Earnings Call: Q4 2018

Feb 12, 2019

Ladies and gentlemen, welcome to the Stipex Q4 Report 2018. Today, I'm pleased to present CEO, Jaak Kapol and CFO, Bengt Lejesen. Speakers, please begin. So good morning and hello everybody. This is Jacob Horn speaking and together with me I have as always, been Leuchtturm, our CFO. And I think we can move forward directly to Slide number 3. In addition to the year end update today, we also want to present and introduce new business areas that we will establish as of January this year. It's an important step for the group. And to start off, we also want to walk you through the market trends that also drive the demand stick to our business. So with that said, let's move forward to Page number 4. There is a lot happening in infrastructure. It is on top of the mind for all major organizations and countries across the globe. It's a main objective within the sustainability goals of the United Nation and also unifying issue across political boundaries. So and the trends are deep and unquestionable. Our infrastructures are aging and there is an increasing demand to rebuild vast infrastructure systems. And let me give you an example. In Europe, there are 45,000,000,000 liters of fresh water leaking due to leaking pipes. This corresponds to the water consumption of 200 millions of people in the Western world. This is, of course, not good, especially not when the border consumption also increases. On top of this, urbanization concentrates population and economies, putting further pressure and strain on the infrastructures that we have surrounding us. So in summary, infrastructure as a market exhibits an undisputable volume demand over foreseeable future. Moving over to next slide number 5. And in addition to an undisputable volume demand, we also want to stress a second phenomenon that drives change and improvements to the infrastructure sector. Sustainability, efficiency and safety are deeply rooted drivers of mankind. They have been and we believe they always will be with reference to the picture to the left with the city traffic. We all expect a smooth flow of traffic when we drive to a city. In terms of transportation efficiency, of course, this is crucial. There are also less idle running cars, reduce and also less idle running cars, reduce emissions and traffic safety is improved by controlled traffic patterns. These uninterrupted traffic flows are enabled by electrical automation that in Stockholm actually are produced by us in Stiftec. Traffic lights are controlled by actual traffic load on-site and the lights are interconnected into green light systems. And going back 50 years, the traffic systems were substantially less sophisticated. But the bar is raised for what we expect in terms of sustainability, efficiency and safety, and we do not want to go back. The expectations are instead continuously raised. Policymakers adapt with more strict regulations and everything is implemented as continuous improvements to the infrastructure. These technical advancements are naturally developed by specialists and experts that to a large extent exist in smaller niche companies. These niche technical companies are in fact what builds up StifTech as a group. With that said, move forward to Page 6. So in summary, Stiftec is an infrastructure technology group. Our offering is with niche solutions to infrastructures. The market trends we just walked through, good volume demand and a drive for improvements. Currently, employees, we have at slightly above 1,000. Our organization is based on 29 business units currently. And over the past 3 years, we've had an annual growth rate at 42%. With that said, we could move forward to Page 8. So we move 2 pages forward. So I'm very pleased to announce that as of January, we established 3 new business areas. Our former business areas are structured based on their business model, installation versus products. Our new business areas are instead organized around markets: water as a market with its particular customers, energy as a market. To the right in the picture, technical services for properties as a market with obvious customers in property owners. And finally, 3rd business area, Special Solutions, where we collect a couple of market segments that I will come back to in a few pages. Within infrastructure, we have identified a number of areas as particularly important for society's development: water, energy, air and climate control, data communication, transportation and also security, we have for a longer period in time focused our work with acquisitions to these particular areas. But we have not had the necessary size to also organize ourselves in line with this. But we have been active to build the areas and we have completed 10 acquisitions over the past 15 months in line with the strategy. And at this point, we see that we do have the critical mass of both business units and also customers to reorganize the group in line with this more market oriented organization. This organization will enable us to better use the competencies, the market insight and the networks that we gain about the specific business areas to develop our business units and also work on acquisitions further as market experts. Moving on to next slide, number 9. Introducing the first business area, water and energy. The subsegments of the business area are water and sanitation and power and energy. Both areas are the focus of global welfare and also constitute 2 of the main objectives of the United Nations Agenda 2,030. The markets are expected to grow through several strong trends such as aging infrastructure, increased consumption of water and energy, along with increased digitization and automation. As most parts of infrastructure, water and energy are also clearly characterized by of stricter environmental regulations. Sales in the business area, about SEK 430,000,000, 2018. The profitability margin on an operating level, 15%. Number of units currently at 12. And actually over the past 15 months, we've doubled the sites there. So we've done 6 acquisitions. And I'll just give you a short introduction to the segment water and sanitation. In Europe, there are 18,000 water treatment plants. There's also 7,000,000 kilometers of water and sewage pipes. The large part of this infrastructure was built in the 1950s, 60s and 70s. Actually, some parts of London is from the late 19th century. So clearly, we are surrounded by aging water networks. At the same time, water consumption rises. And to continue with U. K. As an example, water ratcheting is expected to be introduced in London in 2025. In summary, the investment needs are substantial to develop our water infrastructure. I'll give you one I'll give you also some examples from what we actually do in our companies. The first example is Topaz, Topaz Vatten, developed wastewater treatment plants. These plants are sufficient and also serve them a local community and offloads the strained central systems, which is important. The second example, Poly Prefect. Among other things, Poly Prefect produces it and delivers pump stations to municipal water networks. The third example is Ria, our Norwegian company. Ria offers automation of municipal water clean plants. I would start with 3 examples in the sake of time and moving over to Power and Energy subsegment. Digitization and automation are strong trends that are gaining extra momentum currently. This means that we are seeing high growth in the number of processors that every day are active across our societies in infrastructures. For example, Internet of Things units are expected to increase from a number at €8,000,000,000 in 2017 to €20,000,000,000 in 2020. So actually, 3 years growing from €8,000,000,000 to €20,000,000,000 So societies are becoming increasingly dependent on reliable and interrupted power supply, of course. At the same time, sustainable energy sources such as wind power reduces the overall power quality in the power grids. This is, to ensure, a challenging combination. And poor power quality is estimated to cost the European economy up to €115,000,000,000 annually from unplanned disruptions and loss of production. So solutions that ensure reliability to power and necessary quality are critical for the emerging digitized systems and societies. So I'll give you an example a few examples from this area as well. We start off with Unipower, delivering solutions for power quality monitoring. Customers are typically power distributors around the world. The second example, EuroTeq, providing solutions for uninterrupted power supply. Customers are companies that have equipment that must work around the clock, for instance, hospitals and computer centers. Here, we have ongoing service agreements with approximately 1 1,000 uninterrupted power stations throughout Sweden. The 3rd example, Centralvigen and Centraalmontage. Here we produce electrical automation cabinets that exist in many places in our society where any kind of automation exists. These are not mass produced cabinets, but instead the cabinets are tailor made for each specific purpose. We have increased our capacity over the past 2 years. And in 2018, we produced 7,700 cabinets to customers in Sweden. With that said, we're moving forward to Page 10, introducing our second business area, Special Infrastructure Solutions. The sub segments in the business area are Air and Climate Control, safety and security and transportation. Sales, about SEK 320,000,000 profitability level around 22 percent number of units, 9. It's also increased over the past 15 months with 4 acquisitions. And in addition to water and energy, we have couple of segments as particularly important for the society's development. And what we see in our research is that a lot of technical specialization and advanced products exist in smaller technical businesses. In that sense, it is a fragmented market consisting of many technically advanced companies and therefore a very good market for our business model, for StipTech's business model, which is acquiring and developing Eastern specialized technologies and companies. So it's a good market for us. The first example I want to give you here is CoSS, Klimarten Sustim. The company is in the field of indoor climate control with solution to increase energy efficiency. For example, KOSS have actually reduced the power consumption in IKEA stores by 40%, which is a substantial effort. The second example, Fligotek. Cooling solutions is what they provide. Cooling solutions to supermarkets and to grocery stores is the main market for them. The cooling market is highly regulated. Currently, we have an extensive task of exchanging the refrigerants to bring down the global warming potential in the cooling systems with about 70%. EU directives will continue to become stricter and ahead we will on a steady basis work to reduce the warming footprint of the cooling systems in the grocery stores and supermarkets. It's a very important task, but also good business, of course. The third example, Optima Security System. The company delivers security solutions to hospitals, transportation networks and government agencies to name a few. In the hospital, solutions include highly tailored things as surveillance, intruder control, staff attack control, patient tracking patient tracking, sorry. So it's a very specialized type of solutions in terms of security. And all of these three companies that I presented are examples of specialized styptic companies. They are profitable. They have a long term demand for their offerings. And this is typically what characterizes what to search for and what we believe will provide good building blocks for StipTech and in the new business area. Moving forward to next page, number 11, and introducing the 3rd and final business area, property technical services. The subsegment in the business area is to start off our elevator business And then we have gathered a few other companies in what we call other. The sales in the areas are at approximately SEK 750,000,000 Profitability level is at about 8%. Number of units currently, 8. We haven't done any acquisitions over the past 15 months, and I will get back to you the reason for that. Styptic has its origin in technical services. In cities where population and economy is concentrated, there is a long term need for service repair and modernization of properties and equipment inside properties. Our companies with this focus, they are labor intensive and they also have a business logic that differs from product companies. As we in a more and more clear way focus on our own products, we currently have no plans to expand this business area. So no new acquisition to the business area in the past 15 months and no plans for any further acquisitions either. Anyhow, the business area works well after our profitability improvement plan program in elevators. And I'll just give you some brief examples of the companies in here as well. So to start off with St. Erik's and his partner, they operate as one business unit, these two companies. They provide service, repair, modernization of elevators in the existing property stock of Stockholm. The second example, Castella Entrepreneur provides design and installation of lightweight interior constructions. The company specialized in gypsum and plaster inner walls. Customers are in Stockholm and also in Uppsala. And the 3rd example, TELOS services partner performs roof renovations on existing properties in Stockholm, along with installation of security solutions for rooftops. So the business area has clear customers in property owners, and we believe that we with the new organization also can reinforce our focus on this customer group. Okay. So that was a fast introduction of our 3 business areas. And with that, I will we'll move forward to Page 13. And I will hand over the word to Bengt to walk through the year end update. Yes. Thank you, Jacob. Yes, starting off to look at some quarterly highlights from our Q4 of 2018. We had an increase in our sales, it was 27%. And with it, we also had a profit increase somewhat lower, 19% increase to SEK56,500,000. We're very happy and proud of that. We have been able to increase our EBITDA margin throughout the year, starting off with 10.1% in the Q1 of the year and having 11.7% during the 2nd and third quarter, now then eventually ending up with 13.5% EBITDA margin for the Q4. It's well, it's actually a little bit lower than last year. We had even 14.3% in 20 seventeen's Q4, but we had some units that had an exceptionally high profitability during that quarter. So it was quite tough comparables. So 13.5% we're happy with. Part of that is because of that our elevator improvement program has been successfully completed. It has encompassed a number of units within the elevator business. And the activities have been focused on price increases and also measures to strengthen their aftermarket, their service offerings, but also, of course, to reduce expenses and also then reducing the number of staffs within the area. So but now we can say that we have completed the program and we're now then looking forward to having all these companies performing well in the future. So our outlook, in summary, is positive. We think still we have a positive view on the growing profit levels going ahead, both from improvement programs still and compared to last year and also then, of course, of the added acquisitions that we have done in the past couple of months, but also that will come ahead in the next quarters. We can turn to the next slide, number 14, looking more at the full year. We have a 43% growth in sales and 45% growth in our EBITDA, which is, of course, very good. The organic growth was 5%. It was a bit higher in the beginning of the year and slowed down a bit towards the end of the year 2018, also there because that we had some companies doing very well the last quarter 2017. But still, we are happy with this development. And you can see on the chart there, you can see the quarter by quarter development of the rolling 12 month figures. So as you see, it's very steady pace of increase in both sales and profitability or profits. Yes, turning to number 15, next slide. We look at some more key figures. Net sales, we have touched upon as well as the EBITDA. And as I said, the EBITDA margin did become 13.5% and that's without these extra high profitability units that we had last year. So of course, that's good. On the GEA, total January to December 2018, that is then 11.8 all in all. Then we also have some key figures relating to our debt and our leverage. We have 2 measures that we are tracking. 1 is our financial debt compared with our EBITDA, the net bank debt, which then is all the debt to our banks and financial institutions and that ratio is now 0.59. And last year, it was even a negative, meaning that we had more cash than financial debt. The second key figure is our total net debt against EBITDA. And this one is a little bit more tricky because almost half of that total net debt consists of debt relating to what we call conditional considerations for acquisitions. That is both the reinvestments that our entrepreneurs have made into their old companies, so to say, when we acquired them, but also their earn out part of their considerations. These are typically agreements running for 4 to 5 years. So it's a debt to be paid out in the future. And we also estimate then today what the debt will be to pay in, say, 4 or 5 years ahead, which is, of course, not always easy, but we then book in our books in our financial figures an estimated debt to then be paid based on a higher EBITDA level than today because that's typically how it works. If the profitability is increasing, the profits increase in the different units, then the sellers will get even more in their earn out. So this figure, 3.02 right now, is then being expected that the profit will be even higher than today. So it's not that easy to compare this key figure against other groups' corresponding figure. So we're tracking it vis a vis ourselves. Last year, it was much lower and that was because we had some extra high, call it, more accounting wise income from releasing some debt, which then makes this comparison a little bit not so relevant perhaps year on year. But 3 is a level that we think we will be more continuously running at, which for us is a healthy level. Okay. If we then look a little bit into the 2 business areas that we had during 2018 and firstly then the tailored installations. As Jacob mentioned, we have had an improvement program running well. Yes, sorry, it's Slide 16 that we're looking at. As you can see from the chart there, we have increasing profit and profit margins quarter by quarter. Also these figures are around 12 months. So at the end of the year 2018, we had 7.4% profitability. In the quarter as such, this was 9.8%. Percent. We have had an organic growth of 13% throughout the year. That is, of course, very good figures coming apart from that from the improvement program. The profit has increased quite substantially. It has increased from a little bit less than SEK3 1,000,000 up to a little bit more than SEK22 1,000,000. So that is, of course, very good and it's a big part of that comes from the elevator companies. But we also have had some other companies within this business area performing very well. I've got told you about the cooling products and also the electrical automation products that have had a good year 2018 and a good ending of the year especially. In the elevators, apart from being successful in the profitability, we in order to reach that, we have perhaps reduced the sales a little bit in some of the Swedish companies, but that has been put intentionally to lower sales but increase profitability. Still in some of our non Swedish, non Nordic units, we have seen a better demand and a good growth, which is also nice to see. Otherwise, we have made 2 acquisitions connected to this business area during 2018, and it was then at the end of the year 13 units all in all. Looking at next Slide 17, that's the niche product and services. In that chart, you can see that well, the profitability has actually decreased a bit, the EBITDA margin. That is also that we have very high profitability in the end of 2017, quarter 3 and quarter 4, but also that we have added 6 companies during 2018 and they have perhaps not had as high profitability level as those that were there from the beginning, but still very healthy companies. And as you can see now, we're running at some a little bit more than 20% EBITA margin in 2018. The year actually ended up with an even stronger figure of 21.3% profitability, which is, of course, very good. Some units that had a strong end of the year was, for example, electrical power monitoring company that Jacob also mentioned and some temporary infrastructure companies that work with renting out infrastructure. So at the end of the year, it was 15 units within this business area. And as we guided already in the early fall, we leveled out the profitability, as I said, around 20%. Right. Yes, then I hand over back to Jacob for some acquisitions. Yes. Thank you. We move over to Page 18. So this is a summary of the acquisitions that we've completed in 2018. And actually and then we've added after the end of 2018 in January this year, we also completed acquisition of Red Speed International. So in total, 8 acquisitions completed in 2018 and 1 in 2019. We can move forward to next page, number 19. Just briefly present the 2 recent acquisitions. Pure Water Scandinavia is a leading product company. It's in the business of Ultra Pure Water. The products are typically used in hospitals, laboratories, but also in energy companies where the need for very clean water is crucial. So and we it will be included in the water segment within our new business areas. Red Speed International is in the traffic enforcement industry. The company specialized in developing digital enforcement cameras. The largest customer is traffic for London with surveillance traffic surveillance cameras in the larger London area. And with this acquisition, it will be included in the Special Infrastructure Solutions business area and it will be part of the sub segment transportation. So we're very happy to add 2 very nice niche product companies to StifTech. And then to sum up the next Slide 20, You've seen the growth over the year. We're very proud of that. We're also very proud that we've improved the profitability over the quarters, as Bengt mentioned. And we have an unchanged very positive view on growing our profit levels further. So by that, we hand over to any questions from the audience. Thank you. The first question comes from Robert Bennett from Carnegie. Yes. Hi. Two questions, please. So one on acquisitions basically. You've had another year of high pace in your M and A process, call it. And previously, you've sort of had an outlook comment on what the pipeline looks like, so and now there wasn't one. So my first question would be on your M and A pipeline, how do you think that's developing? Okay. So the M and A pipeline is normal. The work continues. The activity is the same. So there's no change there. We have decided to not to share the details regarding the pipeline. We thought it was an important piece of information when we were growing from smaller levels. I think now that we have proven that we will that we actually do deliver acquisitions in a steady pace. And that need to also demonstrate that with detailed KPIs is not necessary anymore. But there's no change in the activities and in the number of candidates in the pipeline and everything is looking very good. Okay, perfect. Follow-up on that. For 2018, what was the sort of multiple paid, would you say? Gone up, down or same as before? Or do you have a number on it? It's we don't have a specific number to share, but the multiples are approximately the same. We can say that we experienced in Sweden, the acquisition of market has become a lot tougher. Many of the entrepreneurial led companies in Sweden have been approached over a number of years from many different companies, not only StifTech, and it's clear that they know their value, if you say so. And we believe that the price points in Sweden are too high currently. Therefore, we are also happy that we have worked on the U. K. Market for a longer period of time and we see that the that there are plenty of good companies in the UK that also are priced at a more attractive levels. Okay, perfect. And on organic growth, you said that it sort of slowed a little bit during the year gradually. What was your outlook for 2019? Do you feel you'll deliver organic growth in line with your targets? Or do you think that there's headwinds year over year 2019 on organic growth? No, mainly this slowdown was a bit that the comparables were quite tough. So but when we look forward, we think we will continue steadily. We have our target is to be between 5% to 10% organic growth. So that's still what we're aiming for. But of course, the future will tell, but that's yes. Okay, perfect. Thanks. Thank you. The next question comes from Frederic Nielsen from Redeye. Please go ahead. Your line is open. Hello. Fredrik Nielsen from Redeye here. I want to start with the margin in Tailored Installations. It seems to have picked up quite well. Do you believe that this is a sustainable level going forward? Yes. That is mainly because of the improvement program we talked about within the elevator companies. And we will try, of course, to establish on that level. We have previously guided that for that business side, it should be between 8% to 10% in the EBITA margin. Now the companies included in that business area has been split now into the new business areas where most of these have now are in the property technical services, 8 of them of those 13. The others are split mainly in the Special Infrastructure Solutions business area. So yes, so it's here to stay hopefully, this EBITDA level. Yes. And I can add to that also that the activities and the measure that we have taken in the profitability program, they we have taken the tough medicine. So the changes are not the easy quick wins that you also can achieve, but the quick wins there are easily lost as well. So we have gone for the to do some fundamental changes and really identify where is profitability in the elevator market, where are the customer segments that are willing to pay a higher price point and then we have redirected our efforts to those customers. And then eventually, as a result, then we have reduced the staff also. So it has been the work will if the measurements that we have taken are definitely targeted to be sustainable. So we are comfortable that what we have done is something that will be strong also in the future for our companies. Okay. One more question here, if I may. The growth in niche products and services seems to be rather low given that you have made a lot of acquisitions. What's your view on that? Well, mainly looking at the last quarter, we had the 2 of the companies within that business area having very strong sales development last year, which then also makes the comparison a little bit difficult for 2018. As you say, we have added a big number of companies, 6 of them, half of them from summer and onwards. So that will also then account for a higher growth in 2019. Also with these companies, we will split them into the new business areas. So we will kind of having new track records to follow. But the underlying business in these companies are developing well, I would say. Okay. So the revenue level in this quarter is normal and quite representative for a normal quarter, so to say? Yes, absolutely. Okay. Thanks. That's all for me. Thank you. The next question comes from Markus Belanda, Private Investor. Question regarding M and A. How do you plan to finance future acquisition? Like Bengt said, your net debt to EBITDA is sort of getting up there and while your cash flow generation, it won't at least allow for this same pace when it comes to M and A as you've had before? Well, we have our targets for our acquisition activities. We will increase our profit year by year. And we have a good financing backup from our financial institutions, so we can continue with that with those activities. We're right now implementing, yes, for example, a cash pooling mechanism that will make us also then being able to use our existing cash in our subsidiaries in a more efficient way. So we will I don't see really any obstacles to continue acquiring given both the financial strength we have and also that we can still have a good cash flow. And net debt to EBITDA ratio, as we said, the 3.0 is not really representing the actual debt level. So today, it's more the bank net debt that is the crucial point that we are also then discussing when we talk to our financial institutions. The other debt, I mean, if the profitability levels would decrease, then actually that debt would also decrease this contingent or conditional consideration debt. So you can still expect that we will have a high pace in our acquisition activities. Okay, understood. Thank you. Thank you. There appears to be no further questions. I'll return the conference back to you, speakers. Okay. Well, then we thank everyone for listening and meet you back again in 3 months to come. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your line.