Addtech AB (publ.) (ADDTB) Earnings Call Transcript

Good morning. This is the conference operator. Welcome, and thank you to be at Addtech's Fourth Quarter Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Niklas Stenberg, CEO of Addtech. Please go ahead.

Thank you, and welcome, everyone. All in all, another very strong quarter, concluding a highly successful year for Addtech. High customer activity and favorable business climate for our companies continued broad-based in the fourth quarter, and we summarize a very strong 21% organic sales growth. Also, our EBITA growth, very strong, an increase of 47%, and then historically high margin of 14.4%. So strong markets. But as I always point out, it's the people and our strong culture with a focus on entrepreneurship, that's the main reason behind these strong figures. So as I said, very strong sales growth, 34% on an aggregated level, and this is supported with solid double-digit numbers in all business areas. And we should also remember it's challenging comps here as well. Good contributions from acquisitions, a positive currency effect, but it's primarily the satisfying organic growth that is driving here. Looking at the bottom graph, as you can see also in this quarter in the rest of the year, but it's really across the board. If I should highlight some drivers in the quarter, it's strong deliveries within the sawmill sector, electricity grids in Energy, and then also Electrification and the process industry overall has remained very strong. In addition, sales growth is fueled by an overall good delivery capacity when the easening of disruptions in the value chain has occurred. Given the insecure macro climate, it's, of course, also satisfying to see the continued high customer activity. Order intake continued at high levels during the quarter, and our backlog remains well filled and of good quality. The positive profit and margin trends continued in the quarter with strong EBITA growth, as I mentioned in the beginning. So active work in our companies to handle the inflationary pressure in parallel with the strong grip on the cost base. And we have improved the margins both sequentially and year-on-year from high levels. So good contribution from acquired companies and strong organic sales is what's giving this strong outcome. Also, I want to highlight that we continue to strengthen the operating cash flow. This is thanks to the strong result and high margins, of course, and also we welcomed a decrease in stock levels in the quarter. Malin will come back a bit more on that within short. This picture is showing development in all the business areas, and I'm just going to give a very brief highlight. Automation, a very solid Q4, good sales trend, especially towards the defense industry and med tech, and these 2 segments now stands for approximately 25% of the annual sales in Automation. Improved margins linked to some efficiency measures in some of the units, and also fueled by the good leverage on organic growth. Electrification delivers a very strong quarter, both organically and from acquisitions. Overall, good sales growth in most key segments, so it's broad-based, but the battery companies are sticking out on the positive side. Energy has a continued very favorable business situation demand from infrastructure products within electrical transmission and distribution, continues to improve from already high levels, as you have seen throughout the year. We also see a continued strong demand from building and installation, where, as you are aware, we are primarily exposed to hospitals and data center and different kind of infrastructure projects. In Industrial Solutions, also overall strong business situation. This is also the business area with the strongest -- toughest comps. Sales within forest and sawmill industry remained stable at high levels. Strong deliveries of projects in the quarter, but with a flattening demand on new projects that we have seen 2 quarters now in a row. But this is undramatic for us due to the solid order backlog, where we have a visibility into 2024. Very strong margin in the quarter, as you can see, and this was partly due to cautious -- cost calculations in some of the projects that was finally calculated at year-end closing. So that gave a little extra push. Last but not least, Process Technology, a good momentum and good delivery. And it's the Process and Energy segment, in general, having positive development. We also see an increased demand in a segment like oil and gas, with increased focus on production. And here, we provide different solutions to analyze and measure different ingredients in that production. And marine segment, a clearly positive trend, especially relating to service and replacement, but also gas detection and some scrubber installations coming back. So full year highlights. To summarize the full year, we can again conclude a successful year with strong sales increase of 33% and a record high margin of 13.6%. And here again, we should remind that we had a really strong year the year before as well. So it's a clear sign of a strong end market, but also the strength in our business model and the strategic positions that we have in the group. Acquisition pace has been good and according with our growth targets. And we also signed, at the end of Q3, the Science Based Target initiative to further clarify our ambitions in sustainability area. Yes, I've been through most of this, but to mention a couple of things. Organic growth over the year, 17%. A good contribution from acquisitions, 2%. Our companies -- our ability to adapt to the new business situation have also led to many of our companies have advanced their positions in various segments. EBITA over the year up 41%, very satisfying. And we have raised some margins, both from acquisitions but also keeping control of the cost and good pricing power. Cash flow is improving, as I mentioned in the beginning, and a substantial increase also in earnings per share of 39%. And this is also reflected in the Board's proposal for a dividend of SEK 2.50 per share. So in summary, of course, we are very happy with this record year for Addtech with a broad-based delivery. Since we are ending a full year, I just want also to reflect some highlights of the business areas over the year as such. Automation, as you are aware, a large extent OEM-related business here, mechanical process industry, med tech being a primary customer segment. Throughout the year, a strong demand in all of these main segments, which led to a record high order stock buildup. And what we -- now when we have seen towards the end of this year a gradual ease in the value chain disruptions, we have seen strong sales growth the last 2 quarters. And this, in combination with good cost control, have generated a very strong EBITA increase. From an acquisition point of view, Automation acquired one company in December, a Dutch company, MCS, with a good value proposition within industrial IoT. If we move on to Electrification. As you see very, very strong numbers. And as you can see in the pie chart, we have a well-diversified customer base and strong development in basically all of these segments. So an exceptional 54%, with a good mix of organic and acquired growth. From an acquisition perspective, Electrification put their focus to consolidate and integrate, Fey, a large acquisition we did last year, and also ABH in Germany. Beginning of this year, we acquired a new company, Electrum, a very nice company in north of Sweden that adds important software integration competence to Electrification. If we move on to Energy. A key driver for Energy is, of course, the high investment in electrical transmission and distribution. And during the year, Energy also complemented this position with the 2 acquisitions, Spanish Arruti and the U.K.-based Allied Insulators. So with these 2 acquisitions, we elevate our position from being a strong Nordic player in this area to being a more global player. And the demand among grid owners remains high. It's a positive outlook in most geographies. But the sales growth last year is really broad-based, and we have very strong development in infrastructure, building installation and public safety. Industrial Solutions, as I said, also entered the year with very challenging comparisons. But despite that, net sales is up 21%. Solid growth across the segments -- special vehicles, sawmill industry, waste management. Very solid margin development. We have acquired 2 companies here during the year, the Swedish company, DrivHuset, that adds frequency converters to our electrical driveline offerings. And Impulseradar, also a Swedish company, with a strong niche driven by the infrastructure segment. And finally, Process Technology, it's driven, to a large extent, by measuring and decreasing environmental impact in industry production and also in marine. And that has generated, all in all, a net sales growth of 27%. High activity in all segments. Also, comforting recovery throughout the year within the marine segment. And Process Technology has been active in acquisitions, 4 new companies acquired that complement and strengthen the strategy in the different business units. This is a picture summarizing our segment development and segment spreads during -- or by the end of the year. And just to summarize, I mean, our sales is a mix of OEM sales, infrastructure and industrial aftermarket. And it has been equally strong, if you look from that perspective, over the year. And it's also comforting to see in the pie chart that our aim not to be too dependent on any singular segment has continued to develop. So we have today a stable and well diversified customer base. Acquisitions. During the year, we have completed 10 acquisitions, another 4 after closing. So just in accordance with our growth plan, I would say. We deliver in a good way. We also continue to deliver on the strategy to do more acquisitions outside the Nordics. We have accelerated the activities in selected markets, and we see that the deal inflow is increasing when we are now being more present on the market. And there are many well-run, privately owned technical companies that adds very well into our strategy. So we see great potential here going forward. And in general, we continue to have a positive view of the acquisition market. We have a strong balance sheet and an attractive pipeline with high performance -- high-performing companies. So it looks very good going forward. This picture is showing our geographical presence, and we continue to increase our sales outside Nordics just as planned. It's both organically, of course, through export and to follow our customers to new markets, but also, as I said, through acquisitions. So as you see in the picture, if you summarize, as of now, we have about 36% of the sales on other markets than Nordics. And just to mention development geography-wise over the year, all Nordic countries developed strongly, and also the strategic European markets for us, DACH, U.K., Benelux, also had a solid development. Before handing over to you, Malin, to give some more details, I think this is a picture to be proud of. The ultimate evidence on the business model is that we, over the 20 years plus, have managed to create an average annual EBITA growth exceeding 20%. You know that 15% over cycle is 1 of the 2 simple financial targets that we run the entire operation on. And apparently, we've been able to exceed that target over a long time. And also what you see return on capital employed to the right, we're also proud of. And it's the solid and stable earnings growth over time, with the low CapEx operations and the product mix in the group that are the basis to maintain return on capital employed at high levels. So Malin, over to you.

Yes. Thank you. Some words on the financials. And as Niklas said, the strong sales growth is driven by a very good and broad-based demand situation as well as a well-filled order backlog. Our profit margins continued to improve during the quarter, thanks to good leverage from both acquisitions and organic growth, in combination, of course, with our company's ability to offset the high inflationary pressure and not least an overall good cost control. Our cost efficiency continued to improve quarter-by-quarter. In the Q4, the operating margin was strong at 12.4% adjusted for the revaluation of contingent considerations and one-offs, which had a net positive effect on profits by approximately SEK 7 million. We believe the full year margin level should persist throughout the fiscal year. Inventory levels has been a key topic throughout the year, and due to supply chain restraints, we have seen an inventory buildup that has been challenging, even though the levels have been in line with both growth and order backlog. We now saw that the levels improved in the quarter, and we saw a sequential decrease in inventory versus sales for the second quarter in a row. We expect this trend to continue. Our profitable working capital remains on high levels, thanks to profit margins and overall efficient management of total working capital. We are very happy to conclude a strengthened cash flow during the quarter, mainly due to contributions from higher profits and continued strong margins, but we also saw a release in working capital relative to previous year. Thanks to this combination, we actually managed to break the pattern and improve our cash conversion during a period of very high growth, which is very pleasing. Our financial position remained strong and improved sequentially as expected. Our key KPIs are fluctuating over the year, but are, on average, on normal and very satisfactory levels. We have no worries for our interest rate sensitivity. It will not impose any restrictions on our strategy in the foreseeable future. We have comforting headroom to support our ambitions going forward.

Thank you, Malin. To summarize before going into Q&A, I come back to this picture every quarter, it's our 5 areas for future growth. All strategically chosen areas, with growth drivers linked to underlying growth trends, as you can see in the bottom of the picture. So especially the green shift, that's an important driver. So even though the macro situation as we all know is uncertain, and we follow that development closely, of course, so far, industry in general has showed a strong resilience. And for us, demand has been stable on a high level and outlook for next few quarters remains good. And the point with this picture is that we feel comfortable that we are positioned to generate some growth no matter what the industry average will develop going forward. So short summary, successful quarter and year. High sales profit growth. Strong margins in all business areas. And despite the very strong invoicing in the fourth quarter, our backlog remains at high levels with good quality. Acquisitions proceed according to plan, and we have a well-filled pipeline and good firepower. And our outlook for the next few quarters remains good even though we are humbled how the macro situation will affect the market conditions. So one foot on the gas and one foot on the brake. We are well prepared to act if and where the business climate weakens. But we will also continue our growth journey in areas where we will continue to see growth. Thank you, and over to Q&A.

[Operator Instructions] The first question is from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A couple of questions. Firstly, you guide that the backlog is still at high levels and you have quite good visibility. But is it possible for you to give any flavor on sort of the order intake development during the quarter? It sounds at least like it was quite tough for you to reach a positive book-to-bill during the quarter given the higher organic sales growth. And could you also, on that note, remind us on what earnings visibility you have currently with your backlog.

Okay. Yes. Carl, first of all, looking at the level on order intake, we haven't seen any change basically from the last quarter. And if you look year-on-year in underlying companies, so organically, it's on par with last year, which we think is strong because it was a very special situation last year with really strong order intake. So if you look on book-to-bill in the quarter, it's like you say, with this very strong order or sales, organic sales, it was -- our book-to-bill was slightly below 1. But if you then consider the very -- if you take out the very strong order intake with the long backlog in the sawmill industry, it's on par. So in our view, it's a strong -- continued strong order intake in the quarter. Second question on visibility. I mean we have very good visibility, I would say, for coming 2 quarters, if I put it that way. I mean we have some visibility even longer than that. But all in all, in the group, I would say that good visibility for 2 quarters.

Okay. That's very clear. And I mean you mentioned that the marine business picked up a bit during the quarter. Could you give some flavor on the growth contribution from this to Process organic growth perhaps? And then also, historically, it used to be a quite profitable subsegment, did it have any considerable positive mix effect on the segment? And then also finally, on that note, I mean, you took out quite a bit of cost in the marine business a couple of quarters back to adjust the cost base to sort of lower volumes. So do you have capacity to meet the current demand over the coming quarters?

Yes. I mean marine sector is still on a quite low point. If you look in the presentation, we are -- when you look on the market segment, in Process Technology, 15% of Process Technology is transportation, and the absolute majority of that is marine. So there, you can calculate approximately the size of the marine segment. So it's still -- it's an important segment, but it's not anywhere near where we were in the real boost period a few years back. It is good margins in the marine segment, especially this quarter where we had a lot of service and maintenance in certain areas. But we see -- what we can see, we will continue to have a good development in marine, but we are not foreseeing that we will come back to some -- the glory heydays with the scrubbers, it's not something like that. Which also links back to your second question, I mean, we have done a lot of efficiency measures, as you said. But we, for sure, have capacity to grow in accordance with the markets.

Okay. That's very clear. And on Industrial Solutions, also there quite strong margin year-over-year. I mean to what extent is it driven by the strong forestry industry where -- which might, at some point -- of course, depending on how that end market develops, but might have a reverse effect when the backlog is sort of fully delivered? Or is it also when you adjust for the forestry industry, still a quite good year-over-year margin uplift?

Yes. I mean even if you take that out, we had a good margin development in the whole business area. Of course, the strong margin in that sector is giving some extra cream on top. But as I said, we had a very good margin development overall, and also good acquisition contribution here for a couple of companies we added. So I mean if you look on -- this quarter was especially strong, as I also mentioned before, but we have had a margin increase in the underlying business even if you take that out of the equation.

And the final one from my side is on Energy and especially the grids business there, which has been historically following its own cycle, perhaps with slightly softer volumes a year after -- a year with strong underlying volumes in order for them to manage, I guess, capacity, et cetera. What's your view on next fiscal year? Do you think it will be a more muted year? Or obviously, you sound pretty optimistic in your CEO statement here.

Yes. I mean you have done your homework, Carl. Historically, we have always guided that one strong year is followed by a weaker year. What we foresee is that it will be a stable growth development in the transmission sector also the coming year. It's a lot of projects out there to calculate on. So -- and also, we have added the acquisitions that, [ in the end ], cross into new markets that is also giving some fuel there. So what we can say today is that, and most likely, we will see a steady growth.

The next question is from Karl Bokvist from ABG.

Many questions have already been asked. But just staying on the Energy topic there. To understand just based on what you see, is it mainly these kind of -- when you say transmission, are we talking about actually kind of state, municipality grid locations? Or are we talking transmission and grid capabilities related to EV charging points and those kinds of solutions?

Well, actually, I mean, if you look on the situation in the quarter that passed, I mean, we have -- these 2 different things are going hand in hand. Because when you expand the national and regional grids, in the next phase you also have to implement the electrical infrastructure like chargers, and we are present in both of these sectors. And the quarter that passed, I mentioned before that we have had a good development in transmission, but also on the more distribution side and the installation side of that. So I would say both, but it's -- the main underlying driver is, of course, more the state-owned grids, yes.

Understood. Yes. Yes, good. That's helpful. And I know there are some companies who have highlighted this. You did give some comments on kind of underlying orders, et cetera. But have you also perhaps seen kind of still good order intake, that perhaps the level of preordering has come down or normalized as lead times have also improved?

Sorry, can you repeat the question?

Yes. No, we've heard from some other industrial players that, for example, the level of preordering that perhaps 6 or 12 months ago companies would perhaps order a bit earlier than what they usually would because of the supply chain conditions, et cetera. And now it's more gas supply conditions have improved, the kind of lead times and standard order placements from the time they want things to be delivered has also improved. So I'm just curious to hear if you feel that kind of the level of preordering has also normalized.

Yes, absolutely. That's very clear. When we look at our big customers, I mean, the lead times overall has normalized. We are still having long lead times on some -- for instance, some electrical components. But overall, the lead times have shortened. So clearly, the customers are not making the same kind of long orders. That is apparent. We are more back to normal.

Understood. My final one is just on the kind of gross margin compared to the SG&A, we've had a couple of quarters now in a row where the gross margin year-over-year is still a bit down, but you've offset this with strong SG&A discipline. So I heard a comment there on the kind of full year margin and how we should think about it for the coming fiscal year. But is there anything here which you feel you can lift the gross margin, and therefore, that is what will help support the operating margin now? Or is it still kind of continued productivity potential on the SG&A side?

I would say it's a combination. If you look on the gross margin, as you indicated, it has decreased somewhat during the year, but that is primarily due to the product mix. We have taken some high-volume business to a lower margin from a strategic point of view to take market share in a couple of areas. That is the main reason that the gross margin, as such, has gone down. So looking forward, it's a combination of steady or an improvement of the gross margin and in combination with strict cost control.

The next question is from Johan Sundén from Carnegie.