Earnings Call: Q4 2020

Feb 3, 2021

Thank you. Welcome all to this presentation of the Adnod Group Year End Report for 2020. With me, I also have the CFO of AdNord Group, Lotta Jarl de Ried. And we would like to percent the AdNord Group result. So if we could please move to the next slide. And I think we could just move on to Slide number 4, Adnod Group Digital Solutions for a sustainable future. And looking at Adnud Group, As of today, we are training at SEK 3,800,000,000 and we have 1800 employees. We are active in 19 countries, meaning that we have offices and operations there. We do businesses in a lot more parts of the world as well, but our main markets are Sweden, UK, Germany, Norway and Finland. And as you can see on the map to the right, we are predominantly doing our operations in the Northern Europe. We are organized and active in 3 divisions: Design Management, Product Lifecycle Management and Process Management. And we will go in further in details on the businesses of the 3 divisions later in this presentation. So let's move on to Slide number 5, the agenda for today. We will focus on Q4, of course, a little bit on 2020, And we will dive into our 3 divisions: Design, Product, Life Cycle Management, Process Management. We will also discuss our cash flow and financial positions, and then we'll end on acquisitions. And with that, I'd like to move on to the next slide, AdNord Group Q4 2020. Looking at this quarter Q4, we were able to improve our margins, and we had a very strong cash flow. Net sales was SEK 921,000,000, down from SEK 933,000,000. We were able to increase our EBITDA from SEK 100,000,000 to 108,000,000 and we meaning that we improved and strengthened our margins from 10.7% to 11.7 So even though net sales were down, we were able to be efficient in our operations, And we also had a cost cutting program that we have been running in the PLM division that has been going as well as expected. We had a very strong earnings in the Process Management division, And we were able to be diligent with regards to our cost during the quarter, and that was significant for all divisions. And looking at other events in the quarter, We have a new Head of Divisions for PLM and also the CEO of Technia, Manus Falkmann, who took over from Unasier here January 1 and is running the business as of now. With Indian acquisitions in the Q4 of Skanska as well. I will come back to that later in the presentation. And as you can see, this is a quarter, even though we are moving more and more to our business with to recurring revenue and services provided when integrating and implementing our digital solutions. This is the quarter where we actually sell some licenses as well, and then this has a good impact on our margins. And as I said, we will discuss later in the presentation more in details with regards to our divisions. But let's move on to the next slide, Slide 7, AdNord Group 2020. Looking at the full year, this was, of course, a year that was very much impacted everything that has to do with the COVID-nineteen and the change in the market conditions. But I do believe that we were very fast and adaptive to the changes in the business. We can see that started in Q2, Q3. And now in Q4, we're a little bit sort of running the business in a normal mode, meaning the normal mode that most of our employees are working from home offices, able to serve our customers in a good way. It was also a year when we can see that digitalization took at least a 2, 3 years leap, so to speak, meaning that we ourselves have become even more digital, meaning that we continue to work distributed in a good way. Our customers are becoming more digital, and this is also something that drives our businesses because this is actually what we help our customers with to become even more digital in the way they work. And that makes sense both for the things that we do for the construction industry, our architects, The people who are OEM customers, discrete manufacturing, you can also see it in the public sector as well, becoming more efficient with the help of digital solutions. So even though it's been a tough year with the COVID, it has also been a significant year for driving our business long term as well. And what we also can see that we have been able to generate a very strong operating cash flow. Looking at the year, I think the operating cash flow from our operations was SEK 579,000,000 compared to our EBITDA on SEK 3.56 6 means that we have a very good cash generation. That has to do also with our business model. We have In our business model, customers prepay for the right to use the software, meaning that we are operating with a negative operating meaning that when we grow, we actually generate cash. So it's been a good year on that. And we have also been diligent in the way to I think customers actually pay for this. So we have very low, if almost none, customer losses due to bad debt this year. We did 4 acquisitions of Exotic, UniSite, NetPublicator and Skanscott. And So with that, I comment to 2020. I would like to move on to the next slide, Slide 7. It's a slide that shows our 3 divisions that we operate in, design, PLM and process. And I will not spend that much time on that. And it's just an overview for you who are new to the business to see in the 3 divisions that we operate. So I think we're all interested in Q4. So let's move on to the next slide, Slide number 8, and dive in a little bit more to the design division, design management. In Design Management, we support 3 customer groups on a broad base, meaning that Everyone who designs something could be an architect, could also be a technical consultant, it could be someone in the district manufacturing producing something, they need software to design. And they also need software for taking care of all the product data being distributed. And also, we are working with customers on the construction side, helping them with product management tools. And we are also working with facility management customers when things have been built and needs to be in management over time. So we provide software for that as well. So if we look at the figures for Q4, we are almost flat on net sales and almost on EBITDA. And with that, we can also say that the negative with the negative organic growth, it has to do that in the beginning of the year, We made a major acquisition in of Excitec. So they have been contributing to both net sales and EBITDA. And in the Q4 this year, we have a lower net sales compared to last year. And Then we have to remember that last year was a very good year for us. We have a very had a very good organic growth that we hadn't seen before. So It's tough comps as well. And in the market as well as we are right now, we have seen effects from COVID-nineteen that our customers as much this year. But compared to Q3, I would say that nothing has changed. It's the same market condition. So it's more of a matter that we had a very strong Q4 last year, and unfortunately, we have not been able to repeat that. And that has to do with the phase of our Autodesk solutions. If we look at our prepared software for BIM and product management and facility management, it has been a fairly stable demand compared to last year. And we have been able to mitigate the lower net sales with cost control. So if we move on to the next division and the next slide, Product Life Cycle Management. It's been a very good year end for PLM, had a very tough year starting. And we have done a cost reduction program for the year, adapting to the market conditions, and we can see the positive effect of that in Q4. But we can also see that the customers have invested in licenses in this Q4 as the Normally or I should say historically, Q4 is always a strong quarter for PLM. And with the market conditions, there's We are happy that the customers have chosen to invest as well this year. And we can see that from sort of a low point with regards to demand, we can see some increase or at least stabilization in Germany and UK with regards to that. It doesn't mean that we are back on track compared to what we had, for example, in 2018, but I'm just saying that it's a little bit better, in 2018, but I'm just saying that it's a little bit better now. And in Nordics and the backlogs continue to be stable as well. But and here, you can see that licenses is 18 percent of the net sales distribution. That also has a positive effect of the margin this quarter, but that's historically the way it always have been, so to speak. And I'm very happy that we are able to execute and generate a good and healthy profit in the division TLM. They've done a good job executing that. Historically, strong margins. So let's move on to the next division. And that's Process Management did a really strong year end as well. And they managed to have organic growth as well, 3%. It's a good organic growth for this type of business and the public sector. We increased net sales from SEK 223,000,000 to SEK 231,000,000 and EBITDA from SEK 48,000,000 to SEK 45,000,000. We almost reached a 20% EBITDA margin. So it's a strong year end, and this is driven both by stable demand, but also efficient operations and some cost restraints, of course, with regards to the COVID situation. But all in all, a very good quarter from Process Management, and we can see that it's both from our customers in local municipalities and the central government that we are able to do good business with. So with that introduction to our financial For this quarter and the divisions, I would like to hand over to our CFO, Lotta Jarlarid, who will walk us through the cash flow and the financial position. Thank you, Johan. I would like to start with an overview of the consolidated cash flow. 2020 was a very strong year for Adnod Group in terms of cash Generation, as Johan said earlier. In the Q4, we had a cash conversion rate that is operating cash flow to EBITDA of 1 point 7 times. And those of you who have followed AdNord Group for a while, you know that we are usually starting the year with a very strong Q1 in terms of cash generation. This is attributable to our business model with a large share of advanced payments for maintenance contracts in the beginning of the year. In 2020, the operating cash So for the Q1, represented almost 50% of total operating cash flow after a strong Q1 also in terms of net sales. This year, we had a strong cash flow also in the Q2. When the COVID-nineteen pandemic was effect, we intensified our work on bringing in customer payments. Focused work with cash collection, together with temporarily improved terms of payments from certain vendors and customers, had a positive effect on the operating cash flow. The Q3 was weaker when capital tied up increased during the summer due to the business cycle. In addition, the temporary improved terms of payment from vendors during the Q2 resumed to ordinary terms during the Q3. Altogether, this meant that we, in 2020, generated an operating cash flow that was 40% above previous year, landing at CXM €579,000,000 This represents a cash conversion at 1.6x EBITDA. We have actively worked on reducing tied up capital through challenging invoicing and payment routines. The share of account receivables that is overdue now is lower than before the COVID-nineteen pandemic, and we haven't suffered any significant credit losses. With regard to cash flow from investing activities, the 4th quarter contains about SEK 40,000,000 referring to the Skanska acquisition in November. And total cash flow from investing activities about SEK 190,000,000, apparently mainly reflects the 4 acquisitions made during 2020. With reference to the accumulated cash flow from financing activities, please remember that no dividend for 2019 paid to the shareholders as decided by JGM in May 2020. Previously, the dividend amounted to SEK 84,000,000. We have also chose to not to amortize our external debt due in 2020 in order to resume full flexibility in terms of access to liquidity. Next slide, please. I would like to continue to with some comments on the balance sheet. We have been operating during these challenging times, supported by a strong balance sheet, giving us the confidence to continue to develop ADNODE Group. By the end of December, our available cash was SEK 644,000,000. In addition to that, we had another SEK 300,000,000 in Holding credit facility for acquisition purposes and an unutilized overdraft facility of SEK 100,000,000. External debt was about SEK 700,000,000 and leasing debt amounted to SEK 125,000,000. This means that our net debt was on the lower side, about SEK 780,000,000. Liquidity ratio was 40%, and the return on shareholders' equity was Just above 11%. Other large changes in the balance sheet items such as goodwill, other intangibles and other liabilities It's mainly referred to the acquisitions made during 2020. And by that, I hand over to you again, Johan. Thank you, Lothar. And let's move to the next slide, acquisitions. In the Q4, we did an acquisition of Skanscott. Skanscot is a Dassault partner with focus on Simulia, and Simulia is the simulation part of the platform. The company has also developed Bregade. It's a standalone software suite for simulation of British and civil infrastructure. And Skalskot gives us extensive knowledge and experience of advanced simulation services, and they are active in a wide range of industries such Civil Infrastructure, Big Size and Nuclear. So this is an add on acquisitions to Technia. Technia has strong offering with regards to simulation earlier on. And this brings new capabilities and also some add on software. So it's a very good addition to Technia that will make it possible for us to serve our customers even better going forward. So and that was the acquisition that we did in Q4. And as I said earlier, we did 3 more acquisitions earlier on this year. And one of the questions that always get, are you still active within acquisitions? Yes, We are very much, but as you all know, it's a matter of timing when we are able to close things on the terms that we seem favorable for us. So But I expect us to do more acquisitions in 2021. So let's move to the next slide, the summary. Why invest in Adnod Group? So it's not the same speech, it's just a description of what we have done and what expect it to do going forward. We have a growth strategy, and we are very much a growth company. And we do it both organically and through acquisitions. We have a proven track record. We have been profitable ever since the start, and we have found a way to double our operations every 5th year, meaning that we have a net sales growth of around 14% on average the last 10 years. We provide digital solutions for a sustainable future, means that our offerings are supported by strong global trends such as digitalization that we discussed, but also urbanizations. People are moving into cities, and we need the infrastructure there, and Structure needs to be defined and it needs to be maintained and we provide software and digital solution for that. We are long term to our customers and our partners and relationship, meaning that there are customers who have been with us for 30 years plus. We have been working with our partner almost that long as well, and we believe that is a very good benefit and it gives us more opportunities and stabilities as well. We do believe that we have an attractive business model. Lotta discussed the strong cash conversion, and there are a lot of recurring revenues as well. And in the business as well, there are diversification, meaning that we are occasion meaning that we are go supporting both customers in the private and the public sector, and we are doing that in different parts of the world as well and different industry segments. So with that summary, I would like to thank you for listening to us and open up for any questions. Thank We have a question from the line of Frederik Nielsen from Redeye. Please go ahead. Hello, it's Vincent from Redeye here. Then the solid margin in PLM, Is that mainly an effect of the restructuring or are there also significant temporary factors? Thank you, Fredrik, for the question. Fredrik, I think you or your question was that The strong solid margins in PLM this quarter, is it long term something that you can count? Or are there any short term effects that we should be aware of? I think most of the fact is that we have been able to lower the cost base in the divisions, and that will that has an effect. And we can but then we can debate whether there are some With regards to the COVID, we are not traveling as much. We are not meeting up. And there are some furloughs still in Germany in the results. But the bulk, so to speak, are, I would say long term. But we have to be aware that let's see how it pans out with what happens when sort of the COVID situation solves, Will we start traveling a little bit more? Will we meet a little bit more? And will that drive cost? Having said that, we can see that we are able to serve our customers in a very good way, working distributed as we are today, and that we will bring with us going forward as well. But there are some furloughs in Germany that will but at the same time, going forward, we will hopefully see that There are a restructuring program that will mitigate that going forward as well. So we haven't seen the full effect of the cost effective program yet. Okay. That's a good answer. Thanks. One more. The margin in design management Seems quite weak considering the relative weakness of the Autodesk related business. Could you elaborate a bit on that? You can always debate on what kind of margin we'll have, but I think it's a good it's a with regards to the drop in the net sales, I think we have been able to mitigate it very well with regards to the cost structure as well. So I think so I wouldn't call it a weak margin. So I think we have actually mitigated it well. What happened is that When you the net sales there's a variable component in the net sales to Autodesk business, and that's the cost of sales to Autodesk. So That is something that we don't have to pay out. So I will call the weak margin. We have tried our best to mitigate going forward. So but as always, it's a matter of opinion. Okay. I see. I see. Sorry, Fred, I missed the question. You said something about the public sector. Yes. I do believe that you're gaining market share. In the public sector? Exactly, exactly, yes. Yes, I would say we are There are no market data available for that. But let's say that I think we are at least not losing any market share. And if any, we are sort of fortifying our position in the public sector markets, I would say. Okay, thanks. That's all for me. Thank you, Fredrik. Thank you. We have one more question from the line of Daniel Torsheim from ABG. Please go ahead. Yes. Hi, thank you very much. I was a few minutes late into the call, so I apologize if you have covered this one. But if I'm right, I look at the acquired Growth in design management, mainly coming from Excitec, obviously. It looks like it contributed with around SEK 100,000,000 in sales in Q4, which is half the level of the reported in Q1. When we go into Q1 2021 now, should we Expect this level of around SEK 100,000,000 meaning that, that has dropped 50% and that will be part of the organic development in design? Or how should we see the seasonality in Exitec here going into Q1? Let's answer that in 2 steps. When we calculate organic growth, we only calculate organic growth 12 months after acquisitions. So that means that if I'm looking at Lotte, it means that when we report organic growth in Q1, Exciting will not be part of that. They will be part of the organic growth in Q2. But going back to the second part of your question, what is the run rate of Exotic as of now, it's probably closer to 100,000,000,000,000 150,000,000. Yes, I see. Okay. But regarding the organic growth, 12 months after acquisition, wasn't it closed end of January So that it should be organic in February March. No, 1st January. 1st January. 1st, I mean, shouldn't that be organic for Q1 then? No, I don't I think as we reported as part of the full Q1. So then we have to So we'll so that will sort of so that means that Q1 is the so and then we go starting from Q2, we will report it as organic growth. Okay. Okay. But and the run rate is It will be part of the organic growth calculation. Yes. Already in Q1, I guess. In Q2. Okay. Entirely in Q2. Okay. And the run rate is more like 100 versus 150,000,000 to 200,000,000 a year ago. At least we don't do any production, but it's closer to 100 and and you can see that in the figures that's the run rate. And just to follow-up that is that we had overall a very strong Q1 for our Autodesk business, I think it was for the whole division, the organic growth was plus 20% in Q1. And As you can see, the run rate that we have right now, we will not be able to deliver that as well. So we will have an effect of the net sales as well in Q1 for the design business. And that goes along with your questions. Yes, absolutely. Yes, I think that was it from me. I heard Fredrik's questions on PLM margin as well. Yes, I stopped there. Thanks. Okay, thank you. And as there are no further questions, I'll hand it back to the speakers for closing remarks. Okay. Thank you for listening to our presentation. And with that, I would like to thank from us here, from me and Lotta. Thank you. So thank you.