Earnings Call: Q2 2021

Jul 21, 2021

Ladies and gentlemen, welcome to ADNOC Q2 Report for 2021. Today, I am pleased to present CEO, Johan Andersson and CFO, Lorca Jarle Reed. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. I will now hand over to Johan Andersson. Please begin your meeting. Thanks for that introduction, and welcome all to the presentation of the ADNOC Group interim report for the 2nd quarter. And previously stated I have with me also the CFO for Enel Group, Lothar Jalderejes. Can we please move to the slide with the agenda? For today, we'll give you an introduction to interim report with the full group, Adnan Group, digging in a little bit more to the 3 divisions, also talk about the cash flow and the financial position, a little bit about our acquisition strategy, sustainability, summarize our investment case and then open up for Q and A as well. Before we do that, I would like to give moving on to the next slide, Adel Group, and give a short introduction to ADNEL Group for those of you who are newcomer to ADNEL Group. We are a group of companies creating sustainable growth in value by acquiring and developing cutting edge enterprises that digitalize society. We are organizing 3 divisions, providing digital solutions: design management, product lifecycle management and process management. Our group net sales is almost SEK 4,000,000,000. We have a business model with 67% recurring revenue from our software and services of a recurring nature adding to that. We are first down doing business in Northern Europe, and we are located also in Asia, Australia and U. S. With that, I would like to move on to the next slide, Adelgroupe. Signifying second quarter was growth, improved earnings and better market conditions. The group's operation performed well during the Q2 of 2021 and also higher demand in several areas. Customers in the manufacturing and automotive industries once again showed a greater willingness to invest. The British market is showing signs of recovery, Which is favorable for the businesses in design management and product life cycle management. Demand for the process management divisions, solutions and service for the public sector remain good. Net sales increased by 18%, of which 14% was organic adjusted for currency our subsidiaries are continuing their successful work on generating new business. Organic growth in all divisions shows that customers Appreciate our digital solutions and that industrial customers have gained a willingness to invest. EBITDA increased by 75% to SEK98 1,000,000 and we strengthened the EBITDA margin to 9.8%. Recurring revenue is providing a stable foundation for earnings and accounted for 65% of net sales. The earning improvement is mainly attributable to the Product Life Cycle Management divisions, But the Process Management and Design Management division also had good earnings improvement, so good contribution from all divisions. The cost cutting program that was initiated in the Vision Product Life Cycle Management a year ago has been carried out according to plan and adding to the results improvements. With that, I would like to move on to the next slide. Growth in recurring revenue. Compared to Q2 2017, looking to the left side of the slide, we have almost doubled net sales and the majority of that coming from growth in recurring revenue directly related to software. Many customers have been with us for a very long time, meaning that a lot of the services also are of a recurring nature, even though we don't recognize that as recurring revenue. Looking specifically at the Q2, if we break down net sales, license revenue increased with 44% to SEK 62,000,000 adding to the margin improvement. Recurring revenue increased with 18% to say 653,000,000 service revenue increases 14% to SEK 271,000,000 and the share of recurring revenue, as I stated early on, was 65% of the total net sales. And moving on to the next Slide, 3 divisions. We are 3 divisions in Anno Group contributing to the Anno Group. And as you can see, they are fairly similar in size, but we the biggest one is Design Management in sales and the biggest one in EBITA Process Management, reflecting the different margin in the divisions. So if we move on to the next slide, design management. Organic growth and improved market conditions. Design had an organic growth of 16% in the quarter and the EBITDA margin was stable during the Q2. We have won new businesses for design and BIM systems in both the Nordic countries and the UK market, the demand for digital facility management systems has improved. Net sales increased during the second quarter to SEK493,000,000, representing growth of 16%. EBITDA increased to SEK40,000,000, corresponding to an EBITDA margin of 9.1%. The acquisition of the Irish company Prokad in June 2021 further expands the group's geographic presence. So a stable quarter for design with Golar's organic growth. So moving on to next slide, Product Life Cycle Management. Silane had a significant improved EBITDA and better market conditions. Organic growth of 13% and strongly improved earnings. Net sales increased to SEK 699,000,000. The level of activity and customers' willingness to invest are generally better. This is clear, especially in the manufacturing industry in Germany and the UK, where companies are once again investing in new licenses. We can see continued favorable demand in the Nordic countries, Danelux and Germany. The restructuring program has yielded the intended cost savings an EBITDA increase to SEK 27,000,000 compared to minus SEK 9,000,000 last year. And the EBITDA margin strengthened to 9% being negative last year for the comparable quarter. So moving on to next slide, Process Management a good organic growth compared to historical and net sales increased with 31%, to SEK 268,000,000 And the EBITDA increased also with 30% to SEK 48,000,000. Demand for the division solution for document and case management, citizen services, municipal technical systems and other services remained good during the quarter. The division is positioned for public sector tenders and have an attractive digital solution provided for customers And solid experience and good references. That's also one of the things that drives the organic growth for the business, a strong offering. One example is the order from a company called Apothekerket. You can translated to the pharmacy. It's an offspring from the deregulation of the public pharmacy in Sweden that stretched over 5 years, where we will deliver a support system for prescription, processing of drugs for retail pharmacies and dose dispensing, spanning a 5 year product. That's just an example of what we can do for our customers and the time range and the long term commitment from our customers. So a good solid quarter with the organic growth that sets out this quarter for Process Management. So with that as an introduction to the business, I would like to hand over to Lotta, our CFO, who will walk you through the cash flow and the balance sheet. Thank you, Johan. I would like to start with an overview of the consolidated cash flow for the 2nd quarter. The operating cash flow in the 2nd quarter amounted to SEK 51,000,000. The lower operating cash flow compared to previous year was attributable a lower contribution from working capital. Previous year, temporarily improved payment terms from certain suppliers and customers had a positive effect on cash flow. Also the decline in business activity previous year due to the COVID pandemic temporarily decreased tied up capital. The share of accounts receivable that was overdue by the end of June 2021 was, however, lower than before the COVID-nineteen pandemic, and we haven't suffered any significant credit losses. With regard to cash flow from investing activities, obviously, SEK 272,000,000, the amount primarily refer to the 3 acquisitions as executed during the Q2, S Group Solutions, Eelco and Procat. The financing activities in the Q2 primarily related to 3 topics: repayment of previous credit facility and the corresponding rates of bank borrowing under the new agreement, leasing and dividend. With regard to the new credit facility. I will come back to that in more detail a little bit later. In the Q2, the dividend of SEK 2 point SEK 5 per share was distributed to the shareholders in line with the AGM's decision in May 2021. The total amount distributed was the €84,000,000 Previous year, no dividend was paid out as a consequence of the uncertainty regarding the COVID-nineteen pandemic's progression. Next page, please. I'd like to continue with a few comments on the balance sheet. And we continue to operate supported by a resilient balance sheet. We had a strong cash position as of June 30. Also, we had financed the predominant part of the acquisitions this year by available cash funds. In June 2021, we entered into a new multi currency credit the agreement of SEK 1,600,000,000 with Nordea and SEB. The credit facility can be used for financing existing debt, acquisitions and general corporate purposes. It replaces the previous acquisition and credit overdraft facilities in Nordea of SEK 1 SEK 1,000,000,000 in total. The expansion of the credit facility of SEK 500,000,000 strengthens our capacity to acquire and develop businesses even further. Out of the total credit facility, the SEK 761,000,000 was utilized as per 30th June. Please note that the utilized portion of the new credit facility has classified under non current liabilities. The previous Telefonica was classified under current liabilities as its maturity date was 30th June 2021. Net debt was at SEK 396,000,000 and the unutilized available credit facility was SEK 839,000,000. With regard to equity, I would like to mention a couple of things. Firstly, equity was increased by €54,000,000 in connection with the issuance of the 204,802 new Class B shares as part of the total purchase price for S Group Solutions. And secondly, following a resolution by Adna Group's 2021 AGM, a long term incentive plan for managers and senior executives has been launched. In June 2020, 195,800 call options for Class B shares were issued to some the participants. The market value call option premium of SEK 29,800,000 resulted in a total purchase price of approximately SEK SEK 6,000,000, which has been applied to the group's shareholders' equity. There was no dilutive effect in earnings per share for the period since the call options exercise price was below the share price as at 30th June. The equity ratio was 39% and return on shareholder security was about 12%. Other larger changes in the balance sheet items from December 31, 20 Svennj, mainly referred to recent acquisitions as well as the organic growth of operations. Over to you again. Thank you, Laura, for that. So moving on to next slide, acquisitions 2021 year to date. Anadarko's strategy is to create sustained growth and value by acquiring and developing cutting edge enterprises that digitalize society. To date in 2021, we have carried out 3 acquisitions, S Group Solutions, ILPU and ProCAD. Together, these companies add annual sales of approximately SEK 200,000,000, most of which is recurring revenue. Our good cash flow strong balance sheet combined with the credit facility that was expanded, earlier explained by Lotta, buyback 500,000,000 allows us to continue executing our acquisition strategy. Moving on to the next slide, acquisitions 2020, showing you the example of the 4 acquisitions we did in 2020, adding almost EUR 600,000,000 net sales to the group and good business and expanding our operations. So with that, I would like to move on to the next slide, long term sustainability. There is clearly a great need for digital solutions in a number of areas as sustainability demands are rising in business and society in general. We'd like to give you some examples of what we are doing in helping out making that happen. For example, our digital solutions make it possible for city planners, architects and product developers to design more sustainable products, properties and infrastructure. We also provide digital twins of machines or a vehicle, also the building, a tunnel, a bridge or an entire city that enables more structured life cycle planning simulations. Our case management system for public administration support the provision of services that meet citizen sustainability expectations while also complying with legal requirements. It is with pride and responsibility that ADNOCRUBE is contributing to the creation administration of a more sustainable society. For us, our 5 focus areas for our efforts in this area are what I explained earlier, our digital solutions that contribute to sustainable development, that's the foundation of what we actually do That we care for people and the plant in our own operations, how we work with our partners and suppliers, We must be long term financially strong in order to make a Saabem, and we need to have a structure for sustainable management and governance. When adopting our word to the UN Global Goals, we have identified 6 goals with the closest connection to Adno Group's focus areas: good health and well-being, gender equality, decent work and economic growth, Industry Innovation and Infrastructure, Sustainable Cities and Communities and Climate Action. The work is now being continued within line with our decentralized management structure, where our companies are taking great personal responsibility with the support of the Group guidelines, and we will report the progress on the goals that we are in the process of defining. So more to come in this area and something that is not separate what we are doing, but in very much a way of things we are doing. So with that, I would like to move on to the next slide, Annual Group Asset Investments. So in summary, I believe that our strategy and business model is valid for creating value for our shareholders. We see primarily 4 components that drive value growth in the Annual Group. The first component is our acquisition driven growth strategy, where we create sustainable value by continuously acquiring new businesses, but also actively supporting our acquired companies to drive organic growth. So far, we have done 3 acquisitions in this year, and we have completed more than 60 acquisitions over the past 15 years, thereby both building extensive experience in refining our processes over time. We have grown with good profitability. The average growth in net sales over the last 10 years has been 14%. The second component is our focus on sustainable digital solutions. Our solutions for design, simulation, product data information and case management meet global trends in digitization, urbanization and sustainability. The regulatory development also places even higher demands on transparency and traceability. We also see that the pace of the utilization has Greens further during the COVID-nineteen pandemic, both in the private and the public sectors. The 3rd component in our strategy is our business model, which means that approximately 65% of our net sales consists of recurring revenue from the software and SaaS solutions that we provide to our customers. But one could argue that our services are of a recurring nature as well as the customers often return for advice, further development or integration with other systems. We also have a strong cash flow generation, thanks to a large proportion of advanced payments at the beginning of the year and the loan need for investment in addition to product development. The 4th and final component is the diversification across markets and customer categories, which provides a good spread of risk. We are active in several geographical markets. We have customers in both the private and the public sectors and we have customers in many different industries. We are not dependent on individual customers, But we have built many long term customers relationships. So with that, I would like to open up for Q and A. And thank you for listening. Thank you. So that is 1 registered for our question. I have a question from the line of Daniel Kuchen from ABB. Yes. Hi, Johanna, Lotte. Thank you very much. First question, obviously, on Process Management, 13% organic growth in the quarter. What is really sustainable in that growth and also given that margins remain stable versus previous quarters despite the high growth, Would we have seen a slightly lower margin in the case organic growth would have been more in line with historical low single digit growth? Thanks for the question. Looking at organic growth, 13% for the quarter, something that stands out. Historically, it has been more close to probably 2%, 3%, 4%. And I think moving forward, you shouldn't Expect that we can deliver 13% every quarter. We are happy that we have done it and there are good reasons for that. So but we can't deliver that going forward. But I think but it's still a sign that we are doing better With regards to organic growth than we have done historically. And let's see where what we sort of what kind of pace we can set. But I can and will not promise that we will continue to deliver that high organic growth going forward. But we have done some good deals and some projects, and So that explains that. And going back to your second question around margins, sometimes when you drive growth, it also You have to make some investments. So we are happy that we can still continue that growth. It probably would have been the other way around if we hadn't Been sort of having sort of a normal organic growth, then we would have continued to working on the margins. Okay. Okay. I see. So then margins could have been around 17%, 18% anyway, It sounds like. Yes. So we didn't need sort of how should I say, we didn't need the organic growth in order to keep the margins at the same level. I see. And what specifically was actually driving the 13% growth in the quarter? Both that we can see that we are doing good in the projects that we are. And then there are some specific deals Make in some of the companies make that sort of landed in this quarter. Okay. I see. So some timing effect. How about the market? Has that accelerated at least a few percentage points? We can say yes, the mark if any, it's not getting sort of worked. We had a quite a good market during the whole year, the whole pandemic, so to speak, with offering that we are having for the public sector being technically infrastructure to municipalities This and case management system to state authorities. That market is still good. Okay. Okay. I see. And then my second question on central costs in Q2, they were SEK 17,000,000. That was some SEK 5,000,000 higher than normally. Any reason for that or any nonrecurring items in that figure? Yes and no. What I mean by that is that You will find that we have cost for acquisitions in the Q2. Related to that, we have been really We've done 3 acquisitions, and then I include the one that we did for S Group as well that sort of landed in between the first and second quarter. And then we have also made some investments in group policies regarding different things That sort of needed to be done. So some of them are not of recurring nature, but Off recurring line nature because we will continue to do acquisitions, but that's mainly consultancy cost per external. And some costs will, of course, have to increase as we are growing bigger and bigger. Okay. So around The SEK 10,000,000 or slightly above going forward, excluding an acquisition related cost, sounds reasonable still. Yes. It needs to we need to grow. We can't continue to be we will continue to be sort of a slim organization, but we need to have As we grow. Okay. Fair enough. And then on PLM, the cost cutting activity you made in 2020, they were to slim the organization post a couple of good years that grew the business significantly versus 5 years back. Do you feel comfortable that PLM will come out post the pandemic with potentially higher margins than we saw before of around 8%, 9%. Let's see that happening. So I thought we need I think we should be happy what they have performed and what they are doing. And There are potentials to do more than 8%, 9%, but there's also a timing effect, how long will it take because Normally, when you do this, you need to land the organization here, so to speak, and then start working again. So I think in the near time So long term, yes. Short term, I think we need some time to make it make that happen. Okay. Okay. I see. The final question to Lotte, I guess, touching on cash flow. We see a change pattern here versus previous years with strong cash Q1 and first half of the year. Can you again just touch upon the relatively weaker cash flow this year and the working capital pattern? Yes. I mean, firstly, the cash flow is more or less the same as in 2019 for the first two quarters. So I think that 2020 was exceptional year driven by the pandemic and all the measures we took in connection with that. And as we also have mentioned before, I mean, we've got some improved payment terms with some of our suppliers. And also some of the customers, they gave us some more time to repeat earlier than they had to. Also, I mean, last year, the business was it was I mean, there was less activity during the Q3, and then the tied up capital obviously also became lower. So now when we are growing again, of course, we are binding a little bit more capital. But I wouldn't say it's a big change from the year before the pandemic year. Okay. So it's more the comparable year in 2020 that is Yes. Okay. Yes, I would say that. Okay. That's fine. Okay. That was all for me. Thank you. Our next question comes from the line of Damian Jureberg from Handelsbanken. Please go ahead. Thank you very much and good morning. Yes. My first question would be on M and A. Have you gone well loaded for Or bolt on acquisitions or larger ones. And my question is, would you prefer doing larger acquisition compared to a number of smaller ones. And also if you can touch upon geographies or Prefer public or private end markets and so on. And I feel we continue to favor process management. We also, of course, So ULS Group and Yield Pool recently, yes. And also the pricing environment, what you see, if it's very hard to get a deal done given quite high valuations. Thank you, Lauren. Starting with large and small, I think we will continue to do what some people consider small acquisitions because that is something that it could be still be very value creating and adding to our businesses. So but at the same time, we are also looking at, For us, bigger acquisition. For us, bigger acquisition is the one, for example, when we acquired Exitec, EUR 600,000,000 in net sales. S Group Solution was a good add on margin wise. So we are always looking at that. But at the same time, we have found a way of continuing to adding what some people would consider small. So we're doing both and we're looking actively at both. The smaller ones is easier to sort of to do because it's not as strategic. The smaller the bigger one is probably longer decision processes. So we'll in short, we'll do both. Looking at the geography, we are actively now in Northern Europe. So we are constantly looking in all the geographies we are there today. And that means that we have the Nordic countries, Danelux, U. K, Germany and the neighboring countries. And it could be also with some of the business that we have today, we could go outside of that. But then This needs to be something that we are doing today because we have sort of a strategy where we say we don't do 2 new things at the same time. We don't go to a new geography with the new offering. We go to new geographies with something that we know of. But You should expect us doing business acquisition in Northern Europe. And if we go outside of that, it needs to be with something that we sort of know of already, the business. And then the pricing. Pricing has definitely gone up to last year for well run software companies having high RRR going forward, the pricing is definitely up. Looking at the more partnership based businesses that the pricing is still okay. For us, it means that if we historically have been paying around 5, 6 times operating profit for Pure Software Companies, we need to expect starting to paying around 9 times operating profit. And you know the pricing Some of them are even higher, and then we say no, thank you. So the pricing has gone up, but compared to our own valuation, it's still possible to do fair acquisitions. That's great. And if I may, a question on perhaps a lot a little bit what you see and expect from salary increases and possible employee turnover. I guess you're a bit more sheltered than pure IT consultancy companies, but any what should we expect to see here in a perhaps hopefully post COVID environment? What we can see right now is that the competition increases again. I mean, it's been a period here where we have had easy to find people, but now the competition is tougher again. And of course, we are competing about the same resources in many of our operations. So that's what a lot of us IT companies need today. In terms of salaries. I mean, I think we can we hope that we can stay on more or less the same level with the annual increases that we have seen before. But of course, for very sort of high end competencies, we probably need to pay more I have done in the past. So just adding I think comparing to as we are having a lot of companies that are not sort of located in the central parts Of the different countries that we operate means that the competition is probably a little bit lower compared to for example, here in Sweden. If you are located outside of Stockholm or in Stockholm, of course, it has an effect. But we as Lotf said, we are fighting about the same competition. And what we can see is, like you said, Oatesh, that coming this after summer, we expect as the economies open up, people will start to move again. Would you see it as a hurdle that might impact your growth ambitions? Or is it More harder work to recruit them, if it might hit the margins instead with the worst case a bit. As of now, in 2nd, it's something that we need to handle. It's not something that will stop us. It's not what we normally will have to handle in our line of business. Yes. And my last question would be a little bit if you see any changes in the scope from yes, just so on Autodesk in terms of What they define and target direct sales versus indirect sales and if the balance is well kept, so to say, your view? Short answer, no. We're still having good relationships with them. And I think the best way of making us relevant is continue to show the growth that we are. Perfect. And then I will actually share a great continuation of the summer. Thanks. Thank you. Thank you. We have a question from the line of Marcin from Redeye. Please go ahead. Hi, everyone. One question on the demand in design and the PLM. Is it largely back to pre COVID levels and is it are there any areas lagging behind? Thanks for that question. I think if you're looking at you have to separate it a little bit. If you're looking at the Nordics, it's Sort of I don't know, we'll say it's back to, but it's been a stable situation for the last year for us, meaning that the demand is there. Looking at the UK market, it's opening up. People are coming back to offices, helping goods. So I wouldn't say that it's back to COVID pre COVID in the UK's debt, but still good. Looking at the German market, It's better, but it's still not sort of back to where it was before the curve was broken by COVID. So today with better markets, but still not back to where it was in 2019. Okay. One follow-up there. Do you think that the difference between the countries is Mainly related to the general market rather than your performance. General market, I would say, because General market, the difference sorry, I have to sort of split that in 2. The general market are different conditions, But we are having said that, I believe that we have performed better than the competition in the German and the UK markets. Okay. Thanks. That's all for me. There are no further questions registered. So I am back with you for any closing remarks. Okay. So Sorry, I was waiting for another question, but I realized it was up to me. So thank you for all the questions and the interest in Adnan Group. And with that, We would like to wish you a good summer wherever you chose to spend it. So thank you and talk to you later. Goodbye.