Earnings Call: Q3 2019

Oct 25, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Stipeq Quarter 3 Report of 2019 Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand conference over to your first speaker today, Mr. Jacob Holm. Thank you, sir. Please go ahead. Hello. Thank you very much. Hello, everybody, and welcome to our presentation of the Q3 report. And together with me, I have our CFO, Bengt Lejstrom, as always. And to start with, I would just like to say that the Q3 is a strong quarter for Stiftec. We are happy to present it. Good growth, both in terms of organic profit growth and also growth from acquisitions and good development in all business areas. We will come back to those details further on. The cash generation is also very positive, close to 100 and 50% in the quarter, and the earnings per share is also up substantially for the quarter. So all in all, it's a very strong report. We can move forward to Page 3. Stibstedk, we are an infrastructure technology group. As you all know, our net sales last 12 months for the Q3 above SEK 1,700,000,000. We're also very happy to see that our EBITA star margin is growing, continuously growing, now at 13.6%. And our overall goal is, of course, to grow our profit operating profit margin, and it's up 40% the last 12 months, all according to our plan. So that's just a brief introduction. Moving forward to the next Slide 5. And just to repeat some of the underlying drivers for growth in our markets, It's very much based on the challenge that modern societies are faced with in terms of infrastructure. To start with, the infrastructure surrounding us is aging, as you all know, and the important maintenance that always needs to be done is, to a large extent, neglected. So it's an increasing demand to rebuild our infrastructures. At the same time, our capacity requirements continue to grow. Water consumption grows. Electricity consumption continues to grow. Transport volumes continue to grow, but the capacity in our systems are not growing at the same pace, and many of the systems are at peak levels. In urban areas, everything becomes more complicated. The concentration of people and economy makes technical challenges even higher. So the first three points are very much around volume demand in our markets. The 4th point is more around the demand for technical improvements, and it's really driven by basic human drivers for sustainability, efficiency and safety. These are not new drivers. It's more built into us as human beings. Politicians adapt and improve the regulations which are implemented in infrastructure. So overall, the long term drivers in our markets are strong and never ending. We can move forward to Slide 6. And here, we just present 3 examples of infrastructure challenges. The first one being 23% of the water flowing in our freshwater networks is leaking, which is, of course, a huge challenge. 30% to 40% of the energy required to heat and to cool our existing properties are also leaking. And at the same time, we are doing an important change. The society is doing an important change over to renewable energy. This is an important change. The change will continue, but it doesn't come without challenges. The more renewable energy we put into our power grids, the less quality of the electricity. So this is, of course, a challenge when society is being increasingly electrified. But it's an important shift that needs to be done. And overall, these are just three examples, but overall, one data point saying that the investment need over the 15 coming years is 27x Sweden's GDP, which is, of course, substantial investment needs. Moving forward to next slide, number 7. This is to illustrate to you how we are dealing with these challenges. If we have a look at the leakage in the freshwater networks, our recently acquired company, Augers, Customers are insurance companies, and Augur provides an outsourced claims management service to deal with problems with underground infrastructure. So when there's a leakage in the network, Augur fixes the issues. And of course, the issues with the networks, they occur when they occur. So there's no connection to how the overall economy is. So it's a non cyclical type of business, and it's showing still but steady growth due to the aging infrastructure. The second example is CorSS. CorSS provides control systems to optimize energy for properties, the energy required to cool and heat buildings. And by doing that, we can reduce the energy consumption in buildings up to 40%. And moving over to the 3rd example, unit power provides meters to monitor power quality. It's hardware that are implemented in the power grids and then also software software as a service for the clients to monitor the power quality in the power grids. And this is typically our clients are typically energy companies. And by doing this, they can increase the portion of renewable energy in their power grids, thanks to Unipower's products. Okay. We move forward to Page 8, a summary of our strategic position and our business model. So our offering is products and services to clients in the infrastructure sector. Our business model is to acquire and develop niche profitable businesses within the infrastructure sector. We are organized in a decentralized way. This is very important. The decisions are made close to customers. Product development is made in a decentralized way where the competence exists. And this is a proven model to provide continuous profit growth over the years. The infrastructure sector is a good sector to acquire companies in. It's fragmented in terms of niche technology companies. So for it's good to focus on the infrastructure sector. It's not only good since it provides an underlying growth, but it's also good market to pursue acquisitions because there are a lot of companies out there. We move forward to Page number 10 and have a look at our business areas. Since 1st of January, we have 3 business areas, the first two being water and energy and Special Infrastructure Solutions and the 3rd business area, Property Technical Services. The first two areas, those are our investment areas. We do acquisitions in these areas, and we also have a strong organic natural growth in these areas. For property technical service, we focus on profitability improvement only, so we don't pursue any acquisitions in this area. But we focus on it equally much. It's important to us. But as I said, we focus on profitability improvement only. We move forward to our to just have a look at our first business area on Page 11. Water and Energy at currently at EUR 600,000,000 in net sales. And our share the share for the business area is continuously growing now at 44% of total EBITDA. As I said, this is an investment area for us. It's growing in terms of both organic growth but also in terms of acquisition growth. The sectors within the area is, of course, water and sanitation, but also energy and electricity. Our companies, we have also provided to you on the right hand side, and I will just give you a few examples within this area. We start off with the with a few energy companies. We've already talked about Unipower. And of course, the underlying growth there is the task to switch over to renewable energy. So the underlying drivers for Uniq Power is growing energy consumption but also the drive for increased sustainability. We can also have a look at the 2nd company within the energy sector, EuroTeq. EuroTeq provides uninterrupted power supply. And of course, this market is driven by the increased electrification of society where the uninterrupted power supply is more and more important. We can have a look at a few companies in the water sector as well. Poly Profect provides components of systems for water cleaning systems to pass but then provides wastewater cleaning plants to smaller communities. And we can also mention RIA, who provide controlled systems for water cleaning plants where municipalities are the main customers. And these three companies are also driven by growing water consumption, but also driven by stricter regulations to remove contaminations in our groundwater. So once again, it's growing consumption and sustainability that are the underlying drivers for these companies. We can move over to next page and have a look at our business area, Special Infrastructure Solutions, currently at slightly above SEK 400,000,000 in net sales. And the share of the total beta is also growing. It's an investment area for us. We have an organic growth, but we also have the acquisition growth in the area. The underlying sectors for this area is are 3: 1 being clean air and climate control, the second one being transportation and third one being security. We can start off by just giving one example for in the area. Security, Cryptify. Cryptify provides encrypted solutions for mobile communication. And today, our customers there are primarily government, but we believe that the cyber threat will also come to the corporate world and that we believe that there will be a growth in that area as well. We can have a look at company for transportation. Redspeed International provides traffic monitoring cameras. This area is, of course, driven by higher traffic volumes and an increased demand for efficiency in terms of traffic, but also an increased focus on traffic safety. And we can have a look at also Frigatec as an example in the area for clean air and climate control. The Frickitek rebuilds a lot of refrigeration solutions in the retail industry, And the underlying growth is very much driven by stricter regulations to reduce emissions on the global warming potential. So once again, the companies are driven by sustainability and increasing demand for safety but also for efficiency. And we can move over to our 3rd and final business area on Page number 13. Property Technical Services, net sales close to EUR 700,000,000. The share of total EBITDA is shrinking, and that is due to that the other business areas are growing faster in terms of EBITA. Within this area, companies provide technical services for properties, mainly elevators. In Sweden, Stockholm and Vienna, we provide modernization service and repair for property owners. In Europe, we provide services and products for new elevators. And then we also have Castella and Tello service partner, which also are included in the business area. And our elevators companies, they show a very positive trend in terms of profit growth profitability improvement. Castella, which who are in the business of Shell Completion, they've been through a tough year in terms of correction in the market for housing. However, that correction, we've been through already, and we have positive outlook for the future. So we are very happy with the development in this area with a good outlook for the future. We can move forward to Page 14. So moving over to acquisitions. Historically, we have a pace of between 4 to 8 acquisitions per year. Currently, in 2019, we've acquired 4 companies totaling 90 3,000,000 in terms of EBITDA. Our overall goal is to acquire 19,000,000 each year. And of course, the acquisition target is also calibrated with our other key financial ratios. So this target should be seen as a goal over time, and we expect less acquisition activity in the Q4. And we continue to Page 15. And just to mention acquisitions that we have done in the Q3, we've already talked about, but Auger site investigations, very an excellent company at GBP 12,500,000 in turnover. It's a non cyclical company for sure and showing slow but steady growth due to aging infrastructure. And by that, I hand over the word for to Bengt, and I guess we will move over to Page 17 to have a look at the current trading. Yes. Thank you, Jakob. And on Slide 17 then, we have a summary of the financial developments for the group. As you can see on the left hand, we have the sales over the last 5 quarters on a last 12 month basis. And as you can see, we have increased the sales with 23% in total. We have also increased then the EBITDA, our profit with 39%, which then, of course, results in a higher profit margin. And that's due to that we have acquired companies that has a higher margin than the existing businesses. So we bit by bit increased the margin in that way. We have also, of course, then done some efficiency programs, especially in the property technical service business area, which also is increasing the profitability of our group. On the right hand side, we see distribution of our sales to which geography, meaning that here is where our customers are. We do not have that much of export within the group. We have a few companies. We have mentioned like the Unipower or the electricity quality measurements. They are exporting a lot. But typically, infrastructure is a domestic business. So mainly, our companies have their customers within the same country or region. So yes, you can see we have almost 60% of the turnover from Swedish customers and about a 4th quarter of our sales from U. K. Customers. The U. K. Part will increase bit by bit since the acquisitions we have done this year will roll in for each quarter since we have done 3 acquisitions in the U. K. This year. So that part will increase a bit. And then we have customers in the rest of Europe, especially Germany and Austria, of course, since we have businesses there and then also, of course, other geographies. Turning to next slide, Page 18. Some highlights. We see a continued growth, both through acquisitions and organically. The organic growth in sales for the group was 1% in the quarter, but that was then split between Water and Energy and Special Infrastructure Solution business areas, which together accounted for 10%. And the Property Technical Services had decreased sales, which is expected and planned with 8% because there we have done these efficiency programs, which we'll come back to. We have a very stable then sales development. And of course, we are a diversified group. We have a portfolio of now 32 business units, which of course makes it the more portfolio companies we get, the more stable the development will come since if we have one company performing less, we probably have another company performing better than expected. So on a group level, it should be quite stable. Of course, then within the three business areas where the number of companies are less, there may be more their development may be more volatile quarter by quarter. But overall, we see also then a steady stable trend going forward. And apart from yes, Jacob already mentioned that within the Property Technical Service area, we have done an adjustment of the Shell Completion business. And now we're expecting going forward a better development year on year. We'll also come back to that. Looking on the profit. We have had a strong organic profit growth and cash flow. All business areas, that's very good to see that all three business areas had a positive organic profit growth. We have had that in the Water and Energy and Special Infrastructure Solutions before, but now also in the Property and Technical Service business area. All in all then, the EBITA increased with 51 percent to SEK64 1,000,000 this quarter. This quarter, the number 3 is perhaps the in a looking throughout the year, the quarter with the least profit since it contains a lot of vacation during the summer. We have added strong cash flow, and a big part of that comes from working capital effects, but of course, also from our running business. We are typically not that heavy in CapEx, capital expenditure in our companies. We don't have any big production plants or manufacturing equipment, so we're quite slim on that. So most of our profit goes straight into the pocket as cash flow. The outlook is still positive. We see that, for example, then in the water and energy, we have had a good development, but now we're kind of coming and biting our tail, so to say, from this year. So the comparable numbers will become a bit tougher. But still, we see a continued positive outlook for all the business areas. Typically, infrastructure companies perform reasonably well in cyclical downturns, if we would head into that. So that's good. Of course, then individual companies could be affected. But all in all, as I said, positive outlook. When it comes to acquisitions, we have now built up our internal team that has replaced the external team, which has been phased out. So that is completed, which then results in that the acquisitions costs will fall significantly from now on. And if you read our report, you could see that we have had about SEK 30,000,000 as expenditures for the acquisitions cost this year, but that will then be dramatically less going forward from now on. Then turning to Page 19. It's a summary of some of our key ratios. We have mentioned most. We could look at in the middle where it says EBITA margin, that the margin is increasing over time and both from efficiency measurements but also from acquisitions. Looking at our debt ratios, which is always a bit tricky when looking at our numbers, since we have a big part of our debt being non bank debt. Actually, we have only 40% of our debt is bank debt, and we have a large share as almost 50% coming from debt to our entrepreneurs who have sold companies to us through what we call conditional considerations for acquisitions. So you have to have that in mind when you look at our debt ratios because this debt to the entrepreneurs, the conditional considerations, they are dependent on the future profit development of their companies. And it's all taken into consideration that the profit will increase and we will pay a higher amount as an earn out and more money to the entrepreneurs, which then, of course, makes part of the debt being dependent on the profit growth over time. So just bear that in mind when you look at the numbers. Then turning to Page 20. We have for the business areas to summarize the financial developments of water and energy. As you can see on the left hand side, the total net sales have been increasing steadily as well as the margin has been steadily increasing coming from companies with a higher margin that has increased their share of the business and also from acquisitions. Could mention, for example, the company that was acquired during this year, water treatment products, have had a good start. When they are fully included on a yearly basis, they account for about GBP 2,500,000 in EBITDA. We have also increased the margins, as I said, and we have increased the number of units now being 13 all in all. If we can go to next Slide 21, Special Infrastructure Solutions. They have also had a continued growth in sales. Non organic growth was 7% this quarter. All in all, it the sales increased with more than 50%, a big part of them that acquisitions. But as you see on the left hand side, the margin has been more or less stable or even a little bit decreasing since a year ago. And that is that through the acquisitions, we step by step leveling out the margins on the expected level at around 18% to 20%, even though it was a bit higher in the quarter 3. We have had strong growth in the subsegments of Air and Climate Control and Safety and Security. Jacob mentioned some of these companies within the cooling business and indoor climate monitoring and camera surveillance as well. We have done 3 acquisitions in this business area this year: Redspeed, Kryptify and Augur, then the latest one, all summing up to a number of units of 10 in this business area. Then turning at Page 22, we have our 3rd business area, Property Technical Services. And looking at that development on the left hand side, we can see that the sales have been decreasing, which is expected since we have done activities where we prioritize more highly profitable projects and customers instead of big volumes. So we have actually then decreased sales but increased profit. And if you follow the margins, you could see that a year ago, we were picking up, thanks to this efficiency program in the elevator business, but then it has gone down a little bit again. And that is an effect from the shell completion correction, which has both lowered sales but also a bit lower than margins. But now, as we have said, it's we have better comparative numbers year on year. So now we could the development will be positive going forward. The margins for this quarter, number 3, was a strong 11%, much higher than the last 12 months. That's partly due to that the summer months being a strong period for some of the companies, especially, for example, the roof renovation business, which makes this quarter a bit of the highest EBITA margin quarter for this business area. The number of units is 9. We haven't done any acquisitions the last 2 years actually. And that's for the companies we have. We see that the margins are leveling off within the expected range of 8% to 10%. Yes. And let's hand over back to Jacob on Page 23. Yes, 23. Well, this is actually the final page, and we open up for any potential questions. Pardon the interruption, gentlemen. Would you like to go ahead and start with Q and A? Yes, correct. We open up for Q and A. No worries. As there are no further questions in queue, I'd like to hand the call over back to your speakers. Gentlemen, please continue. Well, we just say thank you for listening, and we welcome you back in 3 months from now. Thank you very much. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all now disconnect.