Earnings Call: Q1 2020

Apr 29, 2020

Today, I'm pleased to present CEO, Jakob Hallum. Please go ahead with your meeting. Thank you very much, and hello, everybody, to Stipex report for the Q1. I would like to start off to say that we are very happy to present results. It's a strong quarter for the company. And among other things, we are very proud to present a 12% organic profit growth. But we will get back to more around those details. You can move forward to the next page. So my name is Jacob Ball, CEO for the company. And as always, I also have Bengt Leyser with me, our CFO. Move over to next page, number 3. So just the updated basic facts around Stipek. We are an infrastructure technology group with 32 business units across Europe. Our largest markets main markets are Sweden and the U. K. And the last 12 months have been updated as of this quarter and approximately SEK 1,900,000,000 in net sales. Our profit margin, operating profit margin is still growing currently in last 12 months at 14.9%. And then if we look at our growth, the profit growth is, of course, most important. And over the past 12 months, we've grown those profits at 44%. Moving forward to the next page, number 4. The agenda today, the first two points around the infrastructure challenge and business areas is just a brief introduction of StifTech. The 3rd point, market situation. We will dig in a little bit deeper into the situation around the COVID-nineteen pandemic and what the effects are on Stipek as a company and then sum up as always with current trading and the Q1 results. Moving forward to the next page, number 5. So this is the normal introduction we always do. It's an important page. Societies across the world have a very important task to take care and develop infrastructures, and we are part of this mission, if you say so. So it's something that is important to us, but it's also business opportunity, the challenge as such. The infrastructure is aging. There's a need to rebuild it, to repair it, to modernize it. Consumption of water, electricity, traffic volumes continue to grow, so the capacity requirements also need to be developed and expanded. In the urban areas, the concentration of population and economy, of course, increases shortage and strain, but it also creates more challenging situations and also adds upon the demand and future growth. And the first three points, they are all around the volume demand and will provide a growth over foreseeable future within the infrastructure sector. The 4th point is very much around the technology research development that is required to always improve infrastructure to increasing standards, stricter regulations and development as such. And this calls for that a lot of the development is suited to be done in specialized and niche businesses. And this is really the market for styptic. So this is the overall infrastructure challenge and the long term market situation for our company. So moving forward to the next page, 6. So our strategic position is, of course, we are focused on products and services to critical needs in the infrastructure sector. This is our focus. Our business model is similar to companies like Indotrade, Adtech, LogiKans, where we acquire and develop small and medium sized companies. We differ from these companies from a few things and one thing is, of course, our industry focus on infrastructure. And the 4th point is important. We have a decentralized structure so that the business oriented decisions around proposals, customers, employees and so on are made at a decentralized level. This means that we can always be very highly adapted to changing market situations as, for instance, we are experiencing now during the corona pandemic. Okay. So moving forward to next page, 7, and then also to our business areas on Page 8. Our business areas, we have 3 business areas: Water and Energy. Water and Energy, we provide products and services for wastewater treatment, freshwater purification, also products and services to the growing power grids and distribution systems, but also technologies closer to the power consumptions, for instance, automation. Special Infrastructure Solutions, a couple of sub segments there, important products and services for indoor climate, heating ventilation and energy efficiency, very important. We also provide solutions for public safety, but also a very, very important product to protect against cyber threats in mobile communication. Transportation technologies are highly important to develop the transportation infrastructure. And there we, for instance, we have a product for traffic monitoring. Property technical services, this was our first business area. Technical services property owners, elevators is the largest subsegment there, but we also provide services within shelf completion and roof maintenance. And the first two business areas are our largest, if we focus on the profit levels, which is always the most important. These business areas also are most profitable based on highly specialized products and services that have strong market positions with less competition and an ability to also price our products at a higher level. That's the reason behind the higher profit margins there. Our 3rd business area, we have a profitability focus. We see over the past quarters that the levels in terms of revenue and EBITDA margin, they are stable. But we continue to focus on the areas important to us. And as I said, we focus there on profitability, whereas on the first two business areas, we focus we do our acquisitions in water and energy and especially infrastructure solutions. Okay. Moving forward to Page 9. We dig into the market situation and move forward to Page 10. Okay. So we would like to be as transparent as we can around the corona pandemic, and I will walk you through 2 slides related to that. To start off, we could say that the Q1, it was stable for us. On the demand side, still stable. We did some early actions in the beginning of the quarter to build inventory in late January, early February. It has served us well. We've also experienced some increased sales in some areas. For instance, the encrypted communication solution that we have has seen some increased sales due to more remote working. Our water treatment product company in Wales deals with chemicals, and they have been able to produce infectants to the U. K. Market and we've seen some substantial increase in sales there. But also cooling solutions for grocery stores has been very important due to the higher volumes in those stores. So we've also seen some expanded sales during the Q1 related to cooling there. And the effect on our in the Q1, but this is also related to this current situation, is very much around delays. So the demand for our products and services are stable. We must remember that the products that we have towards water treatment, power, transportation systems, safety and security and so on, but also elevators are things that always need to work. So the demand is solid as we speak. But of course, we have field workers that are that need to be able to get to their working sites and the restrictions in society towards mobility and social distancing, in some cases, prevents us to be able to deliver. And this causes delays. However, it builds up a backlog as well, and we are preparing to deliver on that backlog that is that to some extent is being built up. Right now, the situation is very much as I described. We have since March monitored our all our business units in a specific way. We have introduced new KPIs to monitor the development specifically related to the corona pandemic. One of them is a delivery KPI. The delivery KPI measures the percentage of the planned orders that how much of our planned orders are we actually able to deliver. And the overall KPI right now for the group of companies, we are at 85% this week. In Sweden, the number is just over 90% in U. It has improved over the past 2 weeks in those smart markets. And in Norway, it's actually at 100%. And then if we look further ahead, we are preparing to deliver and catch up on the backlog of delayed work because there is a fundamental need for improved infrastructure. So we are really very cautious about our production capacity and preparing to be able to scale up so that we can deliver upon the backlog. And we do have a flexible organization model. Our decentralized model is very important. All our business units, they are in different situations, different countries, different restrictions, but also local market effects. So each business unit is able to act swiftly on the specifics of that business unit. So that we can really do precise actions that are very effective, but they are not generic actions across the entire group of companies because this is important. They are precise and the actions do not hurt us in the long run. And based on our knowledge of the current situation, where we also see that the restrictions are being eased going forward. We have a good first quarter. Our effects we do have effects, but the most they are more characterized by delays. We see no reason really to revise our growth targets for our organic profit growth target for 2020. So this is also an important message. But of course, I must also say that this is the current situation. It's impossible for us to predict when politicians might change restrictions, if in which case they will ease them or if they might later in the year increase the restrictions. We do not know this, but we want to be very transparent about our current situation and current status. So moving forward to the next page, number 11. We want to develop the situation in our different markets. The restrictions, they are implemented on a national basis. So of course, we see our effects not so much around our business areas, but rather around our geographics. And our sales distribution, half of our sales are in Sweden, 28% in U. K. And then we have 4 smaller markets, Germany, Austria and Norway, each at 4% of our sales. So we would like to share a little bit more on what is going on in those markets specifically related to styktek. Starting off with Sweden. We have a delivery KPI just over 90%. And the impact is small in Sweden. The restrictions have been easier in Sweden as opposed to other markets. So the impact is also smaller. We have a slightly higher sickness absence in some of our units. Sickness as such or staying home because of sickness or taking care of children, so on has not been a big problem to us anywhere really, but to some extent, it is affecting us. We do have some partial delays due to some extraordinary circumstances. For instance, it's difficult for us to come to hospitals and do the service on our equipment there. Hospitals, they are focused on really treating the pandemic. So it's quite understandable that those type of works, they are delayed and postponed. Another example is the project Ruslakspalnam, which is also delayed. We have some important piece of work to do there. It will be picked up. But currently, during the virus, the politicians are prioritized to keep the Rufslacks Balmain open. So they have delayed that project. So that's one just two examples of the delays that we see in Sweden, but a good state, just over 90%. Moving over to the U. K, which is probably the most difficult market for us. The underlying demand is very stable, but the restrictions are stronger there compared to Sweden. We do have some short term leave of staff. It's called furlough in the U. K. So about approximately 100 people on furlough. That number has come down from approximately 130. So it's a positive sign. This week, we do see small steps that we can scale up in line with that politicians are easing restrictions for prioritizing workers. And we are very happy to see that our British companies, they are among the prioritized workers. So this is also typically an effect of that we are focusing on infrastructure. Okay. But when opening up, it's still an uncertainty how to do this. There are still rules of distancing, new ways of working needs to be implemented on working sites and so on. So there's still some complications, and we are at 70% of our expected delivery in the U. K. Currently. Moving over to Germany and Austria. We have actually recalled all our staff that have been away on short term leave after that the restrictions have been released in especially Austria, but also to some extent in Germany. But we do see in both markets some partial delays due to some uncertainty in the market. For instance, when working still complicated to some extent to comply with some specific rules. And some customers are reluctant to do this because they really need to be sure to do it in the right way. But gradually, gradually, things are opening up for us, and we are at a delivery percentage of 85% in Germany and Austria. And then moving over to Norway. We have a full delivery there, and it's really one company that there, and it's predominantly customers within water treatment. And those that type of delivery has been unaffected really throughout the entire pandemic. So it's very, very positive for us. So all in all, we are approximately delivering at 85% of our planned orders. And this is really, I would like to state it once again, this is the current situation this week. We do expect, although, a gradual catch up of our backlog. It's impossible to predict the details about this, when it will happen and to what extent, but we are confident about the long term outlook. With that said, I move forward to Page 12 and then Page 13, and I hand over to Bengt to walk us through the Q1 and current trading. Thank you, Jacob. Yes, on this Slide 13, we can see our financial development since 2016 and especially the last four quarters where you can see the sales numbers and also our EBITDA star profit on a last 12 month basis for each quarter. And as you can see, it's a very steady growth. We have had around 20% growth during the last 12 months for a number of quarters now in a row. And this for this quarter, it was 19%. Of those, that were 1% that was organic growth. So the other ones was from acquisitions. And the profit growth has been 44% during this last 12 months. And the profit growth, well, as I mentioned, the 1% sales growth was over the last quarter. And for this last quarter, we had 12% of profit growth for the quarter stand alone. So it's very stable profit growth and sales growth. And since the profit growth is higher than the sales growth, we then, of course, see an increased margin, which has been growing and increasing steadily throughout the years and is now almost 15% EBITA margin. If we then go to next slide, number 14, we see a summary of some KPIs. We talked about the net sales and a big plus star. And the net sales was 15% up in the quarter, of which 1% was organic and the EBITA star was 37%, up of which organic was 12%. So a little bit lower than the last 12 months, but still a very good and high pace, we believe. Looking at the margins. We're right now for the quarter at 14.6 percent, a little bit lower than the last 12 months, but it's still stable around those numbers. And we will come back to where they come from those margins from the different business areas. Looking at the earnings per share, that's the profit then after taxes and also after dilution and the deduction of dividends to preference shareholders. We see a very big improvement from last year. But if you may remember that last year, we had some major acquisition costs, which resulted during the quarter. We have changed our way of working, and now we don't use so much external resources for acquisition work. We have our internal resources instead and they cost less, they are more efficient and they then are shown in the costs for our central units. That means also that more of the EBITA star results go all the way down to the earnings per share. So that's one explanation to this very big leap from about NOK 50 to NOK 1.60 in earnings per share during the quarter. And for the last 12 months, we're almost at SEK6 per share. Looking at the cash flow. We were at the same level during quarter 1 as last year, even though we had a higher turnover and profit, and that's because we were building up some inventories, as Jokuls was mentioning, during the January, February, if we would have problems with the delivery of supplies from some markets like Italy and China. But it has proven that didn't become a very big problem. So now we have inventories that we are delivering and using up, and delivering from, which is good. But we also, because of the increased sales, we also then, of course, got some buildup of account receivables and so on. So overall, the cash conversion as a percentage was our result was 72%. Last year, we were all the way up to 110. Percent. But on average, for the last 12 months, we are on about 100% to 104% cash conversion still. Looking at our debt, we have 2 measurements. We have 2 KPIs, 1 for the actual bank debt that we owe to the financial institutions and we have for our total net debt where we also include our debt related to so called conditional or contingent considerations or acquisitions. So example now for this last quarter when we paid out some contingent considerations, that debt was, of course, the total debt was reduced because we were paying off those considerations, but at the same time, we borrowed more money from the bank. So all in all, the debt level was the same even though the bank debt actually then increased because of paying out that debt. At the moment, about a little bit less than half of our net debt is related to these conditional considerations. So we are happy with this debt level. It's according to plan, so that's under control. If we then turn to next slide, number 16, we will then have a look at each business area and then starting off with water and energy. We had a small sales increase, about 4%, but the organic increase was actually decreasing 3% because we had some effects primarily in the U. K. For this business area, where the parts of the staff have difficulties getting to their workplace. But if we look on the left hand side of this slide on the chart, you can see that we had a slowly but securely increase in turnover and also the margins are stepping up on the last 12 month basis. And in the table below this chart, you can see the actual number for the quarter and the last 12 months. And we have an EBITDA margin of almost 19% during the quarter, which is a little bit less than the last 12 months, but the Q1 is typically not the best quarter for this business area. So we are actually quite satisfied with increasing the margins compared to last year. Looking on the right side of the slide, you have some bullet points. And I mentioned the first ones with some effects from the COVID pandemic. And we could see the EBITDA increased with 13%. That was mainly from or that was from acquired companies. The organic was flat. But as Jacob mentioned, we had some businesses that was actually increasing their profits during this quarter, for example, the water treatment and disinfectants manufacturing and selling. We have earlier guided about the profit margin of our business areas. Of course, right now, in the current situation, it's a bit difficult, but we believe that the situation will normalize sooner or later. And we then still believe and guide that our margin for this business area will be somewhere between 17% 20% on a full year basis, and that's also where we are right now. We didn't make any acquisitions during the last 12 months for this business area. The last one we did in February 2019. So that's been older or something. And then total number is 13. Let's go to the next business area on Slide 16. It's the Special Infrastructure Solutions. And looking at the left hand side of the slide, you see the chart where the you can see a very steep actual increase in sales during the last quarters. But as you know, we acquired 2 companies during the last 12 months and one a little bit smaller, the Cryptify, which deals with a secure mobile communication that Jakob also mentioned has been an increased sales right now. And also the order site investigations that work with maintenance and repairing of different kind of damages to water and sewage pipes to properties. The margin is increasing because these acquired companies have had higher margins than the average before they were acquired. So it's now, on the last 12 month basis, almost 24%. And during the quarter, as you can see in the table below the chart, it was 26.3%, which is quite extraordinary. But we had some businesses that had historically higher profit margins during this quarter due to some due to very scalable business model. And we could also see some of the units had some one off orders, which they delivered upon during this quarter. So that contributed to the strong growth. As you can see on the bullet points to the right side, we had a growth of 65 percent, which organic was 18%. Looking at the profit, the profit increased with 111% of and organic was 49% of that. So that was, of course, quite exceptionally. We will have, of course, some effects from the pandemic of the U. K. Based primarily the U. K. Based units within this business area. But they are dealing with this in different ways. For example, one company selling camera surveillance equipment. They are redirecting their resources and activities from areas where there are restrictions, for example, construction sites into non restricted areas, as for example, railway stations where they can still continue their work. That's an example of how each company each unit deals with a very specific situation in this pandemic. So but we will then probably see some effects during the near future as well. And also with the guidance for the other business area, it's, of course, hard to tell. But in the normalized situation, we still think this will be between 20% to 22% profit margin on the EBITDA margin on a full year basis. Turning to the last business area on Slide 17. We have the property technical services that are mainly elevator service, the modernization business and the shell completion, but also some roof security and the maintenance business. Looking at the chart, I think Jacob mentioned earlier that this business area has been quite flat for a long time now in turnover. We have shifted turnover from not so profitable customers to more profitable customers, but also have had some effects on the from the demand side. So as you see, the margins are more or less the same as the turnover also are more or less the same throughout these last couple of years. And looking at the table below the chart, you see that the EBITDA actually decreased from 40% this quarter compared to last year. And the EBITA margin was only a little bit above 3%. We haven't done any acquisition in this business area for a couple of years, so it's all organic, these developments. And the sales decreased actually then 3 5%, sorry. That's mainly due to the impact then from the restrictions that Jacob mentioned. And that also then, of course, goes with the results since these are quite staff intensive business. And if they can't do their work, it, of course, hits the profit. It's now a mainly delayed project, so we expect the business volumes to come back. And as Jochen mentioned already, we work on the backlog to be prepared to deliver on that as soon as we can. We don't think there will happen any big leaps in either direction here. So in a normalized situation, we think the EBITDA margin will still be around 8% to 10% as it has been for quite some time. Right, we can turn to Slide 18, which is then acquisitions. And as mentioned, we haven't done any acquisitions during this year. We did 4 acquisitions last year, but we still have a target that's unchanged when it comes to how much profit we should acquire per year. We acquired NOK 93,000,000 EBITDA last year. So of course, we have some to catch up here, but it's always hard to tell and foresee the timing when the actual acquisitions are closed. We have a good pipeline, a strong pipeline. We are selective on in our review on what company to acquire. A number of requirements on each prospect. So but we have a strong pipeline, so it's not any problems with that. And as I mentioned, we have a very good internal team working with this pipeline and going through the different steps in our acquisition process. The demand and these companies were looked at, it's infrastructure companies, so the demand for those services that they deliver are strong as for our own group of existing companies. We've been in a recession. So it's we don't have to wait with acquisitions just because of the current situation. So we're working with the activities as usual. And we have a strong financial position with a good cash flow, and we also have solid and good credit facilities still to use. So we don't see any problems with that either. Right. And then turning to Slide 19. It's really the same as we started off with. So Jakob and I now hand over for questions. Thank Our first question comes from the line of Frederic Nielsen from Redeye. Please go ahead. Good morning. It is Ignis San Fran from Redeye here. Is the 85% delivery rate figures representative for April SO? Okay. Jacob here, I can answer that. You should view this as the current situation. So but of course, you could also see that the effects of the pandemic were slightly higher, let's say, in the beginning of the quarter sorry, the beginning of the month. But then now as restrictions are being eased up, we have a positive trend. So I think I would answer it in that way, and then you will have to make your own interpretation of that. Okay. I think that's a reasonable answer. So far, movement restrictions seems to be the main issue. But at most, is there any decline in demand in any of the segments or geographies due to the corona crisis? We have on a general basis, we have we don't see a decrease in demand. So in that sense, the demand is stable. Then and then, of course, we have perhaps a few units where demand might decrease, but it's more an exception from the rule and it's not significant either. But I could give you one example is, of course, Stockholm radio that provide radio communication to commercial air flights. There we have a lot of subscriptions, which, of course, provide a solid underlying revenue flow. But the traffic has, of course, gone down due to that there are less aircrafts in the air. But that's a small company in the group, so it's not really significant. In on a general basis, the demand is solid. Okay. Could you give us some information about the performance in property technical services outside of the DACH area? Yes. It's really, I think, you can have a look if you have a look at the KPIs that we provided for the different geographies, in Sweden, it's just over 90%, and it's more or less representative for all of our businesses in Sweden. Okay. One last question. Has the corona crisis affected your M and A discussions in any way? No. As Ben said, our targets that we look upon, their products and services of those companies, they are more or less unaffected by recession. So we are still active around that. But then, of course, when we look at companies, it's a positive thing that we finally are in something that more looks like a recession because this is an opportunity for a company like Stiktec, where we are quite resilient towards water recessions. And when we look at acquisition targets, then finally, we could actually see what are the effects from recession. So that's actually clarifying to us. So it's a way for us to get fact based answers. Okay. One follow-up. What about the actual discussions? I mean, due to the movement restrictions, there could possibly be some delays and problems related to that part of an acquisition? Yes. And of course, we dig into those questions. But we have 32 business units in different markets, different characteristics. So we are quite we have good visibility on what type of effects it has on infrastructures related companies. So I think we are well suited to take those kind of discussions, and we really understand the situation of those target acquisitions. That's all for me. Thanks. And the next question comes from the line of Johan Hultner from Interfunder. Please go ahead. Hello. I'd like to start off with some margin questions. If you look at Water and Energy, organic growth down some 3%, but your margins are up. Could you say something more about what's behind the increase? Is it just acquisitions coming in with higher margins? Or have you got costs? Or initiated price hikes? Or something else? Yes. Well, I can answer that. It's well, as you say, it's also from the acquired companies that has been rolling in. It's actually 1 then from last year, water treatment products have good margins, and they have actually had very good margins this quarter since, as I mentioned, they have increased part of their business and their profits. And so it's not one single effect from 1 single company really, but it's an increase to some of the units actually, yes. But you still have negative organic growth. How has the margins developed in those units where organic growth is down? Have margins declined there? Or have you been able to defend them anyway? No, we have been able to defend them. As you see, the sales was down a couple of percent, but the profit was flat. So the like for like companies have been able to increase their profits a little bit in margin wise. Has that been through some layoffs or any cost cuts that might affect growth potential going forward? No. I cannot say whether it's any special, but it's that's always hard work in the companies to improve their profitability. It's not any single type of activity that has caused us. Okay. I think the main effect is from the acquired company water treatment products, which have a higher profit margin than the average that was rolling in fully now. Oscar could also mention there that we have, of course, used the opportunity from the governments in terms of short term leads. And in U. K, it's called furloughs. So where we have people that are not able to deliver, they have been on furlough in U. K, for instance. And that, of course, brings down our costs for those specific units. So to some extent, the offers from the governments, if you say so, enables us to have a more flexible cost structure as well. Okay. Got it. And then the exact same question, but for Specialty Infrastructure. But here, you had 18% organic growth. So I guess some of the improvement is operational leverage here. Exactly. The business models are in a number of companies such that increased sales then goes to very high, say, margin. That keeps the profit very good. So that's and as we said, I bring some one off orders in some companies that was very specific to this quarter that made this margin even higher. So this is an exceptionally high margin level of 26% in the quarter. Okay. And then the third area, I would assume that the decline here, given that you come from a low level organic growth, hits pretty hard probably. And you mentioned also fixed costs in staff. So is this decline just an effect of the negative organic growth? Or is there something else here as well? No. It's from the effects from the pandemic that we cannot get the people out of work. So is a delay of deliveries here. Great. Got it. And then a more general question. If you look at your whole group, how much of your business is working from an order book that might be, I don't know, 6 to 8 weeks? And how much of the business is I don't know the good English word for it, but I'm just calling off the goods from the shelf, so to speak, with very short lead times. Can't give you any exact numbers of that, but we have very little of off the shelves selling, so to say, typically. So we have some of that type of business, especially in the chemicals or water treatment, for example. That's an off the shelf business typically where customers call in every day and want deliveries of these treatment products. But otherwise, typically, it's not that kind of business. And then it differs from a couple of days a week delivery time to up to many months in the longer projects. So I can't I'm sorry, I cannot give you a really good indication on that. Okay. The 20% of our business is mainly service related, but you service different types of whether it's products or the links or what kind of maintenance you are doing. Has that business been more effective now from the lockdowns than your quarter business? Yes. The restrictions on movement mobility, as you say, that, of course, affects the possibility for our technicians and maintenance people to do their work. But our companies, our units are working to get around that as good as possible. So it's not all lockdown, but it's affected. Okay, great. Thank you very much. As there are no further questions, I will hand it back to the speakers. Okay. Well, then we thank you, everybody, for your attention, and we will get back to a similar call in 3 months from now. Okay. Thank you, everybody. Bye bye. This now concludes our conference call. Thank you all for attending. You may now disconnect your line.