Earnings Call: Q1 2019

May 3, 2019

Ladies and gentlemen, welcome to the Citec Q1 Report 2019. Today, I am pleased to present CEO, Jakob Holm and CFO, Bengt I will now hand you over to Jacob. Please begin. Thank you very much. Yes, hello, everybody. And we move forward as usually to Page 2. And we could also move forward to Page 3 in the presentation. To start off, I just would like to say that we are very happy to present a strong report, 25% growth in sales and 50% growth in EBITDA, a margin increase and substantially improved cash flow generation. So that was just to start off with some key numbers that we are happy to present. But as always, I would like I would want to repeat some of the underlying fundamentals for our business, and we start off with the long term trends and move forward to Page number 4 in the presentation. So Schiblic is active in the infrastructure sector, and the infrastructure sector is characterized by long term volume demand. On one hand, the infrastructure surrounding us is aging. It was built in the Western Europe during the 50s, 60s and 70s to a large extent. So it's aging and there's a large need to rebuild it. Also, the capacity requirements continue to grow. Water consumption continues to grow. Power and energy consumption continues to grow. Transportation volumes also grow, both for people and for goods. So all in all, it is an important investment priority and a good underlying growth. Move forward to the next slide. In addition to volume growth, there's also good and a continuous pace of change to implement improvements into our infrastructures. And to start off, it starts off with the really basic human that we have to increase sustainability, efficiency and safety in our societies. We as consumers, we always expect more, more efficient transport systems, more sustainable energy systems, more safe and secure open environments in our societies, just to mention a few. And regulations are continuously and everything is implemented as upgrades in our infrastructure. So there is a continuous pace of change for improvements, and our focus is on niche companies within infrastructures. And niche companies are actually a very good and ideal home for specialists. So this is our position in the growing market. We move forward to the next slide. Stittelk is an infrastructure technology group. We have a good growth, as we said, with strong underlying market trends. And currently, employees are about 1100. We are organized in 30 P and L Business Units, and our year on year sales growth is strong, about 40% on a compound yearly basis. We move forward to Page 7 and can also move forward to Page 8. And as of January 2019, we have organized ourselves into 3 new business areas. As we grow, we have gained a critical mass of both sales and profits in more market oriented business areas, and we are happy to have the opportunity now to organize ourselves towards that. And I would introduce them to you by moving forward to the next page, number 9. So the first new business area is what we call water and energy with subsegments being water and sanitation and also power and energy. We have 13 business units, profit and loss units within the business area. The share of our profit, EBITA star, is 37 on a last 12 month basis. And we have organized the companies in the lower end of the slide here to sort them out as the acquisitions that we have done prior to 2018. You can see 7 companies there. And also an addition of 6 companies that we have acquired in the last 15 months. And out of these 6 companies that we have acquired, we have 2 companies within the Power and Energy sub segment, Multitec and Centrale Montage, RB and 4 companies in the Water and Sanitation segment, Rea, Veraclipan, Pure Water Scandinavia and also Water Treatment Products. And these companies typically provide niche solutions for municipalities, but also for industries, solutions that are more or less mandatory for our customers to implement due to the nature of water and energy segments. Okay. We move forward to the next business area on the next slide. Special Infrastructure Solutions that consists of 3 subsegments: Air and Climate Control Safety and Security Transportation. Currently, the business area consists of 8 business units. The share of our total EBITA star is quite similar to Power and Energy, 36 percent. The acquisitions during the last 15 months, Optimize Security Systems, part of the subsegment Safety and Security. Stockholm Radio Aero and Red Speed International is in the Transportation subsegment and Korss Klimotosteum in the Air and Climate Control subsegment. Okay. We move forward to the 3rd and final business area. Property Technical Services with the subsegment Elevator and we call it Other. I will describe these companies to you in a short while. This business area is really the origin of StifTech. We started off in the technical services area. However, this area is not in focus for future acquisitions. We believe and we see that the other two business areas have stronger underlying trends as well as stronger business models. So but anyway, property taking services is an important part of our business, 9 business units currently. The share of our profits is 27%, which makes it, from a profit perspective, our smallest business area. However, from a sales perspective, it's the largest one at SEK730,000,000 If we have a look at the lower end of the slide, starting off from the left hand side, we have organized our companies here to describe to you the different nature of the businesses. So on the left hand side, we have our service renovation and modernization businesses in Stockholm. Same type of business, however, in Vienna, Auf Zugefriedel. And our 3rd final elevator area is where the customers and the market are new elevators. So in Stockholm and Vienna, we focus on the existing elevator service and renovation of those. And for the company's Metus and Compact Lift System, the market is around new elevators in Europe, where Germany is the largest market. And finally, we have our sub segment that we call other. It consists of Castella Entrepreneur and Telo Service Partner. Castella provides shell completion services to property owners. It's lightweight constructions and predominantly plaster gypsum inner walls. Teloservices partner provides services renovation of rooms, but also to install security equipment on roofs. So there we have our Property Technical Services business area, And we have done no acquisitions over the past 15 months. And there will be no more in the future the way we plan our business right now. Okay. So we move forward to current trading. We can flip over to Page 13. And so I'm happy to present to you the quarterly highlights. I should also mention that normally Bengt should take this section, but he has some issues with his voice. So we will save it for some potential questions. But I'm happy to take it. So to start off, we have a good market situation and a good demand in most of our areas. Our business areas, water and energy, special infrastructure solutions, the demand is strong. And also in our Elevator business, it's healthy with a good demand. Net sales increased, up 25% in the quarter. Beta increased 51%. And the beta star increase is partly from, of course, increased net sales, but also from an increased profitability margin. It's up from 10% last year to 12.3% this year. And I'm also very happy to present strong cash flow generation of under 11% compared to 26% last year. So and the organic growth is strong for our 2 business areas, Water and Energy, Special Infrastructure Solutions. In total, both areas demonstrated 11% organic growth in the quarter. Our Elevator business continues to develop positively, improved profitability and increased profits in the quarter. The business has had a good rebound and is in a healthy condition. However, we saw an opposite development within the Shell completion area. We have, over the years, took advantage of the strong new housing market in Stockholm. The first quarter in 2018 previous year was also exceptionally strong. So compared to that strong quarter last year, the decrease in the shell completion area is also amplified. Now we have a better mix of customers, customers not only from the new housing market, but from municipalities and from commercial offices, hotels, etcetera. So we have a better mix, although they are not on the same levels as they were in the very strong new housing market. That is not to be expected. We also know that the Q2 last year was very strong. However, for the Q3 and Q4 period, we believe that we will come into a more comparable results versus last year. And on an overall level, the outlook is very positive. We do have an unchanged view on growing profit levels. We have healthy demand in almost all areas and also new acquisitions delivered to the results. Finally, we signed an agreement with Nordea, an important agreement regarding bank financing of SEK 800,000,000, an important step and it also strengthens our muscles and scope for further acquisitions and growth in the future. We move forward to Page 14. This is the graph demonstrating our growth on 12 month basis. Net sales up 37% over the past 12 months. EBITA star is up 52%. So our profits grow more than our net sales. And this is due to partly, as I think all of you know, that we have in our elevator business, we have a planned shift to less but more profitable projects. So net sales in those areas have come down. On the other hand, the profits have gone up as we have planned. But also, we have seen a good growth in high margin businesses and also new acquisitions with high margins add to the profit levels. So on an overall basis, our margins are increasing. We move forward to next page, number 15. And this is the financial development in the Q1. I think we have mentioned all the numbers already. And on a 12 month basis, which is on the rightmost column, we have mentioned a few as well, but I'm happy to repeat the growth of 37% 52% in net sales and EBITA store and increasing profit margins as well, which is we're happy to present. And I will also ask Bengt to comment on the netbank debt and the net debt figures. Yes. Thank you, Jacob. For the ones of you who have been following us for some while, you know that in our acquisition model, we apart from paying some upfront cash to the sellers of the companies, we let them make a reinvestment into Striptech, which is a debt for us. It's a debt for a future payment. We call it a conditional consideration. Typically, that one is paid out 4 to 5 years after the acquisition. But anyhow, we book it as a debt, which means that our debt in the group is quite high compared to the existing running business Since we expect the companies to improve our EBIT, we pay a little bit more to the sellers of the companies. So all in all, when you look at our net debt to EBITDA, they can seem a little bit high because of this fact that the debt level is really representing in a higher EBITDA level than it's currently booked and reported. But when we report these numbers you see on this slide, which is also in the report, we have taken our average net debt for the last 4 quarters and then put it against the EBITDA for the last 12 months. And then you see that the ratio is 3.3 right now. And if we exclude these conditional considerations and only take our financial debt, it's EUR 0.84 billion. So that is healthy levels, we think. Thank you, Bengt. Okay. We move forward to the next slide, and we will dig into each business area. We start off with Water and Energy. This is a quite busy slide, so I will guide you. We start off on the left, the table down on the left side. So net sales are up 69% to SEK150 1,000,000 in the first quarter. Profit levels, EBITA star, are up 123 percent to CHF26.1 million. And also the profit margin, star margin is rising. It's up from 13% to 17%. In the business area, we during the quarter, we see an extra strong demand from our customers that are energy distributors that demand specific equipment when they build out the power distribution systems. We also see a strong demand from within the electrical automation market. And thirdly, we see strong demand in the water treatment market segment. So these are the 3 areas where we see extra strong growth. And then I would ask you to move up to the graph on the left hand side, and I would like to point out the development of our margins there. We have rising margins in the business area, and we expect for the full year 2019 that margins will end up in the range between 16% 18% for the full year 2019. We move forward to the next business area, Special Infrastructure Solutions. And once again, I ask you to start down in the left corner, start off with net sales in the quarter, growing 66% up to SEK 100,000,000. Profit, EBITA star growing 51 percent to SEK 20,000,000. And EBITA profitability margin, EBITA star, has come in at 20.6 percent. It's a slight reduction from the Q1 previous year, mainly due to acquisition activities. And if we have a look at the graph up on the left, we have a better, more stable representation for the 12 month figures. The margins are stable between 18% to 20 percent. This is also what we expect for the full year of 2019, 18% to 20% profit margin. And on the customer side, we see an extra strong demand from cooling markets. There's a lot of work to be done to upgrade cooling systems to more environmentally friendly cooling fluids. It's an ongoing work that takes time, especially for our retail customers that are forced to upgrade their cooling solutions. It's a positive change for the environment and a lot of business for us. We also have, compared to last year, seen a good growth from security solutions in the UK, which is also a part of the organic growth in this area. Yes, I think I will be satisfied with that. And we move forward to the 3rd business area, Property Technical Services. And once again, I ask you to start down to the left. Net sales came in at SEK 172,000,000, which is a reduction 9% compared to the 4th quarter last year. Profit levels down to SEK 9 300,000 compared to SEK 14,000,000 last year and EBITDA margin also decreasing down to 5.4% in the quarter. And the reason for this development is from the decreased sales is partly that we have had an ongoing plan focus on fewer but more profitable projects within our Elevator business. But it's also partly from a slowdown in the new housing business in Stockholm. This affected our operations in shell completion, as I said. And I said that we have, over the past years took advantage of the strong new housing market situation in Stockholm. Now we do have a better mix, but it's, of course, difficult for us now in the Q1, but also in the Q2 2019 to come in at the same levels as we had during the peak. So but for Q3 and Q4, we have a good outlook to match the levels from previous year. So if we move up, so what does this mean in total? If we combine the Elevator businesses with the Shell Completion, we can have a look at the graph up on the left hand side. The profitability levels are fairly stable, slightly below 8%. During the year, we do expect the margins to strengthen and to come up between 8% to 10% in the later quarters of 2019. Okay. So we move forward to next Slide 19. Just to short to present the acquisitions during Q1. Redspeed International, which is part of our Special Infrastructure Solutions business area, is a supplier of solutions to the traffic enforcement industry. Typically, cameras to for monitoring speed and other behavior in traffic. The main market is the UK. The second acquisition in the quarter, water treatment products included in the water and energy business area, specialized in formulas and also manufacture then of specific chemical mixtures to treat contaminated water. It's a growing market. Unfortunately, we could say from an environmental perspective, but it's an important part to treat and clean the water coming from industries and also municipalities. U. K. Is once again the largest market for water treatment products. 2 fantastic companies, and we are happy to include them in our group. We move forward to next Slide 20. And this is just a summary of the acquisitions completed over the last 5 quarters, 15 months. And the acquisitions that I've done have all been in the business areas that are in focus for our future growth, Water and Energy and Special Infrastructure solutions. We could also note that 4 of the acquisitions have been in the UK, where we see a more favorable market for acquisitions compared to what we can see in Scandinavia and especially in Sweden, where we experience increasing price expectations from owners of companies. However, we do not experience the same situation in the UK, and we are happy that we have developed the U. K. Market from an acquisition perspective. This enables us to continue our acquisition growth in a good way. And finally, we end up with the last slide, Slide 21. Just a summary of everything. Stiptic, as a group, focused on the infrastructure sector, a good long term growth driven by underinvestments in the infrastructure section, growing demand and as well as a continuous drive for changes and improvements, regulations, plus part of the sector. On a more short term, our outlook is positive. The positive trend in growth continues. The market situation is good with a good demand. Newly added acquisitions always contribute with results. So from the current level of €195 million EBITDA star, we have a positive output that, that will continue to grow on the quarters to come. With that said, that I will open up for questions for the audience. Strong growth in both Water and Energy and Special Infrastructure Solutions. Were there any large order or similar, boasting growth in this quarter? We had we had extra strong good order that we have delivered in both Q4 and Q1 to power distributors. This is a large order, but it's not a temporary order from that perspective. It's that if that's what you're thinking about. But we do see large orders from power distributors. Okay. One more question, if I may. You had rather high acquisitions cost in this quarter. Could you give any guidance going forward? Yes. Well, first of all, we report the acquisition costs in connection with when we finalize the acquisition. So it's actually costs, if you take for this quarter, we have made 2 pretty big acquisitions in the U. K, which we started, of course, already during the fall last year. And we took the actual cash flow, so to say, for those activities last year and earlier this year. But from a reporting perspective, we booked them as costs now in the quarter. And that represent, you could say, some costs that are more or less commission based in relation to the size of the companies, but also lawyers, other financial due diligence experts, etcetera, which of course is a little bit more expensive for us when we acquire in the U. K. Instead of in Scandinavia, where we have more of our own resources. And so we also had some costs coming in from the acquisition in Q4 as well. So it was a bit extra high this quarter, not the normal level, so to say, because of the nature of those acquisitions. Yes, if that was an answer to your question. Yes, yes, absolutely. That's all for me. Thanks. Thank you, Frederic. As there seems to be no further questions at this point, I will hand the word back to the speakers for any closing comments. We just say thank you, everyone, for listening. And we will meet again in for the Q2's presentation. Thank you. Bye bye. This now concludes our conference call. Thank you all for attending. You may now disconnect your