Welcome to Vestum Q3 Conference Call for 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to CEO Simon Göthberg and CFO Olof Andersson. Please go ahead.
Hi, and welcome to our presentation of Vestum's report for the third quarter 2023. My name is Simon Göthberg, and I'm the CEO of the company, and together with me, I also have Olof Andersson, CFO of the company. We will, as always, go through the financials with corresponding comments. But before we dig into the figures, I'd like to take a step back and talk a bit about why we do what we do. Having a well-functioning infrastructure is key to thrive as a society. The infrastructure in Northern Europe in general, and Sweden specifically, is underinvested and outdated. We need to invest more. Today, public spending and infrastructure investments in Sweden amount to approximately SEK 75 billion, of which SEK 45 billion is governmental and SEK 30 billion municipal.
In order to retain the infrastructure in acceptable condition, governmental spending, i.e., excluding municipal spending, needs to reach 1.5% of GDP, and GDP is today approximately SEK 6,000 billion in Sweden. So that means SEK 90 billion, which means doubling the investments from today's 45. We need to invest more. On top of this, we have urbanization and more complex societies, which leads to a lack of capacity, and this can be seen in the shortage of housing, water and sewage systems that have exceeded their technical lifespan, and transportation systems that need to be more efficient. Also, with increased regulation and new policies that reinforce new resource-efficient solutions with less climate footprint, we're forced to be more energy efficient. Again, we need to invest more. In regards to requirements, end customers have increased their requirements on traceability, transparency, ESG matters, and digitalization.
We see this across all of our markets, and this trend benefits suppliers that are specialized, and they can live up to the high standards set by customers. Many of these niche suppliers that are entrepreneur-led or family-owned businesses are focused on creating high-quality companies, solid structural capital, and limited dependency on the founders. But when they reach a certain level in their growth journeys, let's say SEK 100 million in sales, or SEK 150 million, or SEK 200 million, they have a difficult time in taking the next step. It could be expanding to a new geography, making recruitments, expanding their service offering, or making add-on acquisitions. And this is what Vestum is all about: identifying, acquiring, and developing high-quality specialists operating in the civic infrastructure sector. The key takeaways from this slide: we are active in a sector with long-term underlying growth driven by mega trends.
We're focused on niche players benefiting from the trends of increased requirements, and we add value by unlocking, unlocking growth potential. Today, we generate sales of approximately SEK 6.6 billion and have an EBITA of SEK 626 million across 45 businesses in four countries, Sweden, Norway, Denmark, and the U.K., with Sweden being our, our largest market. And our companies are on average 27 years old. 27 years old. That means they were founded in the 1990s and have experienced many different economic cycles. Now, let's have a look at the figures in the third quarter. We generated sales of SEK 1.7 billion, with an EBITA of SEK 161 million, corresponding to a margin of 9.7%.
Cash flow generation was solid in the quarter, with operating cash flow amounting to SEK 315 million, while we managed to decrease our financial net debt to SEK 2.4 billion, corresponding to a leverage of 2.8x EBITDA. So let's dig deeper into our segments and have a look at the water segment. Demand remained solid for our products, especially in the U.K., which is our biggest market. All markets where we operate have an underinvested water infrastructure, and this is especially true in the U.K. Lots of investments expected going forward, and we are very well-positioned to take advantage of this. The quarter generated strong sales of SEK 163 million and EBITA of SEK 31 million, and that corresponds to a profitability level of 18.8%.
On an LTM basis, we are now at sales of SEK 714 million and an EBITA of SEK 141 million, with almost 20% margin. And demand there is expected to remain quite solid going forward as well. So let's have a look at the services segment. Here we're exposed to the installation market, mainly in Sweden, which is expected to generate negative organic growth in 2023 of 9%. I think we followed this trend in the third quarter, but managed to improve the EBITA margin to 10.3%, which is industry-leading. And although we're humble about the outlook for the market in the short term, we're not pleased with 10% margin in the mid to long term. We can be higher than this.
The quarter generated SEK 413 million in sales, SEK 42 million in EBITA which as mentioned, corresponds to an improved margin of 10.3% compared to the same period last year. On an LTM basis, we generate sales of a bit over SEK 2 billion and an EBITA of close to SEK 200 million, which corresponds to a margin of 9.7%, and focus here going forward is on improving profitability. So let's have a look at the infrastructure segment. We experienced continued solid demand with stable growth. Similar to the second quarter, profitability was impacted by certain projects with insufficient margin. That said, we successfully improved the margin sequentially from the second quarter. So in the quarter, we generated sales of SEK 1.1 billion and an EBITA of SEK 103 million, corresponding to a margin of 9.4%.
On an LTM basis, the segment generated sales of SEK 3.84 billion and an EBITA of SEK 337 million, corresponding to a margin of 8.8%. And as with the services segment, we're humble about the short-term development as we're facing an uncertain market, that the profitability level can be substantially higher than 8.8% on an LTM basis.
So let's look at net sales and EBITA development over the past couple of quarters. And, let's begin with the chart on the left, which shows net sales, where the bars show net sales per quarter, and the line is rolling twelve months. And as you can see here, Vestum grows slightly compared to the same quarter last year, and the rolling 12-month development has been quite stable over the last quarters.
If we move on to the chart in the middle, you see that the EBITA development has been weaker than the sales development, and we'll get back to this when we look at the segment further ahead. However, it's worth noting that for Q3, the drop in EBITA was driven partly by the fact that the corresponding quarter last year had a positive effect from reduced earn-out debt, which we didn't, an effect that we didn't have this year. So the drop in adjusted EBITA was only SEK 10 million compared to last year. Moving on to the chart on the right, showing EBITA margin development, and as you can see, this year has been weaker than the year before. However, it's nice to see that the margin in Q3 has picked up from the second quarter.
Looking at net sales growth, Q3 grew 4% compared to last year, driven primarily by acquired sales, and the organic growth was SEK 18 million, corresponding to a 1% growth rate. So if we look at how the segments have developed over 2022 and 2023, up to and including the third quarter, these charts illustrate net sales, EBITA, and EBITA margin. And starting with water on the left, water dropped quite significantly from the previous quarter in net sales, driven mostly by seasonal effects and weather effects, basically. But as Simon mentioned before, it still grew in both net sales and EBITA compared to last year compared to the corresponding quarter last year.
Services, shown in the middle, as Simon mentioned, had a quite tough quarter when it comes to net sales, but managed to increase the EBITA margin, both compared to last year and to the previous quarter. Infrastructure had the opposite development from services, with net sales growing quite a bit, but EBITA margin dropped compared to last year. Still, this was an improvement when comparing to the previous quarter when it comes to margin development. Net debt and leverage. One of Vestum's financial targets is to maintain a leverage, i.e., financial net debt, in relation to EBITDA of maximum 2.5 x. The financial net debt consists of interest-bearing debt, including leasing, less cash, and we measure this relationship in relation to EBITDA. This ratio, the leverage ratio, is illustrated by the blue line.
As you can see, it is at 2.8, higher than our target of 2.5. Hence, our focus is very much on de- leveraging, which, as we've mentioned, is the main purpose of this strategic review. Our earn- out debt amounted to SEK 211 million. It's worth mentioning that we, during October, issued a bond of SEK 600 million, and the purpose of this issue was to proactively address upcoming maturities, and the whole issued amount was used to buy back existing bonds. We continue to consider different possibilities for lowering our leverage and addressing upcoming maturities in the autumn of 2024. One of these possibilities is divestments.
As we communicated when we presented the second quarter, we will always, of course, have shareholder value top of mind in our decision making. Let's move on to operating cash flow during the last 12 months. Operating cash flow, rolling 12 months, increased compared to the previous quarter, driven by positive net working capital development compared to Q3 last year. Cash conversion on a rolling 12-month basis increased compared to the previous quarter, also driven by the net working capital development. As we have mentioned many times, improving operating cash flow is a constant focus for us.
Okay. So in summary, we saw a stable overall demand in the third quarter, which sequentially improved profitability level in the services and infrastructure segments compared to Q2, and the water segment continues to deliver strong performance. Product companies now generate approximately 40% of group LTM EBITA, and these are high margin market leading businesses with exposure across all of our four countries, and we expect this share of 40% to increase over time. We successfully improved cash flow generation and lowered leverage compared to the previous quarter, which is good for many different reasons. The strategic review is ongoing with the aim of increasing shareholder value, as Olof mentioned.
As a reminder, we're potentially, potentially looking to make divestments that are one or both of the following criteria: a strength ened balance sheet and an operational streamlining effect, meaning that the remaining group post-divestment has higher margin, improved cash flow, and lowered operational risk. After the end of the quarter, we lowered the financial risk in the group by lowering upcoming bond maturity volume by SEK 600 million. Total bond volume remains at the same at SEK 1.5 billion, but split between two maturities, one in Q4 2024, and one in Q2 2026. And similar to earlier this year, market uncertainty remains high in the short term, but long term, we are very well positioned to generate profitable growth. And with that, we open up for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Johan Lönnqvist Sundén from Carnegie. Please go ahead.
Hello, Simon and Olof, and thank you for taking my question. A few from my side. First, on the kind of operational development, I'm surprised with the kind of strong margins in the service business, despite the kind of comments we heard here from other listed peers right now. Can you elaborate a little bit on what you have done to kind of manage to hold up margins and how we should expect the margins to develop next year, given that almost all players are talking about price pressure in the installation business currently? I'll start that.
Yeah, thanks, Johan. Simon here. Thanks for a good question. Well, I think that overall, our businesses have a little bit higher margins, right, than many of our peers. As mentioned in the presentation, we're industry leading with double-digit margins in the services segment, I think have been so for the past couple of quarters here. I mean, for us, 10.3% is quite solid in comparison to the market overall, but we wish to be higher on an LTM basis than 9.7%. So we think that over time, this can be... this could be substantially higher. And if you compare to Q3 last year, it's a little bit of a downtick. Sorry, in comparison to Q2.
So, I think that overall, I mean, we're focused on profitability and going into Q4 and early next year, focus will remain with profitability.
So, still no kind of clear guidance if there will be upside next year already, or should we view it as maybe something for 2025?
Sorry, sorry, the last part of your question was?
The kind of long-term margin improvement in the service business, do you think it's possible to already see that normalization coming in 2024, or is that something for 2025?
Yeah, okay. Yeah. Well, I think that's a little bit too early to say, and if you look at the installation market overall, it's the forecast is - 9%, right? This year, - 2% next year. So I think it's really all about maintaining demand and profitability over the next couple of quarters. And if that will reach, you know, 12% or above next year, well, I think only time will tell, right? Focus remains with profitability, and 10.3% is a little bit better than peers, right? And I think that's a clear evidence of the quality in our companies and the level of specialization that we have in the portfolio.
Great. And if we go to infrastructure, we have this seeing comments from other listed companies during this reporting season, that there's been some delays in a few bigger kind of railway projects. Have you experienced anything of that? And that there is some kind of postponements of projects due to kind of underlying dependency of residential new builds? Or give some comment on those comments from other listed companies.
Yeah, it's always difficult to comment on what the others say, right? But I think that organic growth in our infrastructure segment in Q3 was quite stable. I think the overall growth was approximately 10%, and then we had one acquisition of Markvaruhuset, who's included in this quarter. And as you mentioned, new production of housing, I mean, that's a big downtick for the last year, really, and our exposure to new production of housing is quite limited. And I think that also goes to show here with an improved margin in comparison to Q2 in 2023.
So, I mean, going forward here, we're seeing quite stable demand, and really the same as in the services segment. Focus going forward is on maintaining a solid profitability level.
Mm. Great, and then, I continue. I don't know how many questions there are in line, but, just to kind of update on the strategic review, I guess you cannot comment on what to do, but when do you expect the review to be ended? Is there before Christmas, or is it something for the spring, or when should things be clear?
Yeah, I think that's also a little bit early to say, right? What we communicated after the Q2 was that if we end up making potential, you know, potential divestments, that could take anywhere from a couple of months to six months. So it really depends on which track that we choose here. So it could be before Christmas, but it could also be during the spring. A little bit too early to say, I would say. So again, the things that we're focused on here is just to strengthen the balance sheet and ensuring that the remaining business has a stronger financial and operational profile.
A question on kind of leverage and your refinancing situation. You have expanded your credit facilities during the fall. How is the discussion with the bank developing regarding kind of pushing forward the maturity of the RCF? Because that's a way you have been coping with the bond maturities during this fall as well.
Right. No, we have good discussions with our banks, and we have opportunities in the credit agreement to extend, and we have good discussions with the banks.
Will the kind of an extension be announced in relation to kind of the outcome of the strategic process, or can that come earlier?
So when it comes to the, I mean, this is part of the strategic review, right? When it comes to the capital structure, long term, and so on. So, so we're not going to say much more than that. So this is a topic that we're going to have to come back to, as this strategic review progresses, basically.
Understand. And just one final question on the balance sheet as well, and on the contract asset and contract liabilities. Given the kind of divestments you've done, and numbers are a little bit messy when you compare to historical periods, but when comparing contract asset and contract liabilities in the quarter, I note that it's up a bit, both if you compare to Q2 this year and Q3 last year. Can you just kind of give a comment on how what's driving this, and if there's anything we miss with kind of the consolidation and the reporting, stripping out the kind of water business that you divested this year?
Yeah. So when it comes to the contract assets, these are going to vary quite a bit between the quarters because it depends a lot on when projects are finished. So, depending on what the status is, this item can vary quite substantially between the quarters, and that's basically the driving factor here. It's not... We don't see any other item that really stands out driving this.
The same goes for contract liabilities?
Correct.
Do you have any kind of ballpark where you want it to be on a kind of average during a year, or how should we look at it from the outside?
I'd say it's not like we're going to guide on or give a forecast on where we're going to be, but over the long term, I think we want to have a more balanced relationship between the contract assets and the contract liabilities.
Mm. By balanced, you mean that it should be neutral, or that it should be stable in one kind of percent, as a percentage of sales, or?
That it should go more toward becoming neutral. I mean, if we reach there and when we reach there, it's I mean, that's... We're not going to give any forecast on that, but working in that direction is something that we're looking at.
Excellent. Thanks. I get back in line, see if there's any other questions.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
All right. Thanks so much for, for taking the time. Wish you all a good day. Thanks so much. Bye-bye. Thank you so much.