Earnings Call: Q3 2018

Nov 6, 2018

Ladies and gentlemen, welcome to the StigTech Q3 Report 2018. Today, I'm pleased to present CEO, Jakob Polm and CFO, Ben Klatstrom. For the first part of this call, all participants are in a listen only mode. And afterwards, there will be a question and answer session. Speakers, please begin. Okay. Hello, everybody. Welcome to Stiktak's presentation of interim report for the Q3 of 2018. Let us move forward to the next page. My name is Jacob Braun, CEO for Stuttec. And at my side, I have Bengt Lejstrom, our CFO. Move forward to next page. So just a brief repetition of who we are and what we do. StipTech, we are an infrastructure technology group. Our offering and what we provide to the market is niche technology solutions and services to the infrastructure sector. Our market, the infrastructure sector as such, is defined in growth terms by urbanization, but also defined by demand for more advanced infrastructures that are fundamentally driven by improvements for increased sustainability, efficiency and safety. Finally, about our business model. We truly believe that deep technical niches provide both barriers to competition and good profitability. Therefore, we operate in a decentralized model where independent leadership and product development done in each subsidiary will ensure long lived market competitiveness for us as a group. We continuously expand our infrastructure relevance and footprints to the market through acquisitions of additional new niche infrastructure offerings. In that sense, we also grow the group. We have had a solid year on year growth, 53% yearly growth rate in terms of sales since 2015. Currently, the group consists of 27 subsidiaries as of an acquisition that we did yesterday. I will come back to that one. Okay. Moving over to the next page. Okay. So infrastructure as a market, I think we all agree upon that. It's defined by long lasting growth drivers. Any focus for statistics growth are areas within the infrastructure sector that are critical to welfare. And let me once again connect to the Agenda 2,000 and 30 defined by United Nations. It's a global call to action, and its goals include and address water, sanitation, energy, infrastructure, sustainable cities and communities. The world and the societies surrounding us need infrastructures that are more sustainable to reach the goals of UN. Stipex acquisitions over the past 12 months have been within these areas. So companies that deliver specialized technology solutions and services within water sanitation, power and energy, air climate and transportation. So this is very much our focus and it really defines us. So moving now to the left bottom end of the slide. Growth in the infrastructure sector is on one hand driven by a growing gap between demand and capacity. So this drives a larger volume in demand. Infrastructures, for example, water supply, wastewater treatment, but also electricity distribution supply are aging. And there's an increasing demand to rebuild vast infrastructure systems. So as an example, in Europe, 45,000,000,000 of liter fresh water is leaking due to leaking pipes. This leakage corresponds to the water consumption of 200,000,000 of people in the Western world. This is, of course, a big problem due to aging infrastructures and it needs to be fixed and rebuilt. But also capacity requirements continue to grow. So for instance, the new Facebook center in Ljurjo in Sweden has power consumption equaling 40,000 Swedish households. And a limited electricity supply is now limiting growth factor in Sweden. So the capacity requirements as such is also an important issue that needs to be fixed. And then on top of this, urbanization concentrates population, which puts further pressure and strain on our infrastructures. So there's an underlying strong demand for infrastructure technology over a long period of time. And if the growing gap is all about the volume demand, if we move to the right bottom side of the page, we highlight a set of growth drivers that drive improvements to the infrastructure sector. Sustainability, efficiency and safety are deeply rooted drivers for mankind. They have been and we believe they will always be so. And to get there well functioning and upgraded infrastructures are essential. So let me give you an example. In Stockholm, the inner archipelago, the water has in 50 years never been as clean as it is today. This is, of course, thanks to a long lasting implementation of stricter regulations of wastewater treatment. This is an area that Stiktik has several offerings. But at the same time, the organization, Swedish Water, has stated that the price on water will be doubled in 20 years in Sweden due to factors including new stricter requirements on water cleaning, but also the discovery of new contaminations in our groundwater. So these improvements to water quality are based on what we believe human driving forces for more sustainable, efficient and safe society. And as a growth driver in the infrastructure sector, they are not new and they will remain so most likely to a large extent going forward. And policymakers adapt. Regulations are continuously being updated to improve our everyday lives. And we, as citizens and also consumers, change our behavior and also require improvements. And to implement stricter water cleaning, reduce air emissions or better safety in elevators, just as a few examples of regulatory changes that are a natural part of Stipex business and growth. Moving forward to the next Page 5, to the quarterly highlights. And we are very happy to present the continued strong growth in both business areas in the quarter. The organic growth in net sales was 5% in the 3rd quarter, 9% in the 1st 9 months of 2018. In the quarter, net sales increased 48%, EBITDA increased 56 percent. And also, we are happy to see that the profitability margin EBITA star increased also to 11.7% from 11.1%. So continued strong growth. The elevated performance has also been strengthened. So with confidence, we are very happy also to see that the improvement program continues with good progress. The trend shift from early 2018 remains. And EBITA star improves as well as the margin, most important. In a few areas, additional improvement potential still exists, and we will continue activities until we are completely satisfied with the profitability in the area. To sum up, the outlooks are positive. Coming quarters, we have an unchanged positive view on growing profit levels. This is based on profitability improvements in the elevator installation area, but also that products and services will continue on its profitable growth path. Newly added acquisitions will, of course, contribute to fine results to the overall profitability as well naturally. So the outlook is also positive looking forward. Moving forward to the next page, number 6. If we start off on the left hand side with net sales, it is growing year by year. And in specific, we have highlighted for 2018 that for the 1st 3 quarters of 2018, net sales has grown by 35%. During the same period of time, the 1st three quarters, the organic growth has been 9%, as I said. So both organic but also acquisition driven growth in total gives us solid growth in terms of net sales. Moving over to our profits and EBITA star. They have grown in more or less the same pace. So overall, the profitability is stable. During 2018. EBITA star has grown by 37% over the 1st 3 quarters 2018. So by that, we move forward to Page 7. And I hand over to Bengt. Yes. Thank you, Jacob. Yes. Here on Page 7, we have summarized some key figures for the quarter and also year to date 2018 and the rolling 12 months from up to September 2018. And as Jacob just mentioned, for the quarter, we have had a very good progress and the EBITDA is improving more than the net sales, meaning that the margin is increasing, as you can see, from 11.1% last year to 11 point 7% now this year, quarter 3. Looking on year to date, we also have solid increased numbers for both net sales and the EBITDA. We now have for the remaining operations, being that we have excluded the results from those operations we divested earlier this year. It's €121,000,000 in 9 months, meaning there is a margin of 11.2. So we have a steady trend of increasing the margins throughout the quarters. Looking at a rolling 12 months, if you notice there also we have a good progress and you can see that the beta margin is actually even higher than what it is this quarter or in the year to date figure. That is because we had very good profitability last year in quarter 4, which makes, of course, a tough competition this year to match those numbers. But still, we are improving during the year and we'll try to be up on the 12% level as soon as possible, of course. Turning to next Page 8. We see now then some more detailed information on the business area of tailored installations. You can see on the graph that we have shown the path of EBITA margin, which as you may know, has been decreasing the past years because of the challenges in the elevator businesses. We reached kind of a bottom line there during the early month of this year and have then since steadily improved. And as you see in the chart, there is the rolling 12 month figures that were now up on the same level as last calendar year. But in the quarter such as can be found in the table below, you see we are on 7.4% in total for the business area, which means we are on a steady pace improving the margins. As Jacob mentioned, there is still some improvement programs going on, but the business area is not only elevator business. A big part of it is also a number of other business units. And especially this quarter, we could say that we have had good results from the companies working with cooling, interrupted power supply and also the roof maintenance. So there are a total of 13 companies in this business area and there are a number of companies having a very good development in the quarter. Turning to Slide 9. There is a similar breakdown of the business area niche products and services sales and EBITA margin. This one has also decreased the last couple of years, but as mentioned earlier, mainly because we had a very good profitability during last year in some units. And but we guide that we are closing in on a normalization responding to approximately 20% in EBITA star margin for this business area. And during this quarter, as you can see in the table on the left hand side, we reached 2.3% in margin, which is also exactly the same as for the 9 months of this year. On the rolling 12 months, the number was higher than again because of a good last quarter last year. In this business area, we have currently 14 business units, including then the last acquisition of Veraklifan that we announced yesterday. And we will come back to that, as we said. Yes. And then we turn to Slide 10. Okay. Thank you, Bengt. So this is our traditional summary slide of the acquisition status. So we have closed 7 acquisitions during 2018, totaling €60,000,000 of added profits to the group. I will come back to Biraj Lipan on the next slide. But just to mention the status currently, we are working and addressing 3 80 companies. So that is about we have identified 380 companies that we believe are interesting for us. So we take specific contact to reach out to them. And it's the purpose is to get into exclusive dialogues with these companies without competition from the traditional acquisitional market. So this is our strategy and currently 380 companies that we are working on and targeting currently. We are in big discussions with 4 companies, and we have signed a letter of intent with additionally 2 companies. So this is the status in terms of acquisitions. It's a normal status, I would say. So we are where we want to be. Moving over to the next Slide 11. We acquired Rooogaland Industry Automation, a Norwegian based company in July, in the beginning of Q3, a company active in the with products for control and regulation of water systems and sewage plants. Yesterday, we acquired Biraklipan, which is a producer of heavy duty fiberglass pipes and systems in large dimensions. They have a unique production facility, which means that they can produce the pipes, the fiberglass pipes in a never ending length. Normally, pipes are produced in fixed lengths, but Biraklippan has a production facility that can, as I said, produce in lengths of any size. The products are used to large extent in water and sewage systems, but also for chimneys and scrubbers. And we're also happy to say that we are adding both RUGALAN and Viracriptan. They are included in our water segment. And as I mentioned to start off, we truly believe that the market for the contamination of water, soil and air and so on is expected to increase as stricter environmental regulations are introduced back to the human driving forces of sustainability, efficiency and safety. So this is very much at the core of our focus. Moving then over to the next page, 12. In summary, profits are growing year over year, 37% up during the 1st 3 quarters of 2018. What we do, we provide these technology solutions and services to the infrastructure sector. Strong underlying growth in this sector driven by urbanization, but also, as we discussed today, improvements for increased sustainability, efficiency and safety. The outlook for the coming quarters is unchanged. We have a positive view on growing profit levels, profitability improvements in elevators installations, but also based on continued profitable growth in our products and services business area. And on top of this, newly added acquisitions will contribute to the refined results. So this is our ending slide in the presentation, and we open up for questions. Thank And our first question comes from the line of Markus Belanda, Private Investor. A few questions, if I may. First, on cash flow. It seems working capital increased quite a bit in the quarter, and it also increased quite a bit last quarter. What's driving this increase? And do you feel that you are on top of the working capital situation? Yes. Really, we believe we have a good grip on this. And as for the season, there is a buildup of inventories in the companies during the summer months to be ready for their installations activities. For example, now during the fall, there has also been an increase in work in progress, so to say, in the projects relating to the installation projects, meaning that we have worked on the projects but not been able to send the invoice, so to say. So that has increased revenues but also then increased our work in progress receivables, so to say. And there is also some accounts receivables that has increased as well during this period because of a bigger activity in September compared to the quarters of the quarter 2. So yes, there has been an increase in the working capital. But as we see, it is nothing really unusual for the type of companies we have and the season we're in. But of course, we monitor this to make sure that the money will come in soon enough. Understood. Thank you. And second question regarding the margin in Tailored Installations. As you suggested, it is sort of on an upwards trend, but it declined quarter on quarter. What's the reason for the decline? And should we sort of read anything into this? No, not really. This quarter is a tricky quarter. You have July August as summer holiday months, So that the margins perhaps was a little bit lower this quarter than previous quarter is perhaps not alarming in itself. So it's better to look at the trend compared to last year and also the trend from year to date, which is then a positive trend in the margins. And how high do you think the margin in Tailored Installations can go? I mean, can we get back to previous highs? I think 11% is the sort of record high. Or has the business changed structurally since the margin was 11%? What this is Jakob here. What we believe is that normal level for more niche and tailored installation type of services would be around 10 or slightly below 10. So that is probably in the long term what is in a sustainable level, and that is what we're aiming for. Okay, great. And final question regarding the acquisition of Veraclitan. So if I understand things correctly, this is a manufacturing business, which is maybe not quite in line with your strategy to focus on service. Can you talk a little bit about why you decided to acquire this business and get into the sort of manufacturing space? Okay. So we it's correct that we technical services. However, we have over the past 2 years shifted focus more towards product based companies. So this is not so this is nothing new really. And so we do have a mix of product based companies, services based companies, and we believe that the mix that we do have is relevant to our customers and to the market. So we are happy with all the companies that we have within the group currently. But if we look forward and that this has been the case over the past year definitely, but also during the past 18 months, it has we have had more and more focus towards product based companies and but also Drogaland, Zljaut, Mashum. They are companies that more are on the product side of the market. And maybe are there any synergies between, for example, Verra and the other companies? I think you indicated that in the press release, but maybe more if you could be maybe a little more specific, do your other companies buy products from Veraclipan or what's what are the synergies? So Veraklithan has that is that's correct. So our other companies, for instance, Poly Project Environment, RB and Birakitaban, they have similar customers, same type of customer segments. And they offer slightly different types of products to the customer segment. So by combining the offerings, we could provide new propositions to our customers. For instance, for Veracripan's deliveries, we could also add on additional equipment and so on to increase the order volumes for Verakritan, and we can do this by the supply from our other companies. So that is one example. On the procurement side, Veracripan is the delivered product based off fiberglass. Some of our other companies also have products in fiberglass. So on the procurement side of things, we can procure the fiberglass at a lower price point. So there are some synergies here. And once again, these synergies are what we say noninvasive. So it's not a matter about forcing cooperation between companies, but there are opportunities there that are obvious and that the companies are able to pursue together. However, each single business remains independent. This is what we call noninvasive synergies. And may I add to your question about manufacturing that it's not our aim, so to say, to buy manufacturing companies as such. It's to have their proprietary rights over their own products. That's the important thing. Then if they outsource production or have manufacturing in house, that could be different from company to company. In this specific case, the manufacturing process is part of their unique offering. So you could say that their proprietary rights is related to the manufacturing process being able to produce very long pipes, for example. So but otherwise, we are not striving for having huge manufacturing plants and because that only build balance sheets, the assets in the balance sheet. So we try to avoid that, in generally speaking. Great. This has been very helpful. Thank you for humoring me. Thank you. Thank you. And as we have no more questions registered, I'll now hand back to our speakers for any closing comments. Okay. Well, we have nothing more to add. And say thank you for listening, body. And Yes. See you in 3 months when we issue our year end report on the 12th February next year. Thank you. This now concludes our conference call. Thank you all for attending. Participants, you may now disconnect your line.