Earnings Call: Q3 2020

Oct 23, 2020

Hello, and welcome to the report presentation for Adler Group in Q3 2020. It would be me presenting, CEO of ADNOC Group, Johan Andersson and Lotte Jan Ried. And thank you for taking the time for to meet with us. And before we start off, I would like to if we could move to the slide that we provide Digital Solutions and give you just a short introduction to Adler Group for those of you who are new to us. We provide we are a group of company providing digital solutions. We are organizing companies in 3 divisions. The 3 divisions are Design Management, Product Lifecycle Management and Process Management. In Design Management, we provide digital solution for design, BIM and product data, predominantly for the needs of engineers and architects. We also have software for product collaboration, property management and facility management. In the division of Product Life Cycle Management, we also provide solutions for anyone doing products and from simulation to design product data and you will find the customers in both discrete manufacturing, life science, automotive and also the transportation sector. And the brand there is Technia. And in Design Management, you will find Symmetry ServiceWorks and Trivia. And our 3rd division is Process Management, predominantly working with the public sector in Sweden with document and case management systems, e archive, information management and also the dialogue between the local municipalities, state agencies and the people actually live in the country. And as you can see on the right hand side, there are several more companies there, basically one product, one company. And from the group, we support the companies and make sure that we utilize the strengths of the group and share knowledge with regards to people, business models, organizations, technology and go to market strategies. So if we move to the next slide, strategy for profitable growth. And based on this strategy, we have been able to grow from SEK 2,009 to SEK 1,000,000,000 to what we are trailing now at almost close to SEK 4,000,000,000 and has been done both for organic growth and also through acquisitions. So we have found a way to double our business every 50 years. So and that's sort of the DNA of the company and the group that we would like to continue to be a growth company. Of course, there are we have to relate to the COVID right now, but hopefully, we will overcome that as well. So if we look go to the next slide, it says International Group means that we started out in Sweden in 2003. We have rolled out in the Northern Europe. And in 2013, UK became a home market for us. In 2015, Germany became a home market. And we also did our largest acquisitions in 2020 here in January when we acquired Excitec. So you will find us in Northern Europe, offices in U. S. As well and in Australia and Canada, but predominantly in Northern Europe. The biggest markets are Sweden, U. K. And Germany. So with that as an introduction to Anode Group, we'd like to move on to the Q3 report 2020 and the next slide with the agenda. The agenda for today, we will briefly go through Q3, talk a little bit about acquisitions that we have done in Q3, our group performance and dive into the 3 divisions and end up with our financial position. So moving on to the next slide, Q3 2020. With regards to the market conditions, we feel we're never proud, but we are confident with the report that we have published today. We believe it's a strong earnings in a prevailing market. Net sales increased with 3%, minus 7% on the organic growth, and we'll come back to the reasons for that. Our recurring revenue was up to 69% of net sales compared to 65% last year. We have been very focused on cost restraint, furloughs to handle the downturn basically in the design management and the PLM business, executing cost cutting programs in PLM, we'll come back to that as well. And all of these has resulted in a better EBITDA margin than last year, and we had actually improved the profit even though the net sales has gone down. And we made an acquisition in the beginning of the quarter on NetPublicator. So if we move to the next slide, acquisitions. I think we went through that in the last presentation. But in the beginning of Q3, we made an acquisition of NetPublicator, a company that provides our services for digital distribution of documents, register of elected officials, digital signings, video meetings, focuses on political assembly processes on the local municipalities. Services are used by 100 municipalities in the region in Sweden and by some 60 companies, making sure that they can provide their basic functions even in a corona environment when you're not able to physically meet. So and it has performed well and contributed according to the plan in Q3. In 2020, we have completed 3 acquisitions, X Sight in the beginning of the year, with the largest Autodesk reseller value added reseller in the UK market. We also acquired Unisite in the beginning of the year. It's a BIM field tool adding value to our SaaS solutions to construction market. And we also acquired NetPublicator in Vienna Q3. During the initial phase of the corona crisis, we have focused on increasing our pipelines on acquisition candidates. We have now switched over to more active acquisition processes and sort of more back to basic with regards to our Agner Group adds with regards to acquisitions. With that, I would like to hand over to our CFO, Lotta Jan Lelud. Thank you, Johan. Please turn to the next page. I would like to start with an overview of the consolidated performance. In the Q3, which was the 2nd quarter in a row dominated by the COVID-nineteen pandemic and its effects, we saw an increase in net revenue of 3%, SEK 806,000,000 compared to SEK 779,000,000 quarter on quarter. The acquired growth mainly pertained to Excitec in the UK, which was acquired earlier this year. The current adjusted organic growth was minus 7%. Design Management and PLM divisions faced negative growth also in this quarter, deriving from lower new sales of third party licenses and services. The market conditions were especially challenging in Germany and in the UK. The demand for Process Division Solutions have remained stable during the quarter and the division reported an organic growth of 1%. We are now trailing at a yearly rate of SEK 3,800,000,000 in net revenue. Despite the negative organic growth, we reported increased EBITDA and a strength in EBITDA margin. Considerable cost savings driven from government backed initiatives, restructuring program in PLM division and other general cost savings in all three divisions contributed to improved earnings. EBITDA for the Q3 was SEK 80 4,000,000, which was 18% increase from previous year. The EBITDA margin strengthened to 10.4%. In PLM division, work continue with measures aimed at adapting the organization and cost structure to lower sales volumes. The cost for the restructuring program are expected to amount to about SEK 30,000,000 instead of SEK 35,000,000 we've previously communicated. Annual savings are estimated to about CEC50,000,000 to CEC60,000,000. CEC20,000,000 was recognized in the 2nd quarter and CEC8 1,000,000 in the 3rd quarter for the restructuring. EBITDA adjusted for restructuring costs in PLM division of SEK 8,000,000 was consequently affecting the EBITDA to SEK 92,000,000 and adjusted EBITDA margin of 11.4%. During the quarter, personnel costs were reduced by, say, €10,000,000 to government support measures in several of the countries where we operate. In the Q3, government backed initiatives mainly related to short term furloughs, about 380 employees corresponding to about 90 FTEs were affected by furlough in the 3rd quarter. The corresponding amount in the 2nd quarter was SEK 29,000,000 when also reduced to social security costs were attributable. We are now trailing at a yearly rate of SEK 348,000,000 in EBITDA and an EBITDA margin of 9 0.1%. Next page please. With regard to the net revenue distribution, recurring revenue constituted 69% of total revenue in the 3rd quarter. The base of recurring revenue has continuously grown over the years. A stable base of recurring revenue gives downside protection in times of a lower demand. We have so far been able to keep the renewal rate on a stable level despite challenging market conditions. And I hand over back to Johan. Thank you, Lothar. So let's go to the next slide, Division Design Management, and dive a little bit into the 3 divisions. If we look first at the Division Design Management did a really strong result in this quarter. And Design Management have operations in the Nordic countries and the UK, and they improved their EBITDA margin despite negative organic growth and increased EBITDA with 40% compared to last year. Recurring revenue showed continued stability in a challenging market. Net sales increased by 25% during the Q4 to SEK 375,000,000. Organic growth was minus 6% currency adjusted. Looking at the different offering, our own software for facility management and the SaaS solution for construction and infrastructure projects have had a stable demand and continued profit compared to last year. While the as Lotta mentioned before, the new sales of third party software and services related to our Autodesk offering is down in net new sales compared to last year, but the recurring revenue is fairly stable. This all resulted to EBITDA increase to SEK 42,000,000 compared to SEK 30,000,000 last year, and the EBITDA margin was strengthened to 11.2% compared to 10% last year. Excitec, which was acquired in January 2020, made a positive contribution to earnings. Short term employee furloughs and voluntary salary cuts has had a positive impact in the Q3. And together with the cost cutting measures, this contributed to the earnings improvement. So basically the management in this division has done a really good job at taking care of the business in a tough environment and making sure that we are having a stable foundation and being able to improve profit even though net sales is going down. So a really good quarter for the division Design Management. If we move on to the PLM, next slide, product lifecycle management. And this if we look at the demand side first, the PLM division had stable demand in Nordic countries and doing good business. Demand has continued to be weak in UK, Germany and U. S, sort of follows the COVID situation. Organic growth adjusted for currency was negative minus 13% compared to last year. So here we can see the effect in net result with regards to new sales of projects and licenses. The recurring revenues are stable, and we can see a good renewal rate on that. We have been very much focused on cost cutting program and also furloughs have countered the effect of lower net sales. Not to mention the financial effects, but we can see now that we are able to bring down costs and also adapt organizations to the current demand. And we can also see some effects of it already sort of kicking in. And we are following the plan that we have previously communicated that we will be able to generate cost savings in the range of SEK 50,000,000 to SEK 60,000,000 and we will see the full effect beginning next year. And we communicated that we will have cost for SEK 35,000,000 in order to make this happen, And it seems that we will end up closer to SEK 30,000,000. And we also communicated that we will take SEK 50,000,000 in this quarter and it's SEK 8,000,000. And that should be viewed as we should not have to take as much cost as we previously communicated. But those of you who are able to do your math and reading a little bit further back in there can see that we will probably take at least SEK 2,000,000 in the next quarter as well. But that will be within the range of the SEK 30,000,000 that we have communicated as a new sort of estimation of what it would cost to generate the SEK 50,000,000 to SEK 60,000,000 But putting that aside, the quarter is quite okay now because we've been able to do have a good run rate and delivering a profit of SEK 17,000,000 on the EBITA level. And if we add back to SEK 8,000,000 in restructuring cost, it's SEK 25,000,000 and compare that to last year's, we are still doing a better year with regards to the profit side, even though we are down SEK 13,000,000 in net sales. So the management here as well and the team has done a really good job of handling the defects of the COVID situation and putting us in a good situation for when this will turn around because there will be better conditions. And we just want to make sure that we are ready for that. So if we go to next slide, next division, Process Management. So our software for the public sector in Sweden had a good quarter as well. Net sales increased by 2% to SEK 177,000,000. Organic growth was 1%. The difference there is the acquisitions of NetPulcator that we discussed earlier. EBITDA improved to SEK 33,000,000 compared to SEK 20 5,000,000. It's a 32% up, and it has to do with good stable demand and better efficiency in our operations compared to last year and the utilizations of our staff and also cost restraints with regards to the situation we are in right now. And also the newly acquired NetPublicData performed well and made a positive earnings contribution. So a good quarter for Process as well. So with that, I would like to go on to the next slide and Lotta will walk you through the cash flow. Thank you, Johan. Please turn to the next slide. Those of you who have followed Agron Group for a while, you know that we are usually starting the year with a strong Q1 in terms of cash generation from operating activities. This is attributable to our business model with a large share of advanced payments for maintenance contracts in the beginning of the year. This year, we also had a strong Q2 in terms of cash flow. Active work on bringing customer payments together with temporarily improved terms of payments from certain vendors and customers had a positive effect on operating cash flow. In the Q3, cash flow from operations was negative SEK66 1,000,000 mainly due to more tied up working capital. The temporarily improved terms from vendors resumed ordinary terms in August. Altogether, this means that for the 9 month period ending September 30, we had an operating cash flow of SEK 8,000,000, EI considerably stronger than previous year. With regard to cash flow from investing activities, it contains the consideration for the first 50.1 percent of the shares in that publication. As we reference to the accumulated cash flow from financing activities, please also note that no dividend for 2019 was paid to the shareholders as decided by the AGM in May 2020. Previous year, the dividend amounted to €84,000,000. Please turn to the next page. Financial position. We are operating in this uncertain time supported by strong balance sheet. We have a solid financial position and available cash amount due to SEK563,000,000 on September 30. In addition to that, we have another SEK 278,000,000 in revolving credit facility for acquisition purposes and an unutilized overdraft facility of SEK 100,000,000. We have worked hard with our cash collection and have not suffered any significant credit losses during this period. The equity ratio was 41% and net debt amounted to SEK 271,000,000. Other larger changes in the balance sheet items mainly refer to the acquisitions of Exitecenet Applicator. Next page, please. And back to you, Johan. Thank you, Laurence. Basically, to sum it up in Q3 2020, Believe it to be a strong quarter when considering the market conditions that we are in. We were able to increase net sales with the help of our acquisitions with regards to organic growth was minus 7%, adjustable currency effects. We were able to increase our recurring revenue and the percentage of that. And we have been focused on cost restraint, making sure that we are keeping our people safe and our organization in order and executing the necessary cost cutting programs to make sure that we are in a good position as a company. And we have acquired NetPublicator. So all in all, a very focused quarter and making sure that we are doing the business that we can, selling what we can to our customers and making sure that we are adapting to the current market conditions. So with that, I would like to open up from Q and A and questions to Lotte and myself. Thank you. Thank you. Our first question is from Daniel Thorson from ABG. Yes. Hi, Johan and Lotta. Daniel here from ABG. So I start off with a question on TLM. Extremely strong results, SEK 17,000,000 although including SEK 8,000,000 in costs. Can you please elaborate a bit more than you have done from the difference from Q2 as you posted a negative EBITDA in that quarter? How much did government support contribute in PLM, for example? And what are the other cost initiatives you have done? So If you look at you're completely right that it's a strong quarter from where PLM are coming from. And what has happened is that we the team the management team has been really good at adopting the organization, meaning that both from a cost restraint perspective, sort of focusing on what we are, we have less traveling costs as well helping us with regards to that because it's a sales company and we've been able to transform our business and actions to digital world, meaning that we are doing more of webinars, we are meeting our customers online, and we are able to sort of keep up the business that way. That means that on the run so the run rate and operating cost is down. The cost program that has been effective has sort of taken effect as well. That also included. And you can also like you said, there are sort of the help from furloughs and etcetera as well adding up. We are not sort of talking about how it's divided between the divisions. But if you look at what we have done, you can see that a lot of the things that most of the things that we have displayed on group level is related to PLM. That helps you with regards to that as well. So you have 3 things. Management has been really good at making sure that we are adopting organizations to current conditions with regard to cost and also how we sell to our customers. We can see that the cost cutting program, so to speak, has been successful and a little bit earlier than we believe it would kick in. And then we have the help of the furloughs and regards to the result. Okay. Excellent, excellent. And then the second one, which is more general. The common theme of today's presentation and report is really that recurring revenue are stable and you deliver sales on lower costs because you can't really travel and meet your customers, and that leads to lower new sales. When could we expect the lower new sales to have an effect on the P and L going forward? Would that be seen in the next quarter? Or will it take another 2 to 3 quarters before we see the negative sales effect from that? I think hopefully, we you can see the net sales effect. And you know that if you look at Q4 and Q1 going forward, that has not been sort of affected by the coronavirus as those were sort of normal quarters looking forward. So I think if you look at for just obvious reasons, we will see an effect in Q4 and Q1 as well. So that's not a prognosis. That's just a reality where we are with regards to that. So you would probably see an effect as well in the divisions that we're talking about design in PLM. But it doesn't have to be sort of a negative effect. What we are hoping is that the new sales of license that's predominantly licenses and projects that sort of could add rather than it will reduce. I understand your question, will it sort of have an effect like normally if you had a more of a license model and then you're selling a subscription as a percentage of that, then you will have the mathematical effect of that. But that's not really the business model. So I don't think you will we are hoping that it will not have that negative effect rather than that we will be able to increase. But on the same fact, you will have a year on year quarter effect as we are facing Q4 and Q1. We did not have any COVID in it, so to speak. I know it was very round also, but I don't Yes, exactly. Yes, I think it makes sense. It was just about that you have like a perfect situation right now, that you have lots of recurring revenue. You have a super low cost for the sales force, which is obviously driving low new sales. And if we then look 1 to 2 quarters ahead, you will still have low new sales that could affect sales negatively, but you will probably ramp up the sales force cost in terms of traveling, etcetera, if the world open up. And that's going to affect EBITDA negatively. But so far, we have only seen the positive effects from that. Is that the correct way of thinking of it? I mean, that's the correct way of thinking. And then we'll see how it sort of will pan out. But the scenario is very much sort of I can see your scenario where you go after. Okay. Excellent. And then a question on the on PLM and the adapting the organization to lower sales volumes. So you target SEK50 1,000,000 to SEK60 1,000,000 in cost savings. And if I'm right on assumptions, that's around 10% of OpEx in PLM. Should we expect the market to be some 10 percent lower than we saw, for example, in 2019 to match that? Is that your base case? I think you have to what we are saying that we will reduce SEK 50 to 60,000,000 compared to the run rate in Q1 2020. And we were not on the brakes in Q1 2020. We were on the gas pedal, meaning that you have to read that we had we were sort of ramping up the price. So we are not planning for that we will see lower sort of lower net market next year. But compared to this, of course, the market is going down there. But next year, we are hoping that the market will not be lower than it is today. Okay, okay. But at the same time, we have to realize that the cost cutting program of $50,000,000 $60,000,000 will not add $50,000,000 $60,000,000 to the bottom line. Exactly. And that's fair to come back to a more normal margin in the business. Yes. Okay. That's very clear. That's very clear. And in Design Management, I expected Exitec to deliver around SEK 150,000,000 sales in Q3 compared to your comments in the Q2 report. If I calculate it now, it looks to be around SEK 105,000,000. Any comments on the outperformance in the quarter? And what we should expect going forward? No. I think they are having the same as our Symmetry business there. And we started out we saying that when we acquired them that they had net sales of around SEK 600,000,000. If you divide that by SEK 150,000,000, you will SEK 4,000,000, you will get SEK 150,000,000 by quarter. But at the same time, we are also saying that the decrease in the net sales in this division is related to our Autodesk business and that's both that's both Simmetry and Excitec. So this means that they will also have a they also are seeing the same pattern there with regards to new sales going down. Okay. So slightly lower than we all expected in January, for example. Yes. And if you sort of they are taking their part of the divisions decreasing net sales. Okay. Excellent. And then my final one is obviously on Process Management. You commented a bit, but for how long is the strong margin sustainable? Do you see any signs of price pressure, increased competition or lower demand in public sector here? No, we don't see any sort of price pressure there. We are helped a little bit with regards to the program in Sweden with regards to social costs and salaries. So you have a few million there on effect on that. That's not sustainable. But at the same time, we can see that we are being able to move the margins up with regards to our own sort of utilization of the team. And that's, I believe, is sustainable. So we are hoping that we will be able to sort of maintain the margins that we are operating around now in the Process business. Okay. So around above 15% shouldn't be unrealistic to expect going forward? No. We think we can do that. Yes. Excellent. That was all for me for now. Thank you. Thank you. Our next question is from Fredrik Knollsen from Redeye. Please go ahead. Hi, Fredrik Knollsen from Redeye here. One question regarding the margin in Design Management. How much is driven by sales mix, temporary cost cuts and long term cost cuts, respectively? Could you give us some rough number? I think if you look at design, most of it is related to cost restraint during this quarter. We have and the cost restraint and furloughs of the employees being so if we have not, like in PLM, been driving a bigger cost reduction program. And if you look forward to the design, we can see that there will be less furloughs in that division going forward than compared to the rest of the divisions. So I will say that there and here's probably the debate on all the companies with regards to the way we act, how much is sustainable with regards to what we are doing because what we can see at the same time here is that we are able to do business more remote in a digital world. That means that some of our costs that we have had earlier on with regards to traveling to our and from to our customers will probably not be in the same level. And we have all the debates about where we work from. We will work from home, we will work from the office. So it's a little bit pre preempt, too early to say how much will continue to be sustainable. But on the other side, we are not driving a big cost reduction program. Most of the sort of the reduction in costs here right now is with related to furloughs and general cost restraints with regards to the situation we are with the COVID right now. Okay. That's a good answer. One more question. The cost saving program in the PLM, how come it was that much cheaper and faster than you thought initially? It's not the reason why you make an assumption and we try to do our best calculation of how it will pan out and how it will cost. When we when things get moving and things get sort of doing the adoption of that, it may end up that some of the people are because what basically what we're talking about is people in the organization. Some of them might be leaving on by their own, so it will not be a cost for us. And also we can find situation and teams that makes it sort of less costly. So I think it's a combination of that. So I think in regards to we are thinking about it will cost us rather SEK 30,000,000 than SEK 35,000,000. And with regards to if you compare those two numbers, I don't think we're that far away. And it's better to so I'm actually glad that it's not costing us as much as we expected to generate the cost efficiency because we have not changed the goal with it. We're not saying that that will be less. We are saying that it will cost us less than we expected to generate change in organization and the cost savings. So I'm actually happy about it. Okay, thanks. That's all for me. Thanks. And we currently have no further audio questions. I will hand the word back to the speakers. Okay. Thank you for taking the time and listening to us presenting our report for the Q3. I know it's a busy morning with all the reports. So if there are no more further questions, we would like to say thank you. Thank you very much.