Earnings Call: Q2 2019

Jul 23, 2019

Welcome to the Stipek Q2 Report 2019. Throughout this call, all participants will be in listen only mode and afterwards there will be a question and answer session. Today, I am pleased to present Joachim Pond and CFO, Bank of Leidstrom. Please begin your meeting. Thank you very much. So we just jump right away into the presentation. Welcome, everybody, And we move forward to the 2nd page of the presentation. And actually, we move forward all the way until Page number 4 in the presentation, where we will start to just a brief introduction of the company and our business areas. So Stibtech, we are an infrastructure technology group, as you all know. Our offering is directed towards the infrastructure sector, currently about 1100 employees. Our business is conducted in our subsidiaries, 31 at this moment. And we have a steady growth in net sales on a compound annual basis, 38% since 20 16, mainly driven by acquisitions, but also deriving from solid organic growth over the years. We move forward to the next page, number 5. And just briefly, I would like to touch upon the underlying trends in the market for the infrastructure sector. There is some long term underlying growth in the infrastructure sector based on that infrastructure surrounding us is aging. And when we talk about the infrastructure sector, it's different segments in terms of the energy segments, sector, water sector, transportation sectors and so on. The infrastructures were built during the 50s, 60s 70s. They are aging, and there's a need to upgrade and rebuild them. Due to increasing living standards in our societies, the capacity requirements continue to grow. And a lot of investments need to be done over many years to deal with the increasing demands within the sector. We move forward to the next page. And this is more about some a few timeless drivers of change that drives the pace of change within the infrastructure sector. And then going back to increasing living standards and awareness about the environment surrounding us, the global climate changes and so on. Sustainability, efficiency and safety are strong drivers of change from these societies, but also from consumers, policymakers and so on. And a lot of the improvements within the societies and the increasing living standards, they are implemented in the infrastructures surrounding us. And this calls for specialized technologies, specialized products, solutions and services to deal with the upgrades that continuously exist within the infrastructure sector. So this is also an ideal home for niche technology companies. And this is also the business model that Striptech has is to identify successful NIST technology based companies within the infrastructure sector. So we do have the underlying demand in the market and also a good basis to grow through acquisitions since there are a lot of niche companies in the infrastructure sector. We move forward to the next page and move forward when we start looking at the business areas, we move forward to Page 8, where we start off with our business area, Water and Energy. And this business area currently, last 12 months, has sort of sales at approximately SEK550 1,000,000 and operating profit margin, EBITA star at 18% currently. And when we look at the operating profit, EBITA star, this is our largest business area, accounting for 43% of the EBITA star within the group. And I could just give you some examples that are that is going on within the market. If we start off by looking at the water area, in total, in Europe, there are water sewage and freshwater pipes totaling 7,000,000 kilometers. And a lot of these systems are aging. Actually, there's a leakage within freshwater pipes in Europe accounting for the consumption corresponding to 200,000,000 people in Europe. So there's a lot of leakage in there due to aging pipes. The consumption increases, of course, due to high living standards, the electrification within the societies, also digitization, of course. One example from Sweden, Stockholm, new subways being planned for Stockholm. But actually, the capacity in the power distribution networks is a limiting factor to expand the subway. So this is, of course, some serious issues that politicians are dealing with and also calls for a lot of investments. That's just one example within the energy infrastructure sector. And based on these underlying trends, our companies, which you can find below in the slide, are focused on, of course, to deliver specialized products and solutions within these sectors. The customers are mainly municipalities, both on the water and energy side, energy companies on the power and energy side, industries, also on the water and energy side. So real important customers for well functioning societies. Okay. So that's a brief introduction of our Water and Energy business area. We move forward to the next slide and have a look at our second business area, Special Infrastructure Solutions. Sales at about SEK 380,000,000 and operating profit margin at 21%. And if we look at the operating profit, EBITA star, it's our 2nd largest business area, accounting for 35% of the operating profit. I can give you some examples of subsegments there. Our Air Climate Control, Safety and Security, Transportation, some trends that are quite strong now in the Air and Climate area is about upgrading cooling systems to reduce the global warming potential. And this is an area where the regulations from European Union calls for changes. And we are heavily involved in upgrading the cooling systems for, for instance, grocery stores in Stockholm. Another example is in the air climate control areas to deliver products and control systems to for indoor climate control, that is heating and cooling for real estate. The main driver behind this is to reduce the power consumptions, which is a good business case for the real estate owners. So we're also heavily involved in upgrading those kind of systems within the Air and Climate Control area. Within the Safety and Security subsegment, we are actively involved in U. K. To upgrade access control and surveillance systems for hospitals. There's unfortunately a growing demand to ensure security in hospitals. So we are upgrading that in London at the moment. If we have a look at the transportation sector, the global road network capacity has increased since 1990 by 88%. So that is actually the capacity in the road network, up 88%. However, the freight traffic, the global freight traffic during the same period has gone up 2 18%. So of course, the transportation systems are heavily loaded and under dimension. And there's a big need to expand all the systems, also including the traffic surveillance, which we are involved in with the company Redspeed International. So that's just an introduction about a few of the trends going on in the area, especially Infrastructure Solutions. The demand and the need is growing and also on a long term basis. By that, we move forward to the next page, number 10, an introduction to our 3rd business area, Property Technical Services. From a site perspective, it's our largest area, about SEK 700,000,000 However, if we look at our earnings, it's actually the smallest accounting for 23 percent of our operating profit at DataStar. And we have gathered companies here that are that provide technical services to real estate owners. And there is a long term need to maintain, repair, service, modernize, etcetera, of equipment within properties. So we offer services throughout the entire life cycle management for elevators. There could be fluctuations in demand due to ups and downs in the new construction market. However, on the long term, there's always strain. There's a need to repair. The equipment is being aging. Upgrades are continuously required. So there's a long term demand within the technical service sector. And within the elevators area, we are active throughout the entire lifecycle, as I said. With service elevate taking care of service of elevators in Stockholm and also in Vienna, we provide products and services for the new elevator business in Europe. And also we have also collected 2 of our other companies with services towards real estate owners in Shell Completion, Castell Entrepreneur and Roof Maintenance Telos Service Partner. And our focus our development focus for this business area is profitability improvement. And we have we it's a continuous work, and we are pretty successful in terms of that work. And I think Bengt will come back to that when it comes to the current trading section of the presentation. We move forward to the next page, number 11, our recent acquisition, Kriptify RB. Kriptify provides software products and solutions for secure mobile communication. And the sample of customers are, for instance, the NATO headquarters and also the Defense Equipment and Support organization in U. K, the government offices in Sweden, Regeiringskaansliet, as it's called in Swedish. So these kinds of organizations, they have a restricted security classification, as it is called, and the need for complete solutions in terms of encrypting mobile communications is very important. Encryptify provides the entire the entire processes, also the back end processes for managing encryption keys and so on. So some high profile clients there, which we and we are very happy to include Kriptify in the Special Infrastructure Solutions business area. We move forward to the next Slide 12, which is just a summary over the acquisitions that we have completed since starting 2018, 11 acquisitions in total, including the latest one, Kriptify, in Sweden. And as you can see there, all acquisitions are done have been completed within our expanding business areas, Water and Energy and Special Infrastructure Solutions. That's where we have our acquisition and growth focus within these two business areas. With the business area Property and Technical Services, we are focused on profitability improvement instead. And by that, I we move forward to Page number 13, and I will hand over to Bengt to take you through the current trading. Thank you, Jacob. And we can move to Slide 14, a summary of our development the last 12 months. And as you can see, we have had a 28% growth in our sales and 39% growth in our profits, which then also means that we have had an increase in our margins through this period. And I will come back to now how that has been divided between the different business areas. But before that, turning to Page 15, some quarterly highlights. We reported a net sales increase today 19%, up to almost SEK 450,000,000. And all in all, we see a very good market situation for our companies within our business areas, especially for the Water and Energy and Special Infrastructure Solution companies where we could see in total a 17% organic sales growth. Within our 3rd business area, the Property Technical Services, we had, as planned, a reduction with 11%. And I say as planned because we are doing activities within the elevator companies to go for more profitable projects and with higher margins, but instead a bit lower volumes. So we are not focusing there on organic sales growth, but organic profit growth. But we also have in that business areas with our company within the shell completion, we have also some decrease in sales volume because of the housing sector in Stockholm. There has been a correction of the demand in that business sector. And also some large projects previous year in this quarter, of course, that increased the difference between this year and last year, as was in last quarter as well in Q1. But we do not expect this trend to continue for the second half of the year because then we have some other comparative figures from last year. So all in all, we had a 1% organic growth, but it was, as I said, then as we think is very good, very good growth in our two business areas where we focus on the organic sales growth. Looking upon the profit growth, we have had in total this year for the 1st 6 months, an 8% increase organically. And if we then add the 38% profit growth from the acquisitions, we come up in 46% during the first half year in our EBITA star measurement. In the quarter, it increased 42 percent to SEK 63,000,000 and the margin increased to 14%. That was more than 2 percentages from last year. And we also managed to have this earnings increase all the way to the bottom line. So the earnings per share after taxes was up 74%. We have the trend for the margin increase, you could also find in the last 12 months figures, as we could see. So we're continuously working and focusing on margin increases throughout the group. And let's see, perhaps the 14% is pretty high. We'll come back to what we expect from the different business areas in the coming slides. The cash flow was also strong from our operating activities, which of course also is good. We generate cash. We have generated almost SEK 200,000,000 in the last 12 months. Cash that goes primarily to investments in new companies in our acquisitions activities. The corresponding cash conversion or cash generation was 78% within the quarter. The outlook, we continue to work with the profit growth, and we haven't changed our view on the positive profit growth potential going forward. We will continue We will continue the profitability enhancements within the Elevator business and the Property Technical Services business area. What we could say also for our acquisition work is that we have been building up our internal team throughout this year and which also means that we will now be phasing out the external team that has supported us so far, which then of course makes the acquisition costs will be significantly lower going forward when this is completed towards the end of this year. And it also means that the M and A team will be even closer to our business, so we can work even more efficient with the process of acquiring new companies. So turning to next page, Slide 16, is a summary of some key figures. We have talked about the net sales and profit increase and also our earnings per share. Cash flow, as I said, has been very good, and we're working with those activities related to that as well within the group. Our leverage, you could see at the bottom of this slide, we have the total net debt to our EBITDA. The reported EBITDA is SEK 2.7 billion. And our net bank debt, what we owe our financial institutions, is SEK 0.8 billion percent, and this is measured over an average debt over the last four quarters. So there's still room for more acquisitions within these figures. So turning to next page, Slide 17, we have our business area, Water and Energy. We can see a very good sales growth within the quarter. It was 64%, of which organic was 13%. But the profit increased even more to 118% over to €32,000,000 which then, of course, signals that the margin was quite substantially better. And as you can also see here, it was increased from 10% to 19.3%. We guide that the margin for this business area will be in between 16% 18% for the full year. And you can see the trend in the graph on the slide. And for the last 12 months, we are now at 18%. That has been a good development. And we have had some units with high margin units that has had an high order intake, especially in the water and sanitation and also in the quality measurements of electrical energy have had a very good quarter. And also the recently acquired units, which also have a higher profit margin than the average, has supported this development. So and the acquisitions this year has been the water treatment products in the UK, which we acquired in February, which was then fully included in this quarter with its turnover and profit. Turning next Page 18, we have Special Infrastructure Solutions. Also there, we see a growth in sales, 37%, of which organic was 23%, which is very happy to see. The profit increased a little bit less, 30%, which means the margin were actually lower than last year, but this is also according to plan since companies we have acquired roll on with our profit margins. So we're guiding that this business area will have some 18% to 20% for the full year 2019 in margin. And you can see from the trend in the graph that, that's where we're heading. And even though we have had and have a higher margin for the last 12 months, 21%. There has been strong demand within the hiring climate, as Jacob mentioned, within cooling, for example, cooling solutions and climate control and also in the safety and security with camera surveillance business have also had good demand and turnover during this quarter. Turning to next Slide 19. We have then finally the Property Technical Services business area. As we said, we have a decrease with 11% this quarter, but that was planned because we're shifting to more profitable segments within the Elevator business, but also then having some negative trends in the housing sector in Stockholm, especially that impacted our shell completion operations and the business area in total. But we're, of course, dealing with that. So we're directing our orders in the shale completion business towards more commercial and public type of real estate instead of housing. So we look forward to having this decrease not being as big as this quarter is for the rest of the year. So it's not expected to the same extent for Q3 or Q4. The profit EBITA star decreased with some 19%, but the margin was more or less the same as last year, 9 point 5% compared to 10.4%. And also in this graph, you can see our trend for the margin. We say it should be around 8% to 10%. That's been very steady between 7% 8%. And so we have a little bit 2 more things to fix, but we're good underway. We haven't done any acquisitions this year. And also as Jacob mentioned, we're focusing more on the existing business units to have them up in their profits. Yes, that was the business area. Okay. Thank you, Bengt. So that sums up. If we move forward to Page number 20, just to sum up our presentation, we have a good profit growth. That is our over our most important goal is to grow our profit levels every year, and we are happy to present that we are doing that on a continuous basis now. We have the long term growth trends within the infrastructure sectors, especially in our new business areas, Water and Energy and Special Infrastructure Solutions. There is a good and strong demand there, which in many, many areas is not connected to the overall temperature in the economics. But this is this investing in infrastructure is something that needs be done regardless of the economic temperature. So we are happy to be well positioned there. And looking forward, we have an unchanged positive view on growing profit levels. We have acquisitions that are rolling in and have a good organic profit growth underlying. So based on that, we thank you for your time and open up for any potential questions. We have a question from the line of Fredrik Nielsen from Redeye. Hello. Fridrik Knutsen from Redeye here. You had very strong organic growth in both Water and Energy and Special Infrastructure Solutions. Were there any large projects or large orders, both in the figures in this quarter? No, not any, so to say, that it will be affected by 1 or 2 special products. No, it has been a good demand overall, especially in some companies that have a high margin. But no, it has been quite spread out through the companies. Okay. One more question, if I may. You are back to normal margins in Property Technical Service in this quarter. Do you think you're back to normal levels for good? Or was there anything special boasting you already in this quarter? Well, as you can see, we had the SEK 9,500,000 all in all for the business area in this quarter, which is higher than the last 12 months. This quarter is typically a strong quarter as Q4 is. So yes, we have, especially for the service businesses in Stockholm and Vienna, we have had really turned them around and they're making profits. And also good demand out in the European from our Croatian company. So I would say we still stick to our guiding there between the 8% and 10% for the full year. Okay. The guidance actually says a gradual normalization without any time frame really. That's how I interpret it, at least. But okay. Yes. We couldn't say exactly. But so that's where we're heading. And right now, as you say, the quarter, we're in that spread. So yes. Okay, okay. Thanks. That's all for me. And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead. Okay. Well, then we say thank you, everybody, for listening in. And we will talk to you in 3 months from now for the Q3 presentation. Thank you very much. This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.