Good morning and welcome back to ABG Investor Days. My name is Simon Granath , Equity Analyst here at ABG. Next up, I have the pleasure of presenting Simon Göthberg, the CEO of Vestum. With that said, I leave the floor to you, Simon.
All right, thanks so much. As mentioned, Simon Göthberg, CEO and co-founder of Vestum. For those of you not familiar with us, we focus on acquiring and developing the most high-quality, highly specialized companies in infrastructure, and we do this across four markets: Sweden, Norway, Denmark, and the U.K., with Sweden being our biggest market and second biggest is the U.K. We have a decentralized business model, meaning that the MDs in each company focus on the operational decisions on a daily basis, and we focus on strategic advice in terms of accelerating profitable growth. Today's presentation, the first five minutes, I'd like to focus on what excites us the most at Vestum right now, which is water infrastructure, and this is where we will focus our growth initiatives in the short to midterm, so on the left-hand side here, you see some market data points.
On the right-hand side, some growth rates. As you may or may not know, roughly 70% of the world is covered by water, and access to water is a matter of efficient transportation. And we invest so much into different types of pumping technologies to ensure that we have efficient transportation. And if you see the bottom left number here, 70%, that means that roughly 70% of water going from source to household is lost, which is quite crazy. And this is in major cities such as London. And why is that? It's because water infrastructure is heavily underinvested and aging, which means that we need to invest so much more. Looking at the right-hand side, you'll see some growth rates. Irrigation systems, which is one of our main products in the segment, is expected to grow by some 7.5% over the next five years.
And looking at public spending into water infrastructure in Sweden and Norway, that is expected to grow by 6%. And in the U.K., we're looking at record investments going into water infrastructure. The U.K. is one of the most underinvested water markets in Europe. And underinvestment and an aging infrastructure are two main drivers. But a third one is obviously extreme weather, droughts, floodings, etc. And in the Benelux region in 2021, there was a flooding that caused damages of EUR 40 billion. And last week, I read that in Valencia, the floodings that have occurred in Valencia will lead to investments up to EUR 190 million, sorry, billion, to ensure that the city is rebuilt. And with the current pace of investments, it'll take us 200 years to replace the current structure that we have.
So Vestum is all about moving water from one place to another to protect from water and to clean water. And this is roughly 1/3 of our profits today. So the main idea here is that we have a global market opportunity. Underinvestment and an aging water infrastructure is not a challenge only in Sweden or the Nordics or Europe. It's a global issue. And if you look at the three main drivers here, underinvestment, aging infrastructure, and climate change, floodings and droughts have caused, especially in the U.K. market, customers to shift focus. And it's been a shift in behavior, which means that our products, which is again about moving water from one place to another, renting out pumping stations, are now being rented for a longer period of time, which also means increased profits.
And we've identified a fragmentation between the large OEMs, Xylem, Grundfos, the large manufacturers, and the end customers. And here we have value-added distributors, niche manufacturers, and system integrators. Our platform today basically consists of market leaders in these segments across all of our four countries. And on average, they make a margin of 20% with super high returns, 90% if you look at the key metric, EBITDA over net working capital. So we think that today we have a platform that is best in class in terms of growth going forward, both organically and by making added acquisitions and to add new verticals within the water space. Now, I'd like to show a short video. You've seen it before. It's only 90 seconds long, so bear with me. It's our biggest company called Pump Supplies, a U.K.-based market leader in electric submersible water pumps.
Pumps this size, drain them into water, connect it to electricity, connect it to pipework to move water from one place to another. I'm going to talk more about this company after the video. Cool stuff, right? Super sexy. This is a typical Vestum company. So Pump Supplies is our biggest company. They generate sales of some EUR 400 million with 25% margin. They have five depots across the U.K., market leader in each of these locations, and second biggest company on the market. 50% of this is hire, 30% sales, and 20% doing services on these water pumps. And the case here is to grow organically, both by opening up new depots across the U.K., but also to invest in added acquisitions to strengthen their offering. And this is what we did in August earlier this year, when we made our first acquisition in two years in Vestum.
That was a company called PDAS, focused on intelligent monitoring systems that are connected to a software. So you basically sell a control panel to wastewater and basically wastewater pumping stations that are connected to a software. And then you sell it through a subscription-based business model, which creates really, really strong cash flows. And that company generates sales of some EUR 200 million. So now we're at basically EUR 600 to EUR 650 million in sales in this company with a margin of 20% to 25%. And they've grown organically by 21% over the last five years. Organically, 21% over the last five years, which is due to the heavily underinvested water space in the U.K. And we will continue to invest in both added acquisitions and in new verticals in the water space in the U.K. going forward.
And that is what one should expect from Vestum in terms of acquisitions going forward. So let's leave the water space behind us for a few minutes and talk about some more recent activities in Vestum. Last week, we announced that we are strengthening our focus on core business by divesting some non-core assets in the infrastructure segment. These were contracting companies in civil engineering. And it has led us to focus more on core business. And what is core business for Vestum? It's basically leading product and services companies with high margins in selective market niches and technologies and infrastructure. So high margins is a key thing here. These companies were solid companies, but margins were roughly 8%. And it's difficult to operationally increase the margin in these companies. So post these divestitures, we have a streamlined business, increased specialization. Product companies now represent roughly 60% of our profits.
I'm going to come back to why that is so good, and it will continue to increase. We have improved our profitability, so now it's basically 10.4%, 10.5%. Vestum, post these divestitures, on a group level, and we've also reduced operational risks related to projects. These divested assets were basically project-based businesses, so we now divested EUR 1.1 billion in sales in projects. Looking at leverage, obviously, these divestments were made at a good valuation, so capital gains were EUR 241 million, so EUR 241 million. And we acquired these businesses roughly two and a half, three years ago. Leverage has come down from 2.8 times to 2.3 times, and we will now use part of this cash flow to redeem our outstanding bond in full, and it's a bond of EUR 600 million, which will lead to basically EUR 63 million in interest cost savings, basically from Q1 and onward next year.
On top of this, lower leverage also means cheaper bank financing. We're now in a super solid position to negotiate the next level of our bank financing. Our capital structure will be refinanced in the first quarter of 2025. We've also increased our M&A headroom, so we can now go back to being growth-focused. Over the last two years, we focused on ensuring that we have the best capital structure in place and we have a clean balance sheet. We're now done with all that work and can go back to focus on growth and acquisitions. Again, focus is on high-margin companies, specifically products, and mainly in the water space. I'm not going to get too stuck on financials. Only one slide here that brings up financials, but I think this is super important.
It basically tells the story that I've been telling for the last couple of minutes. If you look at the pink bars here, it shows our financial net debt in billion. So if you look at mid-2023, you'll see that we had financial net debt of EUR 2.6 billion in net debt. That is now down to EUR 1.5 billion. So we've reduced net debt by 40% in a little bit over one year, driven by extremely solid cash flows. Our cash conversion is over 100% in Vestum and also these divestitures. And if you look at leverage, the line here, you'll see that we're now at 2.3 times EBITDA, which is below our financial target of 2.5 times EBITDA. Again, created headroom for acquisitions. And just taking a few minutes about the product companies in Vestum.
When we started out, 20% in Vestum of our profits came from products and 80% from services. And from mid-2022 to early 2023, we've been talking about a repositioning of Vestum to focus more on products. And if you look at our annual report for 2023, you'll find that the second page brings up this graph and shows that we were at 44%. And I said that next year it'll be so much higher. And now we're at 60%. And the year is not over yet. And when it comes to M&A, we will be focused on increasing the share even further. The services companies that we have in Vestum will remain. They have some really great positions and solid cash flows. But M&A focus going forward will mostly be focused on increasing the share of products. And why is that so good?
Because they're market leaders in super niches, meaning high margins, and they can increase their prices. So on average, these companies have margins of above 15%. And again, the key metric, EBITDA over net working capital, is at 67% on average. As you can remember, in the water space, it was 90%. 60% of these companies are exposed to water infrastructure, the companies that I've talked about, Pump Supplies and some of the other players that we have in other markets. And 40% are exposed to other niches in infrastructure. We own the biggest and the second biggest container business in Sweden, for example, in renting out and selling and rebuilding containers. Okay, my last slide, roadmap going forward. We're keen on expanding the margin in Vestum. It was 10.8% last year, and our financial target is at 12%. This is after depreciation, so an EBITDA level.
But the ambition is to bring this to about 15%, and that is possible. Working both organically with our existing companies to ensure that we have efficient cost structures, but above all, to increase prices. And obviously, when it comes to M&A, both added acquisitions to existing platforms and to add new platforms and new verticals within our existing space of infrastructure. So fast forward a couple of years, we'll have extremely strong positions in growing niches of infrastructure. We're already there, but there will be even stronger. Best in class profitability. And obviously, digitalization, which is something that we invest quite a bit in right now, will help us reach our targets. And then resilient cash flows, growing cash flows, which is what everything is all about at the end, to grow free cash flow. Okay, that's about it.
Thank you, Simon. Time for some Q&A.
Maybe start off where you sort of ended and talk about the margins and your targets going forward. 12% target, you talk about 15%. What is the expected sort of timeline for that, and what is needed for you to actually arrive at the 15% level, you think?
Yeah, so I mean, we're at 10.5% now in 2024, which is in an economic downturn. It's been an economic downturn for our sector for the last basically 18 to 24 months, right? So I think that as the economy turns around and goes up again, we'll have organic growth and margin expansion in the existing platform, in existing Vestum, which will have a significant impact on margins. Looking at the acquisitions that we're now looking at, they are well above 15%.
So I think when you add that into a cocktail, right, organic growth, margin expansion, and acquisitions, you'll see that the margin will come up. But I'm not going to guide on when we'll reach 12%.
Yeah, I understand. But it's fair to assume that based on the current group today, you think 12% is achievable. And then as you grow and the mix changes, you see potential to increase it to 15%.
Yeah.
Yeah. And I want to talk about the divestments as well. You talked briefly about it, how it changes the group dynamics and stuff like that. But what about the absolute EBITDA levels and cash flows? Because I believe look at pro forma EBITDA, it's going to decrease by some 15% or something like that. But I understand that the cash flow effect is much lower than that.
Yeah, so the divested volume, it's basically SEK 92 million in profits or EBITDA, I guess. And looking at free cash flow investment, which again is what it's all about, free cash flow was pre-divestitures SEK 325 million on an LTM basis in Vestum, excluding net working capital changes. Okay? So basically SEK 325 million on an LTM basis. And that stands out given our EBITDA level of SEK 550 pre-divestitures, roughly 60%. Now these companies had basically free cash flows of, let's say, some SEK 50 million, excluding changes in net working capital, which brings the SEK 325 million down to SEK 275 million, right? Yeah, SEK 275 million. But then as you may remember, the interest cost savings are just by redeeming the bond of SEK 63 million. And on top of that, we'll have lower interest costs related to our bank financing, given that leverage has decreased.
So, I think that cash flow-wise will be in a very, very good position if you look at free cash flow growth just by making these divestitures, although we've reduced volume. And on top of this, we now created headroom to grow by acquisitions. So if you fast forward one year, you'll have an efficient capital structure with the cost savings and organic growth, margin expansion, and acquisitions. So free cash flow should be something else next year.
And you also talked briefly about the differences in project risk and stuff like that of the service companies. But if you look at the remaining sort of 40%, which is more service-oriented, how would you say that the characteristics or dynamics have changed in that part of the group now after the divestments? Is it similar still or any big changes?
Yeah, very good.
So the 40% that you relate to is basically our new three segments in Vestum from Q1 and onward will be flow technology, water space, which I talked about. That's going to be 40% of Vestum's profits. And then we have niche products, roughly 20% of Vestum. And these 40% + 20% are all products. That's the 60%. And then we have 40% in a segment called solutions. And the difference in that segment versus the companies that we had before is that they have a higher degree of specialization and a higher potential to achieve high margins. As an example, we have a company called GW Asfalt , a Stockholm market leader in tätskikt, which is, I guess, sealing layer, sealing layers in English. And they have SEK 250 million in sales, margins of 15% to 20%, and operate in the infrastructure segment. And they really offer solutions to their customers.
We also have installation companies that work mainly towards the property sector, electric installation, HVAC installation, suspended ceiling installation, etc. Those companies are, they have margins of 10% to 15%, I would say, on average. Obviously, with the economy coming down and the property sector coming down, 2024 has been a rough year for those companies. It's looking better next year.
Thank you. Let's talk a bit about Pump Supplies. It's a very interesting company of yours. Maybe just share a bit more specifically on the organic growth opportunities you see in the company.
Yeah, so today we operate, again, Pump Supplies with the pumps, right? They have five depots across the U.K. So they have a depot where they keep and store all these electric submersible water pumps.
They work in a proximity of. I can't remember the exact ratio, but it's in a proximity of that specific location. There are several white spots on the map where we can open up new depots organically. The key here is obviously to find the right people to do so. We're now in the process of opening up new depots. Those will be organic initiatives and also to invest more heavily in our supply chain, almost like a vertical integration where we'll be tighter with our key suppliers and signing up for basically distribution agreements with exclusivity to supply certain key products in the space. We're doing those things organically and on top of that, working on several interesting added acquisitions to expand both geographically and to add more basically value adding to the existing offering, like the PDAS acquisition.
Talking about add-ons, I mean, how many potential add-ons are there for some Pump Supplies and are there in similar regions or you talk about other countries or?
Yeah, yeah, plenty. Because there's a fragmentation. And what's so good about this is that when we go into a new country, we will do it exactly the way we did in the U.K. with Pump Supplies, with a large platform, sales of hundreds of millions. They've been around since 1982, meaning that their reputation and their network and the individuals working in the company have done this for quite some time. And those people on the ground are the ones sourcing new deals for us. I don't have an M&A team in the U.K., and I'm not looking to hire an M&A person in the U.K.
And same thing when we go into the next region, which is of interest to us, which is Benelux. So going into Holland or Belgium, we wouldn't acquire a 50 million company that's been around for 10 years. It has to be a similar company like Pump Supplies, a platform that we can use both to grow organically, but also that can help us to grow with acquisitions.
In the U.K., you talked about you are basically the number two guy, but you're the biggest in your regions. In Benelux, how's the competitive landscape there? Are there similar sort of number of main competitors or how do you view the competitive landscape in Benelux, for example?
Yeah, yeah. So we're now doing a market study of the Benelux region to understand those dynamics a little bit better.
It's obviously key to understand the level of fragmentation and if there are any key market players with significant market share and how the OEMs are thinking, the Xylems and the Grundfos. If they're looking to do an acquisition spree and to attack those markets, it wouldn't be the best idea to compete with those players as they are our main suppliers. We have identified a couple of players that we're now in discussion with in these countries, but I would say that it's at least one year away before we go into a new country. There's so much to do in the Nordics and especially in the U.K. in this space. In the next, I guess, six to 18 months, I would say that we will remain in our existing markets before attacking new ones.
And as an acquisition-driven company, more specifically in general in the market for acquisitions, what do you think about what do you see about valuations and competitions from other serial acquirers currently compared to like six months or a year ago?
Yeah, so valuations in the unlisted market doesn't really follow the listed market. So when the stock market comes down, it's not like unlisted companies in the private space come down by the same amount and vice versa. When the stock market goes up 30%, valuations don't come up 30% for the companies that we compete for. But competition, for sure, that's a major thing, right? And if you look at the Swedish market, it's quite consolidated and very, very mature M&A-wise. We have private equity players that's been around for decades. It's an extremely mature private equity space. And we have compounders like Vestum.
I can mention 10 of us, right? Both in the unlisted and the listed environment. But if you look at the UK and other sort of main large markets in Europe, they don't really have the compounding space the way that we have. So we compete with private equity. And many of the companies that we like, they like our business model. Private equity is about making an acquisition, keeping a minority shareholding only in that company for three, four, five years, and positioning that company for an exit. We have a buy and hold strategy. But then obviously things happen and sometimes we make divestitures like we did last week. But the strategy when we make an acquisition is always to keep that company indefinitely. And that attracts many, many entrepreneurs and especially family-owned businesses.
So I think that in the U.K., the competition is less aggressive, which also creates lower valuations.
Interesting. So the final question for you, Simon. So what do you look forward to the most next year, so 2025?
To grow.
Got it. Thank you so much. That's all we have time for. Thank you, Simon, and thank you, Dorthe.