. So it's also an effect of the utilization rates, meaning that they have run a very efficient organization in Q1, and that shows in the number and the uptake in the margins. Question number 3, and a seasonal effect in exciting making is the strong Q1, or is that the underlying growth rate you saw? You have a it's not that much of a seasonal effect. You have both, like, we discussed here. So some good underlying growth, and then we'll have some effects of the the 3 year deals. You have For those of you who have been following us, you know, that in Q2 last year, we saw an uptake in the in the business model where we were able to sell more 3 year deals. And no, we have sort of gone full year, full circle. So we still had an effect of that in Q1 as well this years, but we also have a good underlying growth. And those 2, together, was able to generate this very strong organic growth. We don't expect that we sort of can have a 20% organic growth in this organization. So it's both, sort of an effect of selling a lot of free year deals, but also good online growth. So that's definitely a good online growth. But as we have mentioned before, we can't expect that we can have a 20% organic growth going forward. If you sort of put aside a corona effect, the organic growth in this business, we have inherited this avenue. It's more to expected around 5%. That's a good organic growth. And then we sort of have a 1 more of a effect of right now, we are able to do good business and we are selling a lot more free year dates. Next question? What is the share of recurring revenue in exciting? Looks like almost 100%. Not almost 100%. It's it's, I would say less. So it's, we haven't given that. So it's not more than we are having for the whole division. It's actually a little bit less. So just to give you a number of that. Next question is, can you comment on how the 1st 3 weeks of April have started growth, has started growth wise in your 3 divisions? The short answer is no, but I still to give you an insight, we can see that we will have a we have an effect from the accrual. And as we mentioned, we have been very clear on that. We can see for example education. We do a lot of education with regards to the use of software due to travel restrictions and also later on their sort of the sort of the basic classroom training is not there yet. And we can also, the new sales takes a little bit longer. So as we mentioned, if we put, the division process aside, and if we look at design and PLM, we can see the effect there. And we were able to see it in the sort of, in the last part of the first quarter, and we can see there's an effect in new sales mentioned with regards to what we're expecting. So people are not there. There are no cancellation. Of existing contracts, but it's the new sales that we are seeing effect on. Next question is, are your recurring revenue in Q1 defined in such a way that it will remain at that level into Q2 as well? We can't make any promises on that. It has to do with there are most of them are renewed on a yearly basis. And as you can see in our cash flow, the most, the majority of the renewals are being made in Q1, meaning that they are actually paying for it. But as you move along going over the year, there are renewables, as well. In Q2 and Q3 and Q4. So it will we'll have to wait to see, to be very honest. It depends on how our customer side if they believe that this will, sort of pan out in a couple of months and we have an effect, we can probably expect that they will not cancel the contract. If, the customers believe that this will take years, then we can probably expect capital. So it's a little bit of wait and see, but we haven't seen any cancellations so far. Okay. Next question. We have commented a little bit on that before. Is there a significant positive impact from 3 years licenses in the growth figures for design management? Yes. It was a little bit discussed in one of the earlier questions, but yes, there's an effect in Q1 from the 3 year deals in the design management. Next question, a size 6 seems to do a very solid quarter in terms of both sales and margins. What are the reasons behind that? Is there a significant seasonality effect? Is the combined seemingly excited offering OLED paying off. To answer that question because the XITI is doing a good quarter. Yes. It's not that much of a seasonality effect. We can say there's worst installment momentum from 2019 moving into 2020, in the Q1. Most of their customer base are in the AAC sector, and that continued to do good business. We with regards to the rest of the design management, we can see that they will be affected in q 2 as well going forward. We're expecting that with regards to new sales, but Q1 was very good. There were some free year deals effect there as well. So it's not so much seasonality. They had a good online growth, but there are also a 3 year deal effect as well. Do you want to comment upon the is the combined cement exciting offering quality? The combined is doing both excited and synergy team are excited about doing it and working it together, but we haven't seen that in the financial figures yet, meaning that we are doing more business together, that is yet to come. And, of course, with all this travel restriction, it's not put on hold, but we are not able to do as much as we would like, but it's a very well run business. So and so they were able to handle it. So the, effects of the combined synergistic is, coming. Next question. Could you give us some rounded numbers regarding the expected impact on non recurring revenue in design and PLM sales? From COVID-nineteen for Q2 and Q3. Is it 10, 30 or even more? It's a very good question, but I'm not able to answer that. We're not fundamentally, we are not giving any financial prognosis And also in the situation where we are right now, it's a very tough answer. And it all depends on how our customers are acting with regards and how they are affected going forward. So, no, I'm not able to answer that question. That was the last question that we received. Okay. Thank you for taking the time. To listen to our Q1 presentation. And, with that, I would like to end this session, and thank you, for me and what time? Thank you very much. Goodbye.