Earnings Call: Q2 2021

Jul 22, 2021

Hello and welcome to this Q2 presentation with Stiptec. With us today, we have CEO, Jacob Hohl and CFO, Bengt Leidster. My name is Christopher Bergen, and I work for Finwire Media. After the presentation, there will be a Q and A session. So if you have any questions, Please visit finwire. Tv and click on this Q2 webcast where you can write your question. With that said, I hand over the word to Jacob and Bengt. Thank you, Christopher, Very welcome everybody to StipeTech's Q2 presentation for the Q2. My name is Jocob Poln And with me as always our CFO Bengt Leidstrom. Today the same agenda as always Business overview, we move into the Q2, the financial development. Bengt will walk you through more of the details. And then finally an outlook what we foresee for the future. Starting off then with the Overview of our numbers. We definitely present a solid report. We continue on with our business model to grow our profits and increase our margin. Sales at SEK 2,400,000,000 profitability margin, SEK 17.6 percent last 12 months In the quarter about 18% continuously growing. Our growth of profits is of course the most important. That's what we focus on. Historically 36% CAGR, last 12 months 43% and in the First half, the growth pace has been increasing close to 50%, so a positive trend In terms of growth as well, please change slide. And so and Really, our business model is really to deliver value growth by consistently increasing our profits. Our business model is, as you know, to acquire and to develop the acquired companies. We focus since a few years back on high margin positions. That is what we believe is the most sustainable Positions for our companies, not only from a profitability perspective, but also from the strength and the competitiveness from our We are performing well now, but we also intend to perform well in 10 years 20 years to come. So Strong market positions definitely in focus and then good underlying growth in the markets where we are active, driven by Infrastructure, Sustainable, Efficient and Safe Societies. Can you move forward to the next one? And then we move into the Q2, starting off to present the acquisition of the quarter, A rather small company. It's an add on acquisition, FICON, to our company Hiltip in Finland. Hiltip is active in the business of providing products to clear snow and ice from roads And Fecon is also in the same business. Hiltip is focused on electrical driven Products, whereas FEKCON has products based on hydraulics, so it's good complement. And ficon also actually has a stronger position on the Finnish market, even though it's a smaller company. So Hiltip and Frikom together will provide an excellent opportunity on the Finnish market, those two companies together. So we're very happy to present that acquisition. It will be included in the special infrastructure solutions business area. Move on to the next one. We have a high activity in the group, we always have, but we definitely have had so also In the Q2 and also in the Q1, we concluded our divestment within the Property technical services area by divesting our Austrian elevator business, Good multiple, of course. And if we sum up All the divestments that we have done during the period of our ownership, they have delivered approximately 150,000,000 in net Profits, so a very good contribution in our journey as of now And the return on equity, the invested equity that we have done in these businesses, when everything is summed up, The return is 21%. So they've also delivered good return for our shareholders. So we're happy to conclude that and it's an important step for us to emphasize our focus on quality And I think that's also something that is reflected in our growing profitability margins in a positive way. And also an important step for us to enter the NASDAQ Stockholm large cap Our first day of trading was June 11th. We've already experienced increased attention internationally from international Funds, so that's been very positive, I think. We definitely believe so. It was a natural step for us to take After 4 years on First North Premier. So we're very happy to finally deliver that step in our journey. We can move forward to the next one. During the period, we've also launched 4 sustainability goals. The first one Is that all the companies that will be acquired by us must contribute to at least one of UN Global Goals for sustainable development and this one is really at the core of what we do Since the companies that we acquire and that are part of our group that is really the products and the services that we sell to the market. So For every revenue that we gain from sales we also want those revenues to contribute to a better world And this is not a new step for us. We're just aligning what we've been doing for several years. We have been focusing, as you know, On companies delivering increased sustainability, efficiency and safety to our societies. So by establishing these goals, we also align our sustainability development with our core business model. But then of course we have an important task as everyone in the world to also bring down Our emissions, so our goal is to reduce those by 50% within 5 years. It's an ambitious goal but it's something that we have to do. We don't Have any exact plan on how to deliver that, but I think that's not an excuse for not delivering Putting up the goal and then doing all we can to actually deliver upon it. So that's an important goal for us from an environmental perspective. The 3rd goal is related to social responsibility and sustainability, where we By 2,030, in our leadership, in all our leading positions within the entire group, We have a goal to be gender equal and it's also an ambitious goal. As you know, we have a decentralized model where many of our companies, they are rather small. That's the whole Idea behind the business model but that also means that it's a limited recruitment base For the leading positions in those kind of companies. But we will do all we can To enable this goal because we believe it's very important to get the diversity that comes with gender equality. The 4th goal is related to governance and that where we put everything together according to our business model. We have a decentralized business model. So for every company, we will implement concrete goals That will support the overall goals that we're looking at today. But for every company, the goals will be individual, of course, so that we can achieve this for the entire group and then we will link those individual goals for each company With the incentives for the leadership for every respective company within the group so in that way We bring it all together so that we really can deliver this as a group. Moving on to the next slide and then having a look at our business areas, starting off by Water and Energy. The development we start off by looking at the graph. The yellow ones represent the last 12 months for the 4 past quarters. And as you all know, we did an acquisition of Rollek charging solutions in Q1 and they really entered our numbers in Q2. So the sales number reflect that. We have definitely an increase there and also an increase in terms of profitability. So sales and profitability positively affected by the acquisition of Rollik, But the entire business area has also delivered solid growth. In terms of EBITDA, Going back 1 year, the Q2 was really the quarter where the pandemic hit the world in the most hard way and some of the units in Energy, they were more affected by the restrictions. These units are now back to normal, so we also have a Strong organic recovery in this business area. So bringing it all together, a very strong quarter from the business area, Water and Energy. Moving then over to the second business area, Special Infrastructure Solutions, once again starting off with the graph. Sales growth Strong, largely driven by the acquired units Hiltip and GAH Refrigeration, so very positive. The sales graph continues to develop in a very positive way. Moving over to the profits, The acquisitions have, of course, added to the profit growth in the quarter 66%. However, the profitability slightly coming down compared to last year and The Special Infrastructure Solutions area actually delivered in a very good way during the pandemic But we didn't really know which way the pandemic was heading, so we implemented quite Strong cost savings over the entire group. So when we still had a positive development on sales last year, we had the Cost reductions, the profitability was extra high in this business area. So the comparables were very tough. So from that perspective the business area is more coming down to what we believe is a normal level. The profitability margin then at 22% to 23%. Moving over to the 3rd business area, Property and Technical Services, which of course now Has shrunk from 9 business units starting this year And now down to only 2 business units. So naturally, the sales have gone down as a result. So it's Nothing strange about that, sales and profits down. The profitability margin In the quarter, definitely lower than we normally would From the 2 remaining business units, however, there's nothing alarming going on there. It's What I think is most important for everyone now to be aware of in this business area is just 2 remaining businesses. So it's a small business at only €100,000,000 in sales For the quarter, that means that the numbers will be more fluctuating and up and down from quarter to quarter. So this is more a reflection of that effect, small size. And then moving over to the financial development and handing over the word to you, Bengt. Thank you, Jocco. I will start with some summary here of some important comments to our report. As Jacob mentioned, we had Some tough comparables when comparing with last year's profits. On the other hand, we have a little Easier comparables when it comes to sales. So if you consider that last year, as we disclosed in different press releases During the Q2 and Q3, we were about 85% to 95% of delivering against the planned orders. If you say that they were 90% in average and now we have had 15%, 16% in organic growth, It really means that perhaps the more normal organic sales growth were about 5% if last year had been a normal year, so to say. So that's according to our goals and expectations. And on the other hand, the profit level were boosted by Subsidies from governments and some cost reductions both from governments and also of course initiatives in our companies. So that comparison is not really normal either. So we feel confident. We have delivered 1 point 3% organic profit growth over the 1st 6 months. And we have a goal of 5% to 10%. That's a long term goal. And we stick to that goal, of course, for this year even though the comparables can be a bit tough. If we're looking at the cash flow, we have if you have read the details on the cash flow statements, you see that we Have an increased working capital. And especially in the quarter, we have had an increased number of accounts receivables. And that's both because of strong sales in a number of our units, also that, for example, Hiltep and a few other Companies with more seasonable sales have had activities going on with customers and offering them longer Payment terms, if they buy pre season, so to say, instead of waiting until the fall. So that has been affecting the Looking for the 1st 6 months, we also had a cash out Flow in quarter 1 from deferred taxes from 2020 when you even could postpone tax payments during last year until this year and that, of course, have hit the cash flow this year. So comparing this year's percentage cash conversion against last year, of course, Show not so nice numbers, but it's not really unexpected. We have also during this year, have the buildup Of inventories in our companies, especially those that have components that face some risks for shortages, Even though we haven't experienced that to any bigger degree, price increases, for example, also some raw materials And the freight rates as well. But they have built up inventory, especially during quarter 1, but they have continued to keep These high inventories also in Q2, even though their sales have been quite good. So in normal cases, perhaps you would Let your inventory down as your sales increase. But in our case, we have then replaced inventories and kept the high levels. So even though the numbers looks a little bit strange, it's nothing really alarming around that either. And then when it comes to calculating the accounting from the divestments, We have actually a capital loss of SEK 20,000,000 from the divestment of the Swedish and Austrian Elevator businesses. And that's due to that We had quite amount of goodwill in our balance sheet, which we have not Amortized over the years in the same way as we amortized the conditional consideration that, For example, because it's different mathematics around those, which meant that now then we when we sold these companies and still had Goodwill in the balance sheet representing profits for the future. There became a hole, so to say, in the balance sheet, which is less About SEK 20,000,000 net. So that's, of course, a one off. Then looking at sales, Jocop had mentioned most of this, I think. But since we have had the quarter with both acquisitions It could be a bit difficult to follow all the numbers. So on this slide, we have added them the split. As you can see, this sales increase of about 38% in Q2 consists of acquisitions, Almost 47%. The divested companies that were included last year, but not this year, That's a negative number of course, 23%. We have the organic growth almost 16%, but currency effects because of that Especially the British pound has lower value this year than last year of a minus 1.4%. So there you can see, so to say, the split behind the total number of 38% in sale increase. When it comes to the split between the countries, you can see that the UK is increasing as it should and this is based on last 12 month figures. So of course, since we acquired both GAH and Rollik during the last 6, 7 months, That number will increase even further for the coming quarters. Looking then on the profits, we have had then a strong profit growth. Also here, We have split it up between the different components for you to a little bit better understand where it comes from. We have a total increase In the quarter of 46%. Of those, we actually have almost 65% coming from acquisitions. We have acquired quite big companies in Rollik and GAH and also Hilltop. We have divested. And as you can The elevator companies didn't really bring much to the table last year, so it's only minus 4.5%. You saw it was Almost 24% when it came to sales, but for profits was 4.5%. The organic growth is negative because of this Very good profits last year and also here we have a negative currency effect. We also, as we said in the report, have Quite high internal central costs, which compared to last year's total profits meant almost 6% Lower profit all in all. Much of those one offs because of the listing to the NASDAQ, SEK 4,000,000 and also some other costs then for lawyers, etcetera, in other situations. So if you look at our total EBITA margin of 18.1% and perhaps deduct those Central costs that are more or less one offs. You get closer to the 19% for the quarter, and that's more in line with our guidance for the full Where we say 19% to 20% of the EBITA star margin. So we feel secure of having that goal also going ahead for the year. If we look at some other metrics, we can then also see that for the quarter, We had had an earnings per share that were perhaps a bit lower than most expected, but that's because of this capital loss From the sale of the Elevator businesses, SEK 20,000,000 which is not tax deductible, so it's directly into the earnings per share. And for then the last 12 months, we are almost at NOK 7 per share. Looking on the cash conversions, we had, as you said, not the most Best figures for the quarter, 26%. Looking at the last 12 months, we are at 74%. And of course, we hope to get better situations for the coming quarters when it comes to the working capital especially. When it comes to our debt leverages, we have a goal of being below 2.5 when it comes to net Financial debt compared to EBITDA, and we're currently at 1 or 0.99. So that's, Of course, a quite good position for future acquisition opportunities that will have a lot of headroom to increase our debt in case Since we borrow money when we acquire companies typically. Looking at the total net debt It's almost 3, but there we have included them our debt for future conditional considerations, which only Come in play if the profits increase over time. Otherwise, those debts will be written down. So that number is not really a relevant number, but we show it anyhow for being transparent. Yes. And then We have an outlook, Jacob. Yes. Thank you, Bengt. So looking ahead, Size a few points. The underlying demand from our customers is solid. The organic sales growth was at 15% high as Bengt mentioned. However, that is to some extent a reflection of lower comparables from last year. In the same period last year we were at between 85% to 9% delivery of planned orders Which actually was a demonstration of the resilience that we have during more difficult periods. But anyway, so taking that into account, The development this year is a couple of percentage points on the positive side on organic sales. So that really reflects The demand that we expect and that we have seen and we also have expected for the future on the sales side. Profitability continues to increase as we've talked about, driven largely by acquisitions, but also by our divestments of low margin Business units, our guidance for this year, we stick to it. For the Full year numbers reaching between 19% to 20%. So that's a positive message as well. And we are positioned with all our companies towards good strong growth drivers. Sustainability, efficiency and safety really drives technology development, but also an increased demand to All our companies, which is very positive. And then what perhaps is to some extent Brings uncertainty to the future, not only for us, but I think for most of the companies that work with physical goods. What we have done there is that we have been building inventory. We actually started doing that already During the second half last year, at least some of our business units did so with the purpose To always be able to deliver to our customers because that is really what is most important in a situation like this. So always be able to deliver. And that, of course, costs a little bit more. As you all know, prices on material And components have increased and that is even more so when you build inventory. However, our customers, they understand the situation in a good way, most of our customers at least. And they also prioritize the ability to deliver. So They accept to take their part of the cost increase. So that is we have good dialogues with our customers. We believe it's the right Type of strategy and we will continue to do that. So continue build of inventory It's an approach and keep the dialogue with the customers on how to deal with the cost increase. That's the way we approach it and we will continue to approach it. And looking finally over to acquisitions, we are well capitalized and we have been We have a high activity, we also have a high activity but since we have been in a pandemic the restrictions It's been slightly difficult to meet owners of companies that is really opening up now in a positive way. It has Opened up since 2 months ago in at least some of our markets. UK is still a bit challenging but that seems to change now as well so that's Positive. And so from that perspective, our pipeline It's good. It looks positive. We have queued up Interesting companies due to the pandemic. So we are really working now on To finalize those dialogues so that we really can deliver on the potential that we have in our pipeline. And I would also just like to mention that we have we really experienced that our business model and our offering works Well, in the United Kingdom, the population there is also larger, fantastic companies that we have acquired and That we are looking into further acquisitions, but we've also since a few years, but we've intensified that now looking to additional markets In Europe, and as we've said before, Netherlands is one of those markets. But we've also more Actively started to look at the market of Northern Italy and There's also an amazing population of technology based companies that fit into StipeTech in the Northern parts of Italy. So we're very excited about that as well. So overall, well capitalized for acquisitions and a good pipeline. So with that, I think we are ready to open up for questions. Great. Thank you for the presentation, Jacob and Bengt. So let's start with the Q and A then. First question, if you look back to the quarter or the first half of the year. Is this something particular or special that you would like to highlight for us for the investors? Well, I can mention, I think, the activities that we do To increase the quality in the group that eventually is demonstrated by an increasing profitability margin, I think that is something that really emphasizes the strategy that we have. So our focus on acquiring companies with strong market positions, that is Really our focus and then divesting companies that are more part of our legacy that we believe not have strong enough market positions. So That is really we are executing strategy that we laid out 3 years ago. Now we are really starting to see the effects of that. So I think that's one important highlight. Okay, great. Thank you. Next question. CapEx for the last three quarters have been quite stable at just below SEK 40,000,000, a low relative level to other Companies and to your own history. While sales have continued to grow organically during the same period, how should we think about your future CapEx needs? Is it mainly maintenance CapEx or and is this level of around 1% relative to sales sustainable? A long question. Yes, but I understand it. Yes, last year, I think we were running at about 1.5% of sales Going into investing in tangible non current assets. And typically, we like companies That are lightweighted on their balance sheet. We are not really focusing on buying manufacturing in itself. We want to buy product companies, Product based companies, which own their intellectual property rights to their products, not necessarily Manufacturing those products. And we also have a number of companies where their products, so to say, is more services as a product, Which means that we are not that heavy on fixed assets on our balance sheet. So we don't really expect this number to increase. Perhaps What could increase could be costs for product development. That has also been quite low, but not to any really substantial numbers. So I think guidance somewhere between 1% 2% of our turnover is that's a good guess going forward. Okay. Thank you. Next question then. Would you say that the current working capital relative The sales level is reasonable going forward? Or should we expect it to decline again? Yes. We mentioned we have built up inventories. Of course, that is often met by increased debts to suppliers. But if you keep that inventory level high, of course, that affects this ratio. So we have this higher level of inventories and we will see how long it's necessary to keep that. That depends on the overall situation when it comes to The suppliers. So I would say that it's these numbers we have today is Quite a good representation, even though perhaps our accounts receivables are a little bit higher at the moment because of good sales and so, but yes. Okay. Thank you. Next question. When looking at the SIS segment, we see that the GAH has a dilutive effect on the margin. All else equal, could you comment on An expected full year 2021 EBITA margin for the business for this business area? Well, we don't give those kind of guidance any longer. We did that last year and the year before just because we had Formed the new business areas in 2019. And last year was a little bit of a rocky year with the pandemic. But now we're instead focusing on our margin guidance for the whole group, the 19% to 20%. We think that's more relevant. But as mentioned here, the GAH as it's rolling in, it was acquired in December, but as it's rolling into a full year, it, Of course, that is the overall margin on that business area. Okay. Thank you. What new countries are you looking at regarding future acquisitions? Okay. Well, I think we mentioned that, so I could just repeat it. So we are new markets Netherlands and Northern Italy. That's what we are looking into. We've done so For a while, those markets are characterized by the similar Characteristics as the Nordics and UK, the markets in those countries, the history of Entrepreneurship is very, very strong. So there's a large number of smaller companies. And also the engineering Tradition within those countries are also very strong. So there's a good population of Large number of technology based high performing companies. So that's definitely true for the Nordics, it's True for UK and it's also true for Netherlands and Italy. So that's really the basis, one of the Criteria for us to enter new markets. Okay, great. Thank you. Could you elaborate a bit on the soft margin in PTS? Did travel restrictions have any negative impact? I think we mentioned that as well. So just to repeat it, it's I think you should view the soft margins in PTS Is that now that business area consists of just 2 companies, so it's a small business area, it will fluctuate from quarter to quarter At a higher extent than what you than what we saw when the business area consists of 9 companies. So It's just a matter of size. Okay. Thank you. What is your view on the Component shortage we see in the world. You mentioned in the report that you have had an inventory buildup to meet a potential shortage. But what's your view on the general shortage, so to speak? I think we also answered that. I don't think we need to maybe it's an old question. If we look at you were hit quite quite hard by the pandemic as a lot of companies were. Are you back in full capacity after the pandemic? Or are there Some of you, Jurgen, is still suffering from it, so to speak. No, we are back to full capacity. So when we were at the bottom, it was about 85% of our orders. We were able to deliver on 85% and that gradually increased over the quarters last year. And then June 2021, the some minor, minor areas have been affected, but those are more or less insignificant. So we're back to normal. Okay. Have you seen input prices rise? And if so, Has that had an impact on the profitability in the quarter? Yes. As we said, definitely Prices on components and some materials have increased significantly, but our strategy is really To take the dialogue with the customers, we prioritize deliveries to them. They prioritize their deliveries as well. So We have a good discussion and most of our customers accept to take their part of the cost increase. Not all do, Of course, but the majority do. So that is an approach where we still can maintain a decent profitability even though our Purchase prices go up. Okay. Thank you. If we look ahead, what will be your main your most important focus going further in the coming quarters? Well, To really deliver, we are well capitalized after capital raise and good cash flows, of course. But so main focus is really to use that capital for further acquisitions. That's definitely in focus. But then also to really continue to we've already started to implement Our 4 sustainability goals, so that is really to bring that work further in a good way together with All our business units, that involves all our business units. So a lot of leaders will step up to deliver on this. So that's a group wide work that is also very important to really kick off in a good way. Okay. Thank you. And I just received a new question here, the last one for today, if we don't receive any additional ones. On a long term perspective, how would you like to be exposed geographical wise? What country shares will you be happy to have? Yes, that's of course very hard to say. It's we do our acquisitions when we believe that We find the great companies and that when we can agree on terms with the owners and that's very hard to predict. However, if we look at the size of the markets where we are active now, of course, UK will most likely Outgrow the Nordics and then Northern Italy or Italy And Netherlands will most likely as together be more the size Of the Nordics. So UK will most likely be our largest market in maybe a couple of years to come. And the Nordics And Italy, Netherlands will be 2nd and third. Which one is larger than the other is impossible to say. Okay, great. Thank you. That was the final question. And a big thank you to Jacob and Bengt for taking the time to present the quarter to us. And I welcome you all back for the next quarterly presentation with StipTech. And until we hear from you again, I wish you a great summer and have a good day. Thank you very much. Thank you. Thanks.