Ratos AB (publ) (RATOB) Earnings Call Transcript

Good morning, and thank you for joining us today. I will start by taking you through the main events in the quarter before Anna walk through the financials in more detail. I would say that overall, Q2 was a strong quarter for Ratos. We delivered profitable growth in what is typically the largest and most important quarter of the year, supported by solid development in our industrial product companies and signs of stabilization in our industrial services companies. Net sales increased by 3.4%. Adjusted EBITA came in at SEK 988 million, corresponding to a margin of 17.3% and an EBITD growth of 14%. Adjusted earnings per share was SEK 1.97, an increase of 20% compared to last year. We had a strong cash flow and cash conversion in the quarter with underlying cash flow growing by 20% and a cash conversion reaching more than 100%. During the quarter, we continued to execute on Ratos 2030. The strategy we launched at our Capital Markets Day in March, and I will now highlight the key actions we took in Q2 and how they link to our strategic objectives. On our strategic objective of building a more focused Ratos, we took several important steps during the quarter. We reduced our ownership in Sentia from 40% to 31%, bringing our stake to a level consistent with our long-term ownership ambition. Sentia has been one of Ratos stronger investments with an IRR of around 30% over 13 years we have owned and developed the company. We're also pleased to be able to report that we received SEK 200 million from our M&A insurance linked to the Expin Group transaction with a positive cash flow effect in the quarter. During the quarter, we have also been focusing on our divestment processes related to our noncore companies. Turning to our strategic objective of driving profitable and capital-efficient growth, we made progress in several areas during the quarter. Presis Infra received a major order of NOK 964 million for Oslo Gardermoen covering a 5-year period. HL Display, acquired UFO Display Solutions, an Australian display company, strengthening the position in the Australian market. Finally, on our objective of develop our ways of working, we continue to strengthen our model as an active and long-term investment company. One example is our recruitment of external senior leaders and experts as Chairs of the Board in selected companies. I would like to welcome Dr. Holger Rubel as Chair of the Board in LEDiL; Lisa Åberg as Chair of the Board in Aleido; and Magnus Håkansson as Chair of Kvd Group. And I would now like to move to performance of our companies, which we have categorized, as you know, as core and noncore. Our core portfolio is where we concentrate ownership attention and capital to drive profitable, capital-efficient growth over time. Turning to our Industrial Products companies. Diab's strong performance continued in the quarter, delivering 16% organic growth, supported by increased demand from defense customers and profitability improved on the back of the higher volumes, but combined with lower depreciation. We also saw a strong development in return on capital employed. HL Display reported 5% organic growth, supported by Electronic Shelf Labeling or ESL rollouts. Margins were impacted by product mix and the Deinzer acquisition. HL also did their second add-on acquisition in the year by acquiring UFO Display Solutions, strengthening HL Display on the Australian market. LEDiL delivered 2% organic growth driven by the indoor business, while the outdoor business continues to face a more subdued market environment. We also saw improved gross and EBITA margins. Turning to our Industrial Services company. Market conditions continued to be more challenging. Aleido reported a negative minus 4% organic growth. The overall market remains cautious and the main bright spot is increased orders and activity in the Defense segment. Aleido has been driving successful efficiency measures that resulted in a strong EBITA development compared to last year. For Knightec Group, demand stabilized in the quarter with continued favorable development within the defense customer segment and Knightec Group also works in reallocation of resources to growth areas and organizational engineering to drive stronger performance going forward. Speed grew 23% organically from larger new contracts and pricing renegotiations. A big focus for the company is the rollout of the automation project that impacted profitability in the quarter, but we saw a sequential EBITA improvement from last quarter and automation project will continue in Q3 and Q4, but we will have a positive impact from next fiscal year. TFS delivered 12% organic growth, primarily driven by an increased share of pass-through revenues while service revenues were down. It's positive to see that TFS received orders in the quarter in the dermatology area that will support service revenue growth going forward. Moving now to our Infrastructure segment. Presis Infra delivered a 4% organic growth in the quarter and profitability was somewhat lower, mainly driven by product mix and timing from FX in starting up new projects. Presis Infra won a major order for Oslo-Gardermoen of NOK 954 million over the 5 years. And now moving on to our minority holders. Aibel now have a record high order backlog, and we're seeing improving sentiment for European energy industry following the conflict in the Middle East. In the quarter, we benefited from successful project execution as well as a more favorable financial net. For Sentia, the share price has increased by more than 50% since the listing in June 2025 and also received a dividend from Sentia in Q2 of approximately NOK 220 million corresponding to Ratos share. And in the beginning of June, we did a sale of existing shares from 40% to 31% in Sentia to institutional investors and further improving our long-term free float and liquidity in Sentia share and also reducing Ratos ownership to a level consistent with its long-term ownership ambition. The gross proceeds from the transaction amounted to approximately NOK 650 million. And lastly, a brief update on our noncore consumer companies. Kvd delivered a minus 9% organic growth impacted by lower used car volumes. Forsbergs Fritidscenter continued to perform well with a strong order backlog. Oase Outdoors reported plus 17% organic growth in its largest and most important quarter and gross margins also improved as a result of initiatives to optimize product cost. Plantasjen delivered 3% organic growth, primarily driven by positive development in the Norwegian market, and the gross margin was robust, but EBITA margin were impacted by marketing investments. And with that, I would like to hand it over to Anna, who will take us through the financials in more detail.

Thank you, Gustaf. And without further ado, let us have a look a bit more into details. I would like to highlight that this is the third consecutive quarter of organic growth. And also now we are seeing in the last 12 months organic growth of 2%, which is really good to see. Looking at EBITA improvement, it grew healthy by 14%, but also it was a solid plus 5%, excluding our associated companies. And then digging a bit further on each and every component, we saw a healthy drop-through of 15% from organic growth but we did see some bits and pieces moving around in that EBITA contribution. So for instance, Speed had quite a negative contribution on EBITA line compared with last year. What is good to see is that Speed has moved to black numbers and has also sequentially improved. But of course, in this bridge, it's highly negative contribution on EBITA. This was offset -- more than offset by very strong Diab who contributed both from top line and EBITA perspective. Moving into M&A piece. We have 2 major items moving in there. It's Expin, the disposal of Expin. And if you remember, Expin was a loss-making company, hence it comes with a good contribution on EBIT here. And also for HL Display acquired Deinzer. Deinzer is quite a sizable acquisition, but unfortunately, due to -- they had quite a pronounced seasonality, out of which Q2 is their weakest quarter, and they were actually loss-making. But still, these 2 components together were margin accretive of 40 basis points. Moving further down into the bridge, we have the FX component. We have turned the corner and now FX is in positive territory. This stems from Norwegian kroner strengthening towards SEK. It's a translation FX impact. On the other hand, it had a neutral contribution to our EBITA margin. Then Sentia, a meaningful contribution of 100 basis points versus last year. We should remember that Sentia was not part of the Q2 2025 numbers. And also worth remembering that as of Q3, we will no longer have this large bridge item. If anything, and all else equal, as we have gone from 40% ownership share in Sentia to 31% ownership share and all else equal, this should be a negative bridge item as of Q3. Aibel, good to see positive contribution, 40 basis points on our margin. It has to be of Aibel actually during 2026 being very good and executing on ongoing projects, but also we saw lower -- less negative net financial items compared with last year. And digging a little bit further again, I would like to highlight some items. I think it's great to see that LEDiL has turned the corner, posted organic growth and also managed to improve the gross margins and EBITA margins. Knightec Group is -- could be under the headline flattening out. That's good even if it was on admittedly easy comparables in last year's period. Another comment that I would like to make is in regard to Presis Infra, where we saw a solid organic growth, but as you can see, negative contribution on EBITA line. This, I would say, has rather to do of having quite difficult comparables in the same period last year. And also, as previously mentioned, we are now facing a project mix where we have larger share of new projects and these projects come with slightly lower margins up until we are efficient enough to increase them. So I would say no -- nothing funny going on there. And then last but not least, of course, Plantasjen, this is their most important quarter. We saw plus 3% versus last year, again, on easy comparables. Of course, we would have wanted to see more here, but we are happy that we are in positive numbers, the second quarter in a row. And also, we managed to increase EBITA by SEK 8 million. We also -- just to mention one another thing that gross margin was good in Plantasjen, but we did make some marketing investments to support Plantasjen going onwards. And just looking at Plantasjen, we have had 1.5 years of focusing only on cost. We would like now to move into phase where we actually focus on the commercial side of things. Hence, we believe it was the right thing to do these marketing investments during the quarter. And now addressing net working capital. Relative net working capital hovers around 7% for several quarters now in a row. So nothing major going on. Looking at it sequentially, we saw a bit of decline. So we released some net working capital supporting our cash. And going to cash, I would say that there were 2 major drivers: One is strong results. The second one is net working capital release. And -- but there are some bits and pieces moving around in our cash flow. Hence, I want to dig a little bit deeper. So we saw a staggering 40% increase in reported cash flow. However, if we were to look at it a bit more operational and a bit more like-for-like, we adjust for discontinuing operation in the first step. And then if we look at our industry segment, I would like to give a lot of credit to Industrial Products. We saw a very good cash generation versus the same quarter last year. I would say it's driven by good results, but also good collections going on in some of our companies. For Industrial Services, also a contribution versus last year, not so much about results, but a bit more on collection and inventory side. For consumer, this is unfortunate as Plantasjen had fantastic cash flow improved with last year, much due to the inventory reduction. But here for Kvd, due to very solid market within motorhomes for Forsbergs they had a bit more inventory on that side, hence, a negative cash flow contribution versus last year and some slippage of orders between Q2 and Q3. And looking in Infrastructure, which is essentially Presis Infra, nothing danger going on, a bit of an unlucky timing between Q2 and Q3. So 20% underlying growth, good cash conversion above 100%. And then on top of this, M&A insurance this is real cash, SEK 200 million and also Sentia dividend, which we received during the quarter, taking us up to that high number of SEK 1.5 billion. A couple of comments on return on capital employed. If we look at on the reported numbers, the main effect and the driver behind the decrease is Sentia disposal or that we IPO-ed Sentia. As you might know, Sentia is asset-light, hence has always come with high return on capital employed. Hence, the reported ROCE is down. But if we focus on the underlying or adjusted ROCE, where we are adjusting for its continuing operations, but it's also excluding our associates, we see a good trend line taking us up by 100 basis points in the past 2 years. The major driver, I would say, Industrial Products again, Diab in particular. When it comes to Industrial Services, this is a long-term metric. We still are suffering from lower results from majority of our Industrial Service companies, not to say all. And one last comment, due to this excess cash that we received in quarter 2, we decided to repay some debt amounting to SEK 800 million in the quarter, which is, of course, part of the capital employed piece. And now looking at our net debt to EBITA, we see significant deleveraging and taking our leverage down to 1x. This is, of course, below our targeted range of 1.5 to 2.5x. But again, these one-off items have been significant in the quarter. So Sentia sell-down SEK 650 million, M&A insurance, SEK 200 million, Sentia dividend additional SEK 221 million and of course, the solid operational cash flow in a very important Q2. This means then that leverage is posted at a very low number. But I just wanted to remind you a different perspective to take here is Ratos has successfully during the past 12 months, received nonrecurring cash items amounting to SEK 1.6 billion. This includes also Diab settlement of SEK 700 million in cash, which we received in Q3 last year. If I were to adjust for this, of course, this is a theoretical example, but then our leverage would rather be 1.7x. But again, what this picture illustrates is, of course, that we do have high financial flexibility. And what it all boils down to is, of course, EPS growth. And we are happy to see year-over-year 20% increase, taking us just below SEK 2. But also on the LTM basis, I would say the growth is even higher. It's almost 40%. What makes me additionally happy is that we see accretion throughout the P&L. So it's not just of us growing the underlying results. It is us having lower net financial items supporting EPS. But it's also -- if we just look at the tax line, it is in line with last year and that this has to do with us having still some tax losses carried forward. So tax is also supporting. We have a lower share of noncontrolling interest. That is also supporting and taking us down to this very, very nice EPS. And just one comment, we shouldn't get used to low tax rate. Reported tax rate was at 12%. Our normalized tax rate is rather in the range, 17% to 19%. So very happy to see this EPS working with us as well. And now I would like to hand over to Gustaf for some conclusions and summary.

Thank you, Anna, for an excellent overview. And now I would like to talk a little bit about the summary of the quarter. And it has really been about delivering profitable growth and execute on the 2030 Strategy together with implementing the Ratos investment company model. And in the quarter, we saw improved performance in almost all portfolio companies, and we added external competencies in 3 of our boards. We did a successful sell-down in Sentia from 40% to 31%, and we are now at our long-term ownership level. We continue to focus on add-on acquisitions in our platform companies. And we end the quarter with, as Anna presented, a very strong financial position, and that enables us to do more add-ons on our platform companies, but also organic investments in other portfolio companies. So looking ahead, our focus is really to keep driving improvements, implementing our investment company model so that we can sustain profitable and capital-efficient growth through Q3 and onwards. And with that, thank you, and we are happy to take any questions.

[Operator Instructions] The next question comes from Björn Olsson from SEB.

First on 2 of your holding companies. If we start with Knightec, I mean you're saying that you're seeing the sort of the decline in demand flattening out, but you're still printing 11% sales decline year-over-year. In the same time, the margin decline seems to have sort of troughed. So I guess the first question is twofold. First, where do you get the conviction that this seems to be the trough in sales declines? And second, have you adjusted your cost base, making the margin decline to stop? Or is it a mix effect?

Thank you, Björn. I will start and Anna can add. But I think if you look at the technical or industrial consultants market or segment, it has been quite a challenging market over the last quarter and the year as well. So I think we are still there. We don't see a huge improvement going forward. But what we say is it has kind of stabilized on this level. There are activities out in terms of orders. We are winning orders. But at the same time, we're also focusing and doing a bit of more focus on higher growth segments. And I mentioned defense and energy and so on where we have a strong position, but we want to grow that even more, and that is correct for both Knightec and for Aleido. So I think we -- I think the team at Knightec, with Dimitris, they're doing a good job in this different industrial focus. At the same time, we work a lot with their model and with their organization and to make sure that we have the cost level that we need to support the margins exactly as we mentioned. And that's the ongoing work and we'll continue to focus on that, of course. But as always, the key priority for Knightec is really to come back and drive order growth and then revenue and of course, margins going forward as well. But that will take some time, I think, looking into the coming quarter, we don't see any big change in the market sentiment, but we are kind of seeing a stabilization. So that is how I would like to describe the current situation. Anna, do you want to add something?

Just a couple of additional comments. I would say what we've seen in Knightec is that we've had difficulty compensating for a drop in gross margin with this integration or OpEx-related saving. As you can understand, gross profit is much larger than the other costs or admin costs or OpEx costs. Hence, even though we have been active in trying to address that, the gross margin decline has been difficult to compensate for. And then we would also like to be a little bit more ready when and if the growth comes back. So what we are trying to do is keep some of the competencies in-house. And also at the same time as we have reduced admin personnel, we have added personnel in COGS. And these resources, they are not up and running from day 1. Hence, they are weighing on the gross profit. So this is a balancing act.

Just to summarize, Björn, I mean it's a challenging market. I think the company is doing a good job here and now to cope with that. But we are well positioned when the growth comes back and the market comes back to have a strong growth position there.

Okay. So then I sort of interpret this as that the sort of 11% year-on-year drop should probably be slightly visible in Q3 as well and then perhaps it can fingers crossed, et cetera, pick up speed once the market in general picks up speed. Is this -- does that...

Sorry, Björn. I don't understand where 11% is coming from. Year-to-date, Knightec, is organically kind of flattish.