Earnings Call: Q4 2020

Feb 11, 2021

Hi, and welcome to Citec's webcast. Jacob Holm, who is the CEO, and Bengt Leysch Sturm, the CFO CFO of SIEtech, will be presenting today. My name is Martin Wessellund and I'm from Finwire TFE. If you have any questions to Jakob and Bengt, you can ask them in Forum 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. With that said, I'll give Jakob Holm and Bengt the stage. Please go ahead. Thank you very much, and welcome everybody to StifTech's year and the CFO. Well, as you know, my name is Jakob Holm. And as always, I have Bengt Klaisturm on my side. Moving forward to the agenda. First of all, to summarize the Full year 2020 and then dig a little bit deeper into the Q4, followed by a financial overview from Bengt and to sum up with the outlook then for the coming quarters. So we're very happy to conclude 2020 with a very strong report. We have Exceeded our financial goals, organic profit growth at 11.3%. Our goal is to be between 5% to 10%. So we're very proud of that. We've also acquired according to our goals €91,000,000 of EBITDA in 2020. And we have a healthy financial net debt at 0.84%, where our goal is to be below 2.5%. Over the year, we've also added 4 excellent companies, Very definitely high quality companies that in one way or another contribute to more sustainable, efficient and safe societies. So the underlying trends are strong for growth. And we're also quite happy to More and more realized that we there is an increased awareness among entrepreneurs and business owners and increased interest for Stipek in the UK. So we have the privilege of being able to be quite selective in terms of which companies that we move forward with. So we are in a position there as well. The margin expansion has continued. It's actually been growing steadily since 2016. We have very much a focus on profitability in acquisitions, but also how we develop our companies. So the expansion over the past year has been 2.2 percentage units on the operating profit. We've also worked hard on the sustainability side. On one hand, Our core business is very much around sustainability, efficiency, safety. So that really goes by automatic. However, we have also increased our internal work so that we always can continue continues to improve. We've implemented a sustainability council to improve our stakeholder dialogue. Part of that, expanded our ESG reporting. We've also internally implemented a handbook for sustainable investments, CFO, which our acquisitions team work with actively, very important. And then last but not least, we're Quite happy to be able to demonstrate resilience during a quite difficult year. So Despite the pandemic, we've added 3.5% organic growth in net sales. So we're, of course, very Pleased to present that. We've also had a good cash conversion. For the 2nd year in a row, it's been above 100%. And then moving over to the next slide, our overriding goal is to increase profits every year. Over 2020, we increased our operating profits with SEK 85,000,000. On one hand, our business model is really designed to increase profits every year through acquisitions. So Contribution from acquisitions, SEK 72,000,000. And then also, we've CFO. As you know, we've also had a healthy organic profit growth, very much driven then by the resilience and the growth in sales, but also from the margin expansion. So if we move over to the profitability side, our profitability continues to increase. One important point there is that the majority of our companies, they have scalable business models. And that means if we grow sales, then of course the gross profits also grow. However, the cost base is rather fixed. So that means that the operating margin increases at a higher pace than the growth in sales. So the scalable business model is a very important underlying factor for our profitability improvement. But also, we've had an extra high profitability level in 2020, and that is really related to the pandemic. Early up in the CFO. The pandemic, we took some quick actions from actions to Be extra careful around cost levels. And so that, of course, has improved the profitability to some extent. And then we've had as part of the pandemic, we've experienced some delays. The demand has been solid throughout the entire pandemic, but we've been unable to deliver. So we've had delays, as I think you know, everyone. But then in Q3, especially, but also in the Q4, we've been able to catch up. So we've had peak deliveries during the past two quarters, but we've done those peak deliveries with normal capacity. So that, of course, also brings up extra high profitability. But all in all, our business model really pays off to increase profits every year. Moving over to the Q4. First of all, just to mention the situation around COVID-nineteen. We have, as I said, caught up on delays from the first wave. And we're also starting to resume important investments. One of those categories of investments is to really bring up our delivery capacity to normal levels. We've been cautious to recruit technicians and production capacity, for instance, due to the pandemic, but now we're bringing those levels back to normal again. Right now, there are restrictions in our markets, in U. K, in Sweden, Germany. But the restrictions and limitation in mobility doesn't affect us to the same extent since now we have been to cope with the restrictions. So the effects are small. And looking forward, we are confident about the resilience. The demand is solid, as I've said, and we have good confidence for the outlook. During the Q4, we acquired GAH Refrigeration. GAH is a U. K. Leader CFO in last mile transportation refrigeration solutions, CFO. And I think you can see on the pictures there on the left hand side, you can see the product on top of the driver's cabin. Inside of that is where the actual product is placed. And last mile, CFO. Cooling transportation that typically involves food and groceries. And the key drivers in those markets, very much driven by a change in consumer behavior towards online shopping. So and during the pandemic, that market has had a bit more of a stepwise growth, which is, of course, positive for the company. The company has a good market position that's really based on strong products, very much focused on R and D and the customer demand to translate those into innovative products, And some of which you can also see on the right hand side. JH Connect is a system CFO, where the customer's fleet of transportation vehicles can be monitored, the temperatures, the opening and closing of doors and so on, so that the superior service and support can be provided to the customers. And on the right hand side below, e fridge, very interesting product that has been developed. And it is a cooling solution that is adopted for electrical vehicles. The sales is currently not that high, but of course, CFO. We and the company expect this to be interesting going forward. And then moving over to our business areas, starting off with Water and Energy. In the Q4, you can see on the graph to the left hand side, a small decline in sales and also profitability. And that is very much related then to the restrictions that to some extent affect some of our business units. One example of that is in the U. K, where we provide temporary electricity and power. The technicians have occasionally difficulties to be at the client side and actually do the work. Another example is a Swedish based business that focused around exchanging water meters, same thing there. To some extent, they are restricted to come home to people to exchange the meters. So the work is delayed in the same way as we've CFO, as we saw in the first wave, we expect to catch up those delays. But the effects, as you can see, are Moving forward to Special Infrastructure Solutions. Overall, sales growth very strong, 42%. Of course, Majority of that is driven by acquisitions, almost all of it actually. We do experience in this business area the same thing as in water and energy, continued stable demand from our customers. Organically, net sales up 0.8%. Also, CS. Some business units have are affected to some extent from the COVID-nineteen. One example is in the Air and Climate area, CFO. Difficulties to access properties to actually do the work. But the Positive development from a profitability perspective offsets CFO, the decline, so organically up 0.8%. Profitability significantly up, as I said, from 22% to 27% and the profitability levels, they have been extraordinary, as we've already discussed. So profitability is normalizing. Cost levels, especially on delivery side, are coming up to normal levels, which is according to our plans. And also worth mentioning, the acquisition GAH that came to our numbers from December. The weakest month is December, since all the transportation vehicles, They need to be ordered, prepared and set before the Christmas period CFO. That is very important in the December. So the CFO. Contribution from GAH was close to 0 since that is normal for them in December. CFO. Four acquisitions over the years, so all acquisitions have been done in this area and currently number of units 13. And finally, Property Technical CFO. Services, sales increased significantly 70% in the quarter. And We are very happy then. I think all of you know that those of you that have followed us a couple of years, we implemented stability improvement program in 20 seventeentwenty 18 and it's definitely paying off now. The business units are much better positioned in terms of having the right customers, the right contracts, those that are profitable. And So we have throughout the year increased our sales efforts. So we are very happy then to see that CFO. That really has paid off in almost 60% increase in operating profits now. So that we're happy to see the effects there. And by that, I hand over to Bengt Yes, to the financials. Thank you, Jakob. And talk a little bit the overall financial development and on this slide, Looking at the group sales and the total EBITA margin development, the group sales increased with 14% over the year. And of that, 3.5% was organic growth. And you can also see it on the development of the profit margins quarter by quarter calculated on the last 12 month figures. And it was improving as you saw in the beginning of the year and a bit flattened out towards the end of the year. And the quarterly, the EBITA margin of Q4 was 16.7%, which was more or less the same as the yearly average. So quite stable in that then. Looking upon the sales divided by country, we're still increasing our sales in relative terms in the U. K. Our biggest acquisition ever. And the GAH Refrigeration has only been included for a month. And of course, they will contribute now this year of 2021 with even higher figures for the share of the UK sales. And also the companies in the UK are quite profitable. So the share of the profit is even a little bit higher. But still half of our sales are in Sweden. Infrastructure business is typically local or regional. It's not that much of export, even though as We invest and acquire more product based companies. The share of exports are slowly a bit by a bit increasing. And you could see from this pie chart that now it's 7% of the turnover is then exported to markets outside where our companies are residing. So but still Sweden will of course be an important market also for 2021. Looking next slide, we have the EBITDA, the operating result increased 30 2%. End of that was 11% organic over the year. For the quarter, it was 10% organic profit growth. And in total, 32% of the year and 20% during the quarter. So it's still quite very stable increase of both profits over the quarter and the full year. As I said, the margin has more or less leveled out now at about 16.5% and 17%. And as you know, during 2020, we were guiding for the profit margins by segment by the different business areas. And that was, of course, we thought it was necessary because of the pandemic and a bit unstable situation. Now we see that they have more or less stabilized, and we think it's better to guide on the full group instead. And we now for the year 2021, we say that our guidance is the total EBITA margin, including central cost, at 17%. And that is an increase compared with last year then and that was 14.4% in 2019. To summarize some of these KPIs for the quarter and the last 12 months. We talked about the net sales. We talked about the EBITDA, the our operating results and also the margins. Coming to the earnings per share, The result for the quarter was a bit low, and I will come back to that to share with you the bridge from our operating results down to the earnings per share. Even though on the full year, it was quite decent And that also then includes the weaker Q4 and also a Q2, if you remember, which was also a bit weak due to currency effects. But I will come back to that shortly. Our cash flows are very good. We had actually in the quarter 137 percent conversion rate from our profits into real cash flow on the operating side. And on the full year, 109%, EUR 450,000,000 all in all cash coming into our accounts. Sometimes that is, of course, that we help of our newly acquired companies to improve on their working capital to free some cash from both stock and inventories and accounts receivables. But it's also a continuous work in all the companies to be very careful about CFO. Our debt ratios, we have a goal on one of them, as Jakob was mentioning the financial net debt that should be below 2.5. It's now was now 0.8, but we also measure the total net debt, which includes our debt for CFO. Conditional considerations being paid out in the future, dependent on the results in different units. If we add that debt, we come up to 2.7. There we don't have an explicit target, but it's still decent levels, we believe, since the nature of that added debt is that In order for that debt to be paid out, the results have to increase from from the levels when we acquired the company. So that means that to pay those debts, the results will be even higher. So that ratio should actually be lower in real life, so to say. But that's a bit complicated to have visibility into, so that's why we concentrate on the financial net debt instead CF. I said I would take you through the bridge and this is a lot of information. I will focus on some of the figures, but it's showing how we come from, well, already net sales down to the net profit after tax. And there are some figures here to look specifically on. If we start for the quarter now from our operating profit, we call it beta star because it's the best representation of how the business is going. There we have the increase with the 20% since last year. But then there is a lot of, CFO. We call bookkeeping exercises because most of these things doesn't have to generate any cash flows or anything, but according to IFRS rules and such things that we need to add a number of components. First, I would like to point out is that we every quarter actually, we look upon these earn out debts, these conditional considerations that are to be paid out if the results are improving to the sellers of the companies. We did that. And since 2020 was a successful year, a number of companies had a very good development profit wise. We eventually had to increase our debt reserves or in the balance sheet. CFO. So if you increase your debt, that means you have a cost. So it's a bit contradictory. So as the business are developing Good and better, we have to take a cost which reduces the result. But we try to not We have to do this up and down every quarter because you saw last year, Q4, it was actually the opposite effect. We had to write down some of this debt because some companies were not performing. So we got a positive effect to the result. So the swing factor here is about €20,000,000 then compared quarter by quarter. So that complicates, of course, the possibility for you to try to predict our results in the future because these CFO effects, you cannot know beforehand really. Another figure I would like to mention is that When we do an acquisition, we have to allocate parts of the consideration, the enterprise value to CFO, different intangible assets, which can be written down. A few years back, we did that We're less 100% to goodwill, which is not amortized, but nowadays we allocate more to CFO. And it's also a bit difficult for you To have an insight in the future, but as a rule of thumb, you could say that 2% of what we acquire a company CFO will end up as amortizations over per year. I will come back to that a little bit. But as you see, it's a quite long number every quarter that has been taken as a cost on these amortizations. Yet another a bit special figure is the currency effects. And now we look upon the full year. And since we have a lot of investments in the UK, they are booked in the British pounds. We try to have that net assets as low as possible. But on one hand, we cannot borrow more money than we need. So The debt in pound is lower than the assets in pounds. That means when as during 2020, the foreign exchange rate Swedish kronor against the pounds has been well, the pounds have been weaker, so we have to take Negative currency effects. In 2019, it was the opposite. Then the pound was strengthening, and we took a profit from that currency effect. CFO. So also here, we have a big swing factor from last year to this year of 35. Sorry about that, our talking device. So and that will go a little bit up and down. Now this year, we can See that the currency effects are positive. The pound has been strengthening. And so if that continues, we will have a positive effect in the quarter number 1. Finally, as one of these bookkeeping effects is that we also have to booked a discounted interest on all our conditional considerations. These earn out debts that are to be paid out in the future. We don't pay any interest rate on those debts to the sellers, but we have to book theoretical interest. So these are not money going out in the cash flow. It's kind of a non cash item, but it's still affecting our debt results. Also there, we have a rule of thumb saying about 2% of our total conditional debt ends up every year as interest cost. So it's really not easy for you to follow all these numbers coming from our operational profits down to the net profit after tax. But anyhow, for the full year 2020, we increased the net profit by 33% 2020 compared to 2019, even though in the quarter 4, we actually decreased with a little bit more than 20%. So hopefully, this gave you some more insight into this. Otherwise, we're happy to answer questions later on. You can send e mails or so, and we'll try to help you dig deeper into the effects of all this. And I would like then to end my part of the presentation with some planning assumptions going forward. We stick to our financial targets. They are still the 5% to 10% organic profit growth, and we should acquire company is representing €90,000,000 EBITDA per year. Although if they are acquired later on during the year, they will not contribute with €90,000,000 but as a pro form a. And I and I talked about the new guiding for the underlying profitability as it has been strengthened throughout the year, but we say now we will be a little bit better than 2020 by around 17%. And then adding then these two rules of thumb for you when you try to project the future that we have 2% of CFO. The acquired company's purchase price that will be amortizations, and that's for new then acquisitions. And for the discount interest, we have as a rule that about 2% of the outstanding CFO. Okay. Thank you, Bengt. So we summarize with an outlook. Looking forward, first point is very much around Our underlying development and I think 2020 has demonstrated that kind of resilience. We do have a solid demand from our customers and we are growing organically in sales. So that's an evidence. And then at the same time, our underlying profitability is gradually increasing. So that's a combination, which is of course the best combination, organic sales growth combined with margin expansion. Secondly, the prospects for future acquisitions, they are good. They are normal, we should also say. We are well capitalized for further acquisitions. And to some extent, our discussions with entrepreneurs are, to some extent, bit more difficult due to travel restrictions. But even so, we have a solid pipeline for 2021, and there's No reason to think that 2021 will be different from an acquisitional perspective. On the contrary, the quality of our companies are Very good and it looks very promising. And then also we are very well positioned In comparison to strong drivers within the societies, there are new efforts towards more sustainable CFO, around sustainability issues. One example is Boris Johnson that has declared that there will be no new sales of fossil based cars in 2,030, and that is a change over 2020. It's quite a clear message. CFO. The Mayor of London City has also declared a zero vision in terms of death accidents for the City of London. So politicians are definitely taking steps forward here, which will affect the infrastructures and then also companies that deliver products and services to the infrastructures. And then finally, investors put additional pressure on companies in terms of is really sustainability, efficiency, safety. It's around our current businesses and also on the acquisitions that we look at. These are the kind of trends that we've been looking for, for a couple of years. So we are well positioned to take an active role in creating more sustainable, efficient and safe societies, and we are very proud of that. By that, We hand over to questions. Thank you, Jakob and Bengt. Now it's time for the Q and A. And if you have any questions to Jakob and Bengt, you can ask them in the forum on our website, and I'll ask them if time allows. And if you're watching this afterwards or we don't have time to answer your questions, I'll make sure to send them to Jakob and Bengt. So the first question is cost of goods sold have dramatically increased in Q4 reducing gross profit margin. What's the reason for this increase? Well, we have if you compare this with the previous year or the previous quarter, we have, Of course, added acquired companies. I'm not sure if That question is really pointing at some very specific item of the cost of goods sold. It's in general no specific Item that we believe has been dramatically changed from 1 year to the other, but it's more driven With the acquired companies if you compare it with last year. Okay. And the next question is from of Sandorstrom from Nordea. And the question is, at 16.6% in Q4, you are slightly below your 2021 guidance. In which business area do you believe that you could improve the margins for 2021 versus Q4 2020? Well, first of all, yes, there was some focus on the business area margins last year. And I think The year ended up quite well for both Water and Energy and the profit the Property Technical Services. They were quite spot on with our guidance when it comes to the EBITA margin. It was the Special Infrastructure Solutions that a bit reduced the margins a little bit towards the end of the year and a big part of that for the Q4 comes from the acquisition of the GAH, which then added quite a lot of turnover in the quarter, but at more or less 0 profit as Jakob said. So that reduced, of course, the margins quite a lot. And that company has about a 17% profit margin as their normal profit margin. And so the Special Infrastructure Solutions business area will have a lower profit margin this year 2021 since we have added that company. And also then, we are guiding Again, then in total for the whole group to be a little bit above last year. Okay. And the next question is from Adrian from ABGSC. And the question is, should we see the 17% EBITDA margin as a target for 2021 or midterm? And why 17 percent? Well, the it's for the full year. And then we always have seasonal effects. And I think that you can look at our historical numbers. It's quite clear the seasonal effects, CFO. They are quite similar in the forecast for 2021. So 17% is for the full year. And well, why 17%? Well, that is CFO, our best judgment of the situation. And as you know, we come from extra high profitability levels. So we are bringing up the guidance slightly, which actually means that taking out the extra high profitability, we're going back to normal profitability levels, we are actually continuing the underlying margin expansion. Okay. And the final question is it harder to make acquisitions giving traveling restrictions? And will we see a release of delayed acquisitions, once these restrictions ease? To some extent, it is more difficult because If you want to do an acquisitions, you or if you want to sell a company, if you want to buy a company, to meet someone physically in person is, of course, very important. For us, it makes the work a little bit more cumbersome, but it's not really hindering us that much. We have plenty of companies within our pipeline. It's about 300 companies in total, and that's handpicked CFO. Companies that we have a relationship with, the majority of the relationship is by phone, by video conferencing, and that's the way it's always been. So the pipeline is quite big. And the current restrictions from travel, it affects us to some extent, but it's not really big hinder. CFO. So you shouldn't expect an avalanche of acquisitions once the vaccination is done. That's not the situation. For us, Things are moving on fairly normal. Okay. Thank you for that answer. And we actually got a few more questions for you. And if you deliver on your acquired EBITDA of SEK 90,000,000 in 2021, based on historical acquisition multiples, where would this take your financial net debt to EBITDA to on a theoretical basis, please? Well, our goal of the SEK 90,000,000 in acquisition is actually calibrated against our leverage. And if we keep up the space of acquiring that amount of profit every year and we do it kind of not everything in the same month, so to say, but spread out over the year, then we will stay below our financial debt goal of 2.5. So that's actually where this SEK 90,000,000 come from in the beginning. We have a very strong cash flow. We got 450,000,000 into our pockets from the operating businesses during 2020. So we will use that, of course, first. And then CFO. We borrow more money from our credit institutions. So no, it's the SEK 90,000,000 will not put us in any worse situation, so let's say, in the leverage. Okay. Thank you for that answer. And given that you guide for a 70% EBITDA margin on the group level and a lower margin year over year in Special Infrastructure Solutions. To assume a higher margin in property technical service in 2021 relative to last year. Well, we're actually not guiding anything for the Special Infrastructure Solutions for 2021. The The only thing you could say that it ended up a little bit lower than what we guided for Q4. We said that 2020 should have ended up Between 28% 30%, but it was actually 27.2%, so that was a little bit lower. But CFO. We are not guiding anything for that business area. So for you who are calculating for the future, you have to consider The acquisition is done in that business area and that it was very highly profitable last year. But again, it's on the group level now. We guide. Okay. Thank you. And could you please elaborate on your margin expectations in mid term within TTS? Well, the Property Technical Services, CFO. If you follow the historical number, it has been very steady between this 8% and 10% stem. They had, of course, a worse situation in 2017 2018 to start with that picked up through these programs of profitability and efficiency within the companies. And they also had a strong Q4 with about 11% profit margin. So but over history, over time, they have has been very stable. And yes, we don't really expect anything else for the future, but we don't give a number. CFO. Okay. Thank you, Jakob Bengt, and thank you to all of you who have followed this webcast today, and I hope to see you again soon again. Thank you.