Earnings Call: Q3 2021

Oct 26, 2021

Quarterly report

Hi, and welcome to Steedech's webcast. Jacob Holm, the CEO and Bengt Leidstrom, the CFO of Stipek will be presenting today. My name is Martijn Westlund and I'm from Finwire TAVR. If If you have any questions to Jacob and Bengt, you can ask them in the form on our website that is located to the right. And if you're watching this on YouTube, you can find that form in the description. And with that said, I'll give Jacob and Bengt the stage. Go ahead, please. Thank you very much, and welcome everybody to Stibtech's report for the Q3 this year. As always I will be presenting together with Bengt. Unfortunately Bengt has Quarter call, but he will join in for the Q and A session. But the presentation I will take By myself this time. So moving forward to the agenda. Short overview is Stibtik, then digging into the Q3, which is the main event, of course, the financial development and then summarizing with an outlook for the future. So as most of you know by now, we We are an infrastructure technology group focused on, of course, infrastructure. With that said, also It comes then with the products and the services that we sell. They contribute to more sustainable, efficient and safe societies. That's very important. It gives us purpose And also improves the world that we're living in. €2,500,000,000, 2.6 €1,000,000,000 net sales last 12 months, growing, of course. Our profitability margin also increasing. The most important growth metrics, of course, grow our profits. We're up 44% there compared to then a CAGR development over the past 5 years of 36%. The key development is also illustrated in this graph. And as you know, we have a business model that is really designed to Acquire niche companies and develop them, of course. We have very much focused on quality companies. We define quality companies As those who have strong market positions that are also defendable towards competition, very important. The underlying growth trends in our markets are solid and stable over a very long term. Okay. So digging into the Q3 then. First of all, just a brief note on the acquisitions. We're very happy to present the 2 acquisitions. The first one is ID Systems, U. K.-based company. ID Systems are specialized in temporary power distribution. So it's a product company. So they develop and produce and sell their own products. To some extent, they also lease these products, but the DNA is that they develop their own products. One important part of the product suite is a software A product that really enables the customers to monitor the power usage, to reduce power consumptions And as an effect, of course, carbon emissions. So it will be included then in the Energy segment or the Water and Energy business area As of September 2021, so they have already contributed to some extent to the numbers in the quarter. Moving over to Certus Automation, our most recent acquisition, which is the first one in Netherlands. SerDes provides solutions to ports and terminals predominantly, but also logistics Distribution centers and their products help the customers in an automatic way Identify, register, but then also continuously positioning, for instance, containers in ports. So that really drives increased efficiency as opposed for those customers who do it in a manual way, which is a traditional way of doing things. And the software is a sophisticated one. The really core part of Software is an image recognition technology. So in that way The ports and terminals can identify containers, vehicles and so on in an Automatic way, they will by that increase efficiency of course, but they will also reduce mistakes. When you load containers into ships, for instance, it's very important which order you load the containers so that they can be off Loaded in a logical way when they reach the different destinations. So it's a quite sophisticated system and quite complex processes That the products facilitate. And the image recognition software has really been identified Also it's interesting for StipeTech as a group for other products that we sell. So It's going to be interesting to see how we can leverage that. Moving forward, we are Organically on sales, but we are down organically in profits, down 13% in the quarter compared to last year. So with that said, we wanted to remind everybody about The situation last year, so we have taken a few quotes from the report for the Q3 last year. And as most of you remember, we had a very strong growth of 18%. So that's the background. And one important reason for this profit growth was the extra high delivery levels when we caught up in the delayed orders From the beginning of the pandemic, so sales were up. And Equally important or perhaps even more important was that we were very stringent on our costs. We had implemented cost savings from the beginning of the pandemic and provided that the situation was still quite Certain what was going to happen with the pandemic. The cost levels were still low, but the sales were up Significantly. So overall, the profitability was extra high. So and we also said that those should not be considered as Permanent. So with that in mind, with quite extreme effects up and down, we think it's important to have a look at the profit development from a period in time before the pandemic until today, So the 1st January 2020 until today. And the average annual Organic sales growth approximately 6% and the same number for profit growth approximately 7%, which is perfectly in line with our Financial goals of 5% to 10% profit growth. So for us, it was important to show this. It really proves that the underlying demand is solid and growing and also that the growth is Profitable, in line with our goals. Okay. Moving forward, Few updates on other things that has happened in the quarter. To start off on the point regarding Italy, We have executed a couple of pilots in new markets for approximately 1 year. The purpose was really To figure out if and which markets that our acquisitions methodology fits well. And as you know, the purpose of our methodology is really to find the best companies in each niche. We are focused on quality rather Than a quantity of a lot of companies. And the findings from the pilot is that our methodology is Highly effective in Italy, along with our proposition to owners, Which has been received very well, especially the point that we have a focus on infrastructure that has been very well received. So as a result, we've decided We that we won't have feet on the ground in Italy, which in practice means recruitment of key resources that can really help to dig into the potential that we have in our Italian pipeline of companies. In addition to that, we have launched a more a wider view on infrastructure. I would like to call to say that it's a more modern and also more relevant view on infrastructure. So according to us infrastructure is Components and Systems providing commodities and services that are essential to enhance societal living conditions and improve the surrounding environment. So what that really means is that if we take the concept of resources efficiency, So that is really about taking care of the resources that we have on the planet. That view is Wider than a more narrow view of water and energy that we have today. Water, very important resource. Energy, naturally extremely critical resource, but there are other resources that are so important as well. So food, for instance, very important resource that we need to work in A different way. We need to produce a lot of food to grow in population, but we cannot destroy The world, while we're doing it, so a lot of development needs to be done there. Waste is also a very important resources Resource or waste management recycling includes is included in the wider definition as forestry, for instance. So the wider view makes us more relevant, but it also really opens up to additional acquisitions opportunities. And as you know, we have completed the divestments in the business area Property Technical Services. We started off the year with 9 companies. We divested 7. So the remaining 2 will be included in Special Infrastructure Solutions as of this quarter. Moving over to the 4th point. We have raised our acquisition Target, that is really on the back that we are ready to do it. We are prepared for new geographical markets, As I described, we've also entered the Netherlands, as you know, in addition to a focus on Italy, we have a wider view on infrastructure. We have a well developed methodology for acquisitions, highly developed Structured capital and experienced team. So we are more than ready to raise the target. So the way we want to see it is first you get prepared And then you raised the goals. So that's really what we are happy to present here as of the Q3. Moving on then to acquisitions. The previous goal was set in 2016 is represented by the gray part of the graph. The goal was SEK 90,000,000 per year, more or less, with the exception of 2018. We have delivered upon that goal. And as you can see in the graph and as you know already, we have acquired according to 158, And that is, of course, in line with our new target SEK 120,000,000 to SEK 150,000,000. And Also taking into account the divestments that we have done, the net effect is SEK 120,000,000 which is then also in line with our financial goals. Moving over to our 2 business areas, Starting off with Water and Energy, start off by having a look at the graph. It really illustrates steady growth in sales, But also positive trend on profitability from 2018 and onwards. Moving over to the quarter. Sales increased by 76%, Largely driven by the newly acquired business units. Rollik has been part of the Group for more than 1 quarter. They have developed in a positive way and ID has also got a very positive Start. And also in addition to that, the entire business area, the business units have also demonstrated solid growth. So overall, a healthy and strong development in the entire business area. Moving over then to profitability. Profitability margin increased to 25%, which really reinforces the Profitability trend that you can see in the graph. The most important or actually the real contribution to the improved margin Comes from the newly acquired business units. Organically profitability is slightly down And that is really on the back of that the exceptional profitability that we had last year. So Now we have returned to more normal cost and staffing levels, which of course affects the profitability. But everything taken into account, it's still an increasing margin and Adetastar increased naturally more than sales, They doubled actually. Okay. So moving over to Special Infrastructure Solutions. So starting off on the left hand side. As you know, PTS has been merged with CEES as of this quarter. So all the numbers that is presented for CEES also includes former PTS. So taking into account what has happened then into PTS would be reflected in the numbers for Foreseas. So 7 divestments in former PTS we did in Q1 and Q2. Those are, of course, included in the Sales numbers that you can see in the graph. From now on only 2 remaining business units from PGS and Cs. And then looking at the quarter then, it's quite interesting. It's actually quite it's actually a coincidence, but The contribution from the acquisitions that in the quarter on the positive side and the negative Contribution, if you say so, from divestments are more or less the same. So the net effect is really small and rather insignificant. So the majority of the sales growth was organic actually. So that really demonstrates continued solid Sales growth in the business area. However, lower sales than expected in some units That is really due to delayed orders from customers. To some extent, we've had some challenges with our own components, But the delays are not extraordinary. More so, we have had Customers that are delaying their orders to us. They have placed the orders, but they're delaying the delivery. And that is really because they are lacking components from 3rd party providers. So the situation around the supply chain It's a bit more complex and it goes outside the what we can control on our own. But with a very good dialogue continuously with the customers, we want to deliver, the customers want us to deliver, they work with all their providers. So the most difficult situations are normally solved in a very good way. Moving then over to the profitability side. Important to keep in mind, the newly acquired GAH Refrigerations has a profitability level approximately at 17%. So that really contributes to a lower margin than Previous year. Organically, CICE was perhaps the business area that had the most extreme High profitability previous year. So of course, organically, profitability is down when we return to more normal levels. But that's really then going back to the comparatively high Numbers that were compared with in this quarter. Also increased material prices have affected profitability. Our business units in this business area, but also for Water and Energy, are very good at actively working with the customers To have them take the majority of the price increases. It is possible to have that Type of dialogue because the products and the services that we deliver are really critical for our customers. So in that way we can have a very constructive dialogue on the price situation. However, The price increases have been really large, as you all know, and they have occurred in a Short time. So to some extent, the cost increase have borne by us as well. So taking into account the 5% growth on sales and slightly down on profitability level, of course, then the net effect is that EBITDA star is down 3%. This is really expected both on the acquired contribution, but also an organic contribution. And given the extraordinary high profitability last year, This is actually a very strong result. Moving over to Financial Development. Starting off then with the sales. The Graf, of course, demonstrates an illustration of our business model to continuously grow our group organically, but also With acquisitions, of course. And also we definitely have a focus and a strategy to For quality in the companies that we acquire and how we develop our companies and that is also illustrated by the improving margins. You can also see that the profitability in the Q3 2020 was extra high since it goes up And then flattens out, but that is also expected as we discussed previously. Sales wise or country wise, U. K. Is growing as a segment and this is really the last 12 months, So there's a lag. So U. K. Will continue to grow as a geography within the group And it comes natural for us. U. K. Is a very good market when it comes to infrastructure. Infrastructure is to a large The domestic market and U. K. Is from that perspective large market. So it's a very positive aspect of our composition. Having a look at the profit development, Profits are up 38% over the last 12 months. CAGR wise, over the last 5 years, 36%. So we really continue on the trend of demonstrating a strong profit growth. And quarter increased 28%. And as we described before, that is From the entire increase then comes from acquisitions, and we have organically EBITDA coming down due to very Difficult comparison with last year. Data margin still improving, 17.7% over the last 12 months now 18.4 percent, so it continues to go up. And we keep our guidance for the full year. I can mention that because we talk about margins. It's, of course, difficult to fully understand what will happen with supply chains, with the Price increases, we are actively working with these questions. So there's some uncertainty, of course. But what we know now, we see no reason to change the guidance. Okay. Looking at the numbers for year to date, we've broken them down. EBITA store up 40 4%, organically then down 4.5%, which is also expected. The acquired contribution is quite Significant 53%. And the divested businesses there, What we've taken out contributes or equals to minus 4.2 Percent compared to last year. And as you know, we divested in Q1, a smaller company, Tello, but then the elevator business in Q2. So year to date, they have been part of the numbers. So the reduction there is quite Small in comparison. Currency minus 0.4. Okay. Well, that was the comments around the profit development. Moving over to the additional metrics. Starting off with the cash conversion, it has been proved in the quarter. And the reason for that is that the receivables have been reduced and that is really a reflection that we are coming back or resuming to more normal Organic growth in terms of sales, 4% this quarter, for instance, compared to 18% previous quarter. So receivables are coming down in a healthy way. And also we have done an inventory Build up over a longer period, as you all know, that is really On the back of the difficulties with supply chains, however, in the quarter, the levels Well, the goods have been released out, so inventory levels have also come down. All in all, Cash conversion is slightly gradually coming back to levels that we expect. Having a look at the earnings per share, 2.05 in the quarter, 6.42 for the last 12 months. Important to keep in mind, we want to remind everybody That last year's EPS also included capital gain when we sold off products That was really part of our legacy many, many years ago. So we divested them last year. And of course, they that contribution approximately SEK 0.8 was included in last year's numbers. So if we exclude that, the EPS also demonstrates a healthy growth along with our business model. Looking at the debt side, the net financial debt is on low comfortable level, 1.05. That really means that we have muscles to achieve and deliver upon our raised acquisition of the goal. And the net debt, the total net debt, which also then of course includes our earn out debts at 3.16. Please keep in mind that those debts are sized for future growth. So if a future growth doesn't occur, then that number is actually lower when the debts are to be paid. With that said, moving over then to having a look at the future. Starting off, we want to repeat The average annual organic sales growth at 6% and the beta star growth at 7%. It really demonstrates resilience throughout the pandemic. It's in line with our financial goals. So with that said, we also have a good dialogue with our customers We have unchanged view on growing customer demand for the future. And profitability continues to increase, Primarily positive contributions from acquisitions. And as we mentioned, we will keep our guidance for 2021. However, there are continued uncertainties as we talked about, the supply chain, material prices. Every day we work with these issues. Every day we solve a lot of issues, but it's very difficult to know exactly what is going to happen over the coming months. Finally, we are definitely ready for the updated goal for acquisitions to acquire 100 €20,000,000 to €50,000,000 per year. The purpose of our methodology is to very selective basis welcome the best companies in each niche market. And more and more we are experiencing that the companies since we have a focus on Specific segments and sectors within infrastructure, the companies that we acquire, they really add complementary technology and customer segments. So we more and more are operating as an interconnected group. One example of that is that Rawlak that we acquired earlier this year, the products are already sold by a number of other business units within the group. We've also by with the help from our Swedish business units, they have helped Rolex to establish themselves in the European Union to that really enables very important distribution contracts in the European Union. And that was made possible thanks to our Swedish companies. So there are a number of examples which Really, really, really demonstrates that what we're building is really more and more a cohesive and interconnected group focused on infrastructure. With that said, I open up for questions for the audience. Thank you very much, Jacob. And like I said, now it's time for the Q and A. And we'll take the first question. At your CMD in September, my impression is that you claim to have managed a applied chain in a fairly good manner. Would it be fair to assume then that the situation worsened during the latter part of September? To some extent, yes. It has to some extent worsen, But it's not a significant change. So as I said, it's something that issues, they occur every day. They have been doing so For a long period of time now, so we're dealing with them every day as well. We're dealing with them on a basis. So it hasn't been a significant change. It's more that it's there are Still uncertainties. And what has been different is that the material prices have increased to such an extent That it has not been possible to take the entire increase out to the customers. That has changed. But other than that, we're working every day with issues and we're solving them every day as well. Perfect. Thank you for that answer. I will take the next Question, could you please specify if the challenges were mainly related to the former PTS division? It's not yes, we've had it's not specifically for the former PTS. We have we've had difficulties there and that the nature of those has typically been then that our customers they are lacking Some other types of material or goods to initiate the project. So in that case, they have delayed the orders from us. But those orders, they will be delivered. So it's we're building up a backlog in PTS area. The demand is stable, but we do see challenges throughout the entire group. It's not something that is isolated To PTF. Thank you for that answer. And we'll take the next question. What do you see as the main driver in future margin expansion? Is it organic margin expansion or due to acquired businesses with higher margins? Okay. Well, predominantly, it will be through acquisitions. So the companies, I think, if you have a look at the companies that we've acquired, with the exception of GAH, the profitability He is quite clear about 20%, sometimes up at 30%. So the type of companies that we scout and that we identify our really top quality companies and with that comes a higher profitability. So we expect The acquisitions to have the most important impact on a continued profitability improvement. Thank you for that answer, and we'll take the next question. You had an EBITDA margins of 18.1% in Q1 till Q3 in 2021. But the 19% to 20% EBITDA margin guidance for FY 2021 is still in place. What are the building blocks for the higher margins you expect for Q4, uplicity in the FY guidance? For instance, are there large price hikes coming through in Q4? Or is there a risk you end up the year below the 2019 to 2020 guidance? Well, this I mean, this is not the promise. We're looking into the future, but The guidance is what we still believe is valid. Anything can happen, of course. The Q4 is normally the strongest quarter. So with that in mind and our knowledge about our companies, we see no reason to change the guidance. Perfect. Thank you for that answer. And we'll take the next question. Could you elaborate a bit on the growth rates you're seeing in the acquired businesses of Rolex ID and GAH? We do not share specific growth rates for individual business units. So we cannot disclose any specific numbers related to that, but we can say that all those Three companies, they are developing well according to our expectations. Perfect. Leidstrom. As we look into 2022 versus 2021, what drivers do you see that could or should support organic earnings growth when it comes to volumes and or additional margin improvements? Well, the most important aspect is that the underlying demand is very solid. I think we demonstrated that And that we see no reason why that would change. It's really demand for products and services for infrastructure. So from that perspective, it's solid demand. And then of course, when we have healthy businesses, the organic sales growth will be translated into Organic profit growth as we've shown throughout the years. So it's just an expected pattern That we see no reason to change. So our financial goal to grow our profits 5% to 10% per year It's definitely valid for 2022 as well. Thank you for that answer to that question. We'll take the next question here. On supply chain disruptions, could you please provide more detail on what cost pressures you're seeing in what segment were business units? Well, we have over 30 business units. Each one of them have their own supply chain. So of course, there's over 100 and 100 of important suppliers. And that includes steel. Steel is important. Plastics is important to and then of For semiconductors, a lot of our products, they include microprocessors. And so that's also a very important material or product or component, of course. So and to some extent also wood even if it's indirectly to in some cases. So we are really exposed to a wide variety The materials and components. And with that said, it's actually something positive since it really brings Diversification. We are not exposed to a few single providers or a Few types of materials components. So it really brings diversification and a Could spread of the supply chain risks. Okay. Thank you very much for those answers to our questions and thank you very much, Jacob, for presenting today's Q3 report. And a big thank you to all of you who have following us online, and I hope that we'll see each other soon again. Thank you, and goodbye. Thank you. Bye bye.