Earnings Call: Q4 2019

Feb 11, 2020

Hello, everyone, and welcome to the StigTech Q4 Report 2019. Today, I am pleased to present CEO, Jacob Holm and CFO, Bengt Leitstrand. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. I will now hand you over to Jacob Holm. Please go ahead. Thank you very much. Hello, and welcome, everybody, to Stipex Year End Report 2019. So to start off with, we would like to just we're very happy to present a strong report summing up the numbers for 2019 and our business. And we are really improving on many KPIs. And a few of them, I would like to start off by also mentioning, we'll come back to them, but our operating profit growth has been 48% over 2019, of which 8% was organic and 39% driven by acquisitions. We've also improved our operating profit margin significantly from 11.8% up to 14.4% at the year end. So we're very happy about that. Our cash flow generation is above 100%, very positive. And also, we're very happy to say that our earnings per share grew 88% over the year. So we're very happy to present this report. With that said, we can move on to the next page. And as always, I have Bengt Gleidstrom, our CFO, with me on this presentation. And Bengt Gleidstrom has been with us since 2018, as you all know. We move forward to Page number 3. Brief introduction about some data points on Stixteq. We are an infrastructure technology group. Our business is decentralized in 32 business units. And the fresh numbers that we are able to present today, our net sales at approximately SEK 1,800,000,000 Our profit margin, EBITDA star, has been rising steadily throughout the year. And as I said, it's over the past 12 months at 14.4%, very important to us. And our growth in EBITDA, we've already mentioned that, but we're very happy to present that number as well, 48% up. And we will come back to the more details in numbers lately when the bank will take you through that. We can move to the next Page 4. The brief agenda today, I would just start off by talking about the infrastructure challenge. Why is this important? It's important to us because it really drives the growth in our business segments, market segments. One slide on our business areas and then over to current trading piece of the presentation. Move to the next Slide number 5, please. So the drivers behind the infrastructure challenge is they are worth mentioning and repeating. One important aspect is that the infrastructure surrounding us is aging and there is a need to rebuild it. The capacity requirements continue to grow, Consumption of water, energy, transportation volumes and so on continue to grow. In the urban areas, the strain increases. So all in all, there's a growing investment gap, which really drives the solid underlying growth in our market segments. Finally, I always want to also mention that the human drive for increased sustainability, efficiency, Safety is really also imperative to the characteristics of our markets. This drives stricter regulations. And just to mention 2 examples, one thing from Stiftech, one thing is that we are working hard to upgrade cooling systems to meet lower emissions and reduce global warming potential. So that's one example. Another example is our power quality monitoring systems, where there's an increasing demand for those because they are an important enabler to shift to more renewable sources of energy. So with that said, we can move on to next Page, number 6. And here we present 3 examples of the infrastructure challenges. We start off by the left one. 23% of the freshwater networks, there's a loss in distribution by because of leaking pipes. The second example in the middle is a positive data point indicating the reduction of car crashes after speed camera installation, about 20% reduction there. And the third example on the right hand side is related to an increasing cyber threat that is moving into our mobile cell phones. And we have companies that are addressing these challenges and opportunities. If we start off on the left hand side with AUGR, whose clients are in the insurance industry. So AUGR's core business is to fix leaking pipes and wastewater systems. And the driver in that market is really a slow, steady, but inevitable growth due to aging infrastructures. Red Speed International develops traffic monitoring and safety systems, and the driver there for growth is really the increased regulations for safer traffic and transportation. Cryptify, the 3rd example, delivers software for encrypted mobile communication. And the driver there for the underlying growth is really the increasing cyber threat that, as I said, is moving into our cell phones. And Crypify has a great solution to ensure encrypted mobile communication. We move forward to Page 8, it says 9 actually on the slide here, but next page. Since we have we are focusing in UK as a growth market for us, we think it's important also to share our views on how Brexit is expected to impact Striptech, and the impact is expected to be small and definitely manageable from our point of view. Starting off with the export to UK, which is the normal concern with regards to Brexit. Our exporting companies, they have low share of revenue of export to UK. So we don't expect any significant impact there at all. Then we have our UK based companies. They do purchases from outside U. K. However, we have built up our inventories. Once again, we've done it a couple of times. We've also done it this time. So we've built up our inventories just to ensure that we have a buffer in case there would be some disturbances at the border customers. We've also redirected our routes. So instead of having shipping go through the European mainland and Rotterdam, We are redirecting the routes directly to the U. K. Just to avoid the potential problems. So we are comfortably prepared for any negative Brexit impacts. On the other hand, we, in the future, expect some positive impact due to increased infrastructure investments by the U. K. Government, but we'll see more about that in the future. With that said, we move forward to the next page, Number 8. Sorry, Bengt helped me. I have some problems with my Page number. It's actually Page number 8. We move forward then also to Page 9 about our business areas. And I will just briefly mention what I think is most important at this stage in the presentation. Our 2 leftmost business areas, Water and Energy, Special Infrastructure Solutions, these are our 2 largest business areas. If we look at the profit levels, which is, of course, the most important KPI in terms of value, These are our growth areas in terms of which areas we do acquisitions. And both of the areas have delivered a strong organic growth in 2019 and also in the Q4. As a result, we've seen profitability improvements due to that. And we've also had acquisitions with profit levels above our average level in the business areas. So we have a positive trend with growing margins, and we actually ended up above our expectations, which we didn't expect actually, but Q4 was above our targets. But Benk will come back more to that. Our 3rd business area, Property and Technical Services, which is our smallest business area in terms of profits. We've had a clear profitability focus there since 2017, and we are very happy to announce that the Elevator business, which we've had challenges in terms of profitability throughout 2017 2018, our profitability improvement program that we started to launch in late 2017 has really paid off. And 2019, we've really been reaping the benefits and effect of that program. And the profit levels in this business area or actually in the elevator business, to be specific, the profit levels in 2019 are significantly above the profit levels of 2016, which was the year before we listed our B share. So we're very happy to say that the results are very good there. With that said, I move on to Page number 10, which is the final page for me before I hand over to Bengt. Just to sum up our acquisitions over the year, we did 4 acquisitions, I think, that all of you know. Our target for acquisitions is to acquire totaling SEK 90,000,000 EBITDA per year, and we ended up more or less spot on that target. And we that target continues for 2020 as well. And I think you should all expect acquisitions. They don't come as steady as you would like and expect. But the acquisitions, we do acquisitions when we see that we have a good business opportunity. And with that said, the acquisitions can occur infrequently. But our targets, we are very comfortable with and it still remains. With that said, we move on to Page number 7. 11, and I hand over to Bengt. Yes. And I will guide you through a little bit more of the numbers for the current trading. So we can turn to Page number 12 of them. Here you can see the development of our group sales and our profit, our EBITDA star, our profit measured excluding the effects from adjustments in the balance sheet relating to acquisitions. So this is the true profit from our operations. As you see, we have increased our sales very steadily through 2019 quarter by quarter. I think it's actually around 22% every quarter year on year more or less. And so we ended up 22% eventually for the full year. Of that, it was only a little bit above 0 in the organic. And excluding currency effects, it was actually a little bit below 0%, the organic growth. But that's because of what's just Jacob mentioned about the Property technical services program for profitability. The other 2 business areas have had positive organic sales growth throughout the year. Looking at the profit, you see that the profit has increased even further, 48%. And of that, through the year, we have an organic profit growth of 8%, as mentioned, and that has been mainly done in the 2 business areas, Water and Energy and Special Infrastructure, but also Property Technical Services had a positive growth in the last quarter. And as the profit growth has been higher than the sales growth, we have had an increase in our operating margin. So it's now at 14.4%. If we look to the right in the picture, we see the distribution of our sales. That is where our customers are. Infrastructure business is typically quite local or regional, so most of our companies do not have any major exports. Of course, there are some exemptions, but the distribution of sales are more or less related to where we have our companies. And you will see that number increase a little bit further than And you will see that number increase a little bit further the next two quarters since we have the order acquisitions, which we made in August, and that one will be rolling in with our customer base in the near future. Apart from Sweden and UK, we also have turnover in Europe, mainly Germany, Austria and also Norway. And then we have spread of different countries in our export business. If we turn to the next Slide number 13. We have some quarterly highlights. I said that the sales growth was good. It was actually a little bit beyond our expectations since we had a pretty strong end of 2018, but we increased sales altogether with the quarter as well as for the full year with 22%. And we had good performance throughout the organization, especially positive to see that Property Technical Services had a growth organically of 5%, which we think completes and concludes the action program within the elevator operations. Looking at the profits. We had also a very strong organic profit growth in the quarter, 25 percent 21%, if we look in fixed currencies and in total, an increase of 48% of EBITDA star. The margin was actually up to 16%, but the quarter 4 is typically a strong quarter for StipeTech. So as you can see last year, it was also 14%. Looking at the cash flow, we have had a good performance throughout the year, and we ended also the quarter strong with above 100%, which is our goal to have a positive cash generation. Perhaps that will cannot go on forever, but at least for now, and that's our goal. And we actually had a cash generation of 128% during the quarter, mainly for having the accounts receivables coming in, and we also had some positive cash flow from taxes, getting a tax, so to say, repayment. Could add to this picture, which is not in the text, is that the central cost for quarter 4 was a little bit higher than it usually is. We have had some extra costs for some projects and also with audit activities. And but we also have increased our staff at the headquarters, building up our internal acquisition team for margins and acquisitions. And that team is now in place. And the costs for that team is perhaps also rolling in a few more quarters since staff has been joining during the 2019. So you will see a little bit higher level of central cost, perhaps not in the range of SEK 10,000,000 because that was a little bit extra during this quarter. But on the other hand, we do not have external acquisition costs as high as previously since we don't have that external team any longer. Looking at the outlook, it's still positive. As Jacob had mentioned, the infrastructure segment has a very strong underlying long term demand with a lot of investments needed. So we don't see any real signs of a downturn in the near future. So the coming quarters, we have an unchanged positive view. Let's turn to next slide. That's a little bit more details about Water and Energy. As I said, they had a strong growth in sales in the quarter and also had some acquisitions then compared to last year. And as you can see in the diagram on the left, have had a steadily increase both in the sales and in the margin levels. And the profit for the business area, water and energy, increased with 33% in the quarter, of which 4% was organic. The EBITA margin continued to increase and was nearly 23%. We have made a revisit of the guidance we make on the margins since now we have had a number of acquisitions rolling in through the year. So we have increased the guidance for this business area from the 2016 to 2018, which we had during 2019 to be 17% to 20% for the full year 2020. The spread in the margin there is more related to that our companies or our companies' customers have business, which is a bit project related. So the order intake can be varying between quarter by quarter. So it could vary a little bit, the margin quarter to quarter. But all in all, between 17 to 20, we expect for the full year. And right now, we are 13 units. And the water treatment products, which was acquired last year, will then have been joining us for full year from now in February. If we turn to next slide, we have the Special Infrastructure Solutions. Also there, we see a continued strong growth in sales, was 49% in Q4, 6% of which was organic. We have made 3 acquisitions to this business area throughout the year. So that also, of course, explained very strong growth in sales. The margins, however, have been quite steady, between 21% 22% throughout the year. And so we have also then increased our guidance for this business area to 20 20 to 2022 for the full year of 2020. It was 18 to 20 last year. So due to the acquisitions, we have increased that guidance a little bit. We had good profit growth, not the least from our acquisitions, but also very strong organic profit growth in the quarter in total 20% and a very strong margin then concluded the year. But as I said, the quarter 4 is typically a little bit stronger margin wise than the other quarters. All right. So let's take next Slide 16, which is our 3rd and last business area. The Property Technical Services. Jacob has mentioned that the elevator program and the profitability program for the elevator operations have concluded with very positive effects. Now also the sales have been coming back and we had a 5% organic increase during the quarter. So and that, of course, is very nice to see. The margin levels have been quite steady around 7.5% to 8.5% throughout the year, and that's also our guidance. It's a little bit higher. It's 8% to 10%, which is has been for the full year of 2019. We haven't really been in the upper part of that due to that our business with shell completion has had a bit lower activity during 2019, but we expect that one to have a better performance during 2020. So the margin should be in that area between 8% to 10%, Greg. We had a very strong organic profit growth in the quarter, mainly due then to the elevator business. It was 72%, making the profit to SEK 16,000,000. Right now, we are 9 business units, which is the same as 2019 2018. We haven't done any acquisitions there for the last 2 more than 2 years. So and that is also our ambition not to make any further acquisitions within this area. So with that, I hand over back to Jacob. Thank you, Bengt. Well, I think we it's time to open up for questions while we have this final slide. Thank you. Our first question comes from the line of Fredrik Knilsen from Redeye. Please go ahead. Your line is now open. Hello. Seveldik Hindsgaard from Redeye here. Nice report. One question regarding the increased guidance. You claimed that the recent acquisitions, however, your last acquisition was made in August. Why do you raise the guidance at this point? And do you see an underlying improvement in margins as well? Well, yes, it's true that our acquisitions were made during the first half of twenty nineteen. But of course, we want to see that they are coming into the group as we expect. So we don't change guidance from 1 quarter to the other. It could be a little bit volatile then depending on our acquired companies. So we prefer to let's see how it develops and perhaps change the guidance once a year. So but as you say, it's also not only because of acquisitions. We have had some good development in other companies as well. I think, Frederik, is we had tough comparable numbers in especially Q4, especially for Water and Energy. And it was actually above our expectations that we managed to meet those comparable numbers. So the end result was above our expectations and above our guidance as well. Okay. Thanks. One more question, if I may. The organic growth in both Water and Energy and Infrastructure Solutions was strong in the beginning of last year. Would it be too aggressive to assume an organic growth in line with your target for the beginning of this year? As we said, our target is regarding profit, and we have a target of 5% to 10% organic profit growth, which is still our target. So of course, it could be up and down through the quarters, but that's our long term target. So we intend to try to reach that, of course. Okay. One last question for me. The margin in Property Technical Services decreased relative to Q2 and Q3 despite good growth. Is that mainly because of seasonality? Well, perhaps two things. You have the seasonality that the Q3 is typically very strong for this business area since some of their business is not so hectic during the winter months in the building sector. But it's also because of this shell completion business that didn't meet the expectations during the Q4 really, but we think that is will be better situation now for 2020. So it's a little bit lower than we expected. Okay, thanks. That's all for me. Thank you. Our next question comes from the line of Robert Reddin from Carnegie. Something on acquisitions. I mean, you clearly state that €90,000,000 is still your target and the acquisitions can go. But could you say something about the pipeline now going into 2020, maybe comparing to what it was like going into 2019, say? And secondly, on multiples paid, are they still around the 6x level you've been in the past when you sum up 2019? Okay. Well, as you know, we closed a number of acquisitions starting off 2019. So at that stage, we had a pipeline that was where our cases were in a final stage. So at that from that point of view, it was a very strong pipeline, but that was it was stronger than normal. And it goes up and down, as I said. And on an overall basis, our pipeline is equally strong as it always has been if we have a look at all the stages in our acquisition process. We have a good number of candidates. We are working on them in a very structured fashion, And we are very comfortable to reach our target for the year. The pipeline right now is not at the same level as it was last year. But as I said, it goes up and down. And on a long term basis, it is steady. And when it comes to multiples, it has been throughout the year 2019 on the level between 6x to 6.5x operating profit EBIT. Perfect. Thanks. There's no questions. Thanks. Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for any final comments. Please go ahead. Well, thank you everyone for listening. And we say thank you for this time. And we will meet up again in 3 months from now. Thank you, everyone. And this now concludes today's call. Thank you all for attending. You may now disconnect your lines.