Ratos AB (publ) (RATOB) Earnings Call Transcript

Ladies and gentlemen, welcome to the Ratos Q4 report 2020. Today, I'm pleased to present Helene Gustafsson, Head of IR and Press. [Operator Instructions] Helene, please begin.

Good morning, everyone, and welcome to today's telephone conference. Ratos' CEO, Jonas Wiström; and CFO, Jonas Ågrup, will present Ratos' report for 2020. After the presentation, a Q&A session will follow. A recorded version of the telephone conference will also be published on our website after the call. With that said, I'll leave the word over to Jonas.

Thank you, Helene, and thank you, everyone, for joining this call. Welcome. Before we present our development in the fourth quarter and for the full year, I would like to start with a few comments on who we are, for new attendants and, most importantly, put this report into the context of our 3-year journey, going into a new and quite different Ratos in the future. So with that, let's move over to Slide 2. This is a picture of Ratos today. We have some 12,500 employees in the group before the divestment of Bisnode, a total sales of SEK 37 billion. Our EBITA is SEK 1.9 billion. And we like to have our companies headquartered in the Nordics, and we are solely focusing on long-term and very active ownership. Down to the left, you can see our EBITA rolling 12 months since Q4 2018. During this period, both EBITA and profitability has more than doubled. And this EBITA comes from profitability growth and not acquired growth. So this is an organic journey. Ten out of the 11 companies we have today in our company group have improved their EBITA. Companies to the right is now in order of EBITA size. Plantasjen is the largest EBITA contributor, followed by Diab, HL, Aibel and onwards. Bisnode is down to the right because Bisnode will no longer be with us in 2021. So let's move over to Slide #3. As from the start of 2018, we decided to stop all acquisition activities and focus shifted into stability, profitability and organic growth. We decided to lead the PE conglomerate idea, which some actually still refers to, with a vision of building a company group of larger companies with an eternal ownership horizon. Necessary divestments of companies that are not qualified to be a member of the future company group have been made and we also have increased ownership in TFS. So now when we have achieved most our goals regarding stability and profitability, we're ready to take on also acquisition of growth in some of our companies and also new platform acquisitions in branches where we do have industrial knowledge and experience. So regarding structural changes, you see there's one box not ticked. We can't exclude that there will be some more changes to the existing group. But the important message is that we're now starting add-on acquisitions in our group companies and also new platform acquisitions. If we go to Slide 4. I just want to underline that our focus is EBITA growth, EBITA growth. We will stop reporting book values. We will not introduce NAV values, et cetera. EBITA growth is our ambition. And we have detailed plans for all our companies in the future company group. And above, you just see a few examples. So with that, I wanted to move to Slide 5 and also have a look at our new financial targets that was launched today. So we aim to have an EBITA in the company group of at least SEK 3 billion. This means a 14% annual EBITA growth in the next 5 years. Now I can tell you already by now, since I have some experience from acquisitions and growth through acquisitions, that it will not be 14% every year. In some year, we will have a much higher EBITA growth and some years, we will have a much lower EBITDA growth. You can't plan when acquisitions should happen. If we go into our leverage goal, we want to have an efficient capital structure. We want to be a net debt company, although we're not that at the moment. We think a target of a net debt over EBITA between 1.5 to 2.5x over time is a sound and good leverage. We also have restated our dividend to say that we exclude capital gains and losses from our dividend policy, and we aim to pay out a ratio of 30% to 50%. So with that, we move over to talk about the current quarter and the full year and move to Slide #6. The quarter and the year is quite affected by currency effects, sales and COVID-19, of course. Sales declined 9%. Again, currency effect, 6% in the quarter, made us to have an organic sales decline of 3%. And that is COVID-19 and it's Aibel. We're coming back to Aibel, who are dependent on a very low number of very big projects and a big number of smaller projects. And the phasing of these projects make turnover and EBITA to vary from quarter to quarter and year by year. We had strong growth in Plantasjen, airteam and Diab, in that order, in this quarter. Also, the EBITA is negatively impacted by currency of some SEK 8 million in the fourth quarter. To that number, of course, individual currency impact for some companies is upon this number. The EBITA is up SEK 244 million compared to Q4 last year. One should remember that in Q4 '19, we had some SEK 70 billion in extraordinary costs for increasing profitability in TFS. That was SEK 40 million or SEK 41 million. And in Plantasjen, it was some SEK 30 million. Ten of the existing companies in the business group increased EBITA. It was Aibel who didn't do it this quarter, although their profit margin was higher. And we have higher EBITA margin in all companies, except Bisnode, who is leaving us or who has left us. Cash flow continues to be stronger through improved earnings and increased or focus on working capital. And we have a further improved financial position, driven by increased earnings and cash flow. Let's go to Page 7. Here, we can see the development for the full year 2020. Sales declined 2%. Currency effect was 5% for the full year. Organic sales was up 4% for the full year. And if we look at the strongest organic growth performer during the year, in Swedish currency, was actually airteam, 7%; Diab, 13%; and Plantasjen, 6% over the year. But we have actually said 6 companies showing negative organic growth due to the pandemic and Aibel's project phasing. The EBITA is affected by currency negatively with SEK 84 million. Plantasjen, HENT and Diab had the highest increase of EBITA compared to 2019. Ten of the existing companies in the business group increased EBITA, again, all except for Aibel and LEDiL. EBITA margin improved in all companies, except for Aibel, and cash flow improved by 86%. This sums up all in all with an earnings per share increase with almost 4x. Last year, you remember, we sold -- we divested our headquarter and had a capital gain, which is excluded from the 4x increase. Our Board of Directors has suggested to increase the dividend with some 46% compared to last year. Now I want you to move to Slide 8. And I, at the same time, leave the word over to my dear CFO, Jonas Ågrup, to comment on leverage.

Thank you, Jonas. So we are at Page #8 now. And we saw the leverage coming down by 58%. In the end of last year, we were at 1.1x in leverage compared to 2.6x in the same quarter the year before. EBITDA or EBITDA improved by 55%, and net debt decreased by some SEK 1.1 billion. We saw strong cash flows in both Q4 and for the full year 2020. If you look at the net cash position within -- in Ratos AB, we had in the end of the year, SEK 1.2 billion in net cash, roughly. And Ratos AB has also a loan facility, which was unutilized and is unutilized of SEK 1 billion. After the closing of Bisnode, under the divestment of that business, if we adjust for the Bisnode numbers and include the cash that we received from the divestment, the leverage in the end of last year was minus 0.9x and net cash position in Ratos AB is approximately SEK 4 billion. Out of the total SEK 3.9 billion that we received from the divestment, we invested SEK 1 billion in Dun & Bradstreet shares corresponding to roughly 1% of the shares outstanding. And then also in Q4 last year, we received a dividend from Bisnode amounting to SEK 175 million. Back to you, Jonas.

Thank you, Jonas. And let's move to Slide #9, where we are trying to summarize the COVID-19 impact to 2020. We had negative impact on net sales in all companies, except Plantasjen and Oase Outdoors, and we are coming back to these companies later. The fourth quarter, we had a little bit less negative impact from COVID-19 than before. During the year, we have received government support, tax reductions, et cetera, in all countries or most of the countries we're active in, and it amounted to some SEK 79 million. In Sweden, we also have received contributions on SEK 6 million for furloughs and be able to temporary -- what do you say, to lead the company for a temporary time. That amount, we have paid back to the government and all contributions that is possible to pay back, we have paid back. Our priorities during the year has been, of course, our employees' health and safety, but also a big focus on liquidity and after that, EBITA. And I think that has further helped us to improve our cash flow, actually. Now we are continuing to focusing on mitigating risks and negative impacts of the pandemic. And actually, I view the first quarter as more -- much more challenging from COVID-19 than the fourth quarter. We have more restrictions now in Europe, and we have actually had some lockdowns in China with the new virus spread, which we hope they will handle very efficient, as they've done before. But COVID-19 is not over, and it will continue to affect us for the first half year. Let's take a look into the business areas and move over to Slide 10. EBITA is up 13% for Construction & Services in the quarter, and for the year, EBITA is up 27%. The organic sales were down 9% due to the project phasing in Aibel. But also, Aibel and HENT were affected by the COVID-19 pandemic. Actually, we had to stop some projects in HENT during Q4 just due to the pandemic. Aibel has increased their EBITA during the year, quarter-by-quarter. And also, the EBITA margin continued to stabilize during the year. So Aibel's profit margin in Q4 were actually higher than last year. In fact, in local currency, Aibel had a record year in sales. The backlog of orders at the end of the third quarter was roughly NOK 11 billion, of which now as much as 45% is in wind and electrification of offshore platforms. airteam, a really great year for the company, growing 11% in the quarter, 15% for the year. Record-high order book covering a big part of our business going forward. EBITA is up 34% in the quarter and 39% for the year. A good and increasing profitability in both Denmark, where they are the #1 player, but also in Sweden. So a great year for airteam. HENT, commented on the organic sales, which is down in the fourth quarter. Some project has been postponed and even temporarily closed due to COVID. But EBITA is continued to be improving due to more stable projects portfolio. Speed Group, you remember the great turnaround program we had in Q2 2019. And since then, we have seen further improvements by the new management in this company that has a good future to look forward to. Now in Slide 11, if we move to that slide, I just want to say that not only Ratos is transforming. Aibel is transforming from platforms and services to the oil industry into sustainable energy. Platforms in offshore wind farms and electrification of existing oil platforms is growing. Offshore wind is a rapidly growing market. And the goal for the European Union is to fivefold capacity within this decade. That is offshore wind. It's really a good market trend for Aibel because we have 6 years of experiences from working with offshore wind converter stations. And we also see efforts from the Norwegian government to reduce carbon footprint, which is a boost for the electrification of offshore production facilities. And again, the green share of the order book is continued to increasing and is up to 45% in the quarter. With that, let's move into Slide 12, where we have our business area, Consumer & Technology. EBITA, up SEK 160 million in the quarter and 86% during the year. Organic sales development, 7% plus, with strong sales in Plantasjen with 12%. The organic number for Plantasjen's growth is 18%. I'm not going to comment so much on Bisnode, who had a lower EBITA in the fourth quarter due to the lower sales, again affected by COVID-19. But there was higher EBITA and EBITA margin for the full year. KVD sales decreased in the quarter due to lower sales in Kvdpro. Cars is growing a bit and EBITA margin is increased during the quarter and full year. And KVD is continuing to gain market share in a rapidly transforming used car market in the Nordics. Oase Outdoors had a very tough start of the year since their shops and camping sites were closed. Now if we look into the Q4, it's a very small quarter. It's normally 2% to 3% of annual sales, so the quarter itself is not very interesting. What is interesting is that the EBITA and margins from summers -- from the summer, when camping sites open up, when shops open up, was very, very strong, a positive effect from the COVID-19 pandemic, more people spending time in outdoor activities. The order book for 2021 is higher than ever, and it covers more than 1 year of normal sales. Plantasjen finishing a very strong year with a very strong Q4. Sales is up in the quarter, of course, and even for the full year. We had, last year, the first 3 quarters speed up in our businesses, which contributed with sales, but strongly -- strong negative impact from Spira last year of EBITA. EBITA increased in the quarter and full year due to higher sales, increased gross margins, higher efficiency and so on. And I think everyone wants to know how large is the EBITA effect from COVID. Well, it's difficult even for us to put an exact number on this because many things have happened. During Q4, loss-making Spira was divested, as I said. In June 2020, we had a new CEO, who very rapidly took a number of measures, put in a new management team with -- some new members on key position was created, I think, within some 1 month or so. This has resulted, together with a better sales, with a profitability increase from 3.6% to 12.4%. We have better gross margins, higher efficiency store, lower costs for logistics, better customer offering, better customer satisfaction, and the new management team is really focusing on reducing seasonability. So how big was the EBITA impact from COVID? Well, our best guess today is around SEK 150 million for the year. We expect the gradual decrease of COVID-19 effects during 2021. There was a survey performed in Sweden from [indiscernible] Institute, whatever that is in English, where they interviewed customers, and almost 50% claimed that they will spend more time with gardens than before the pandemic, also after the pandemic is gone. We will, of course, follow this very closely. One should remember that Plantasjen also is dependent on weather, especially on the few spring and summer months, and the weather was rather okay during 2020. Let's move to Slide 13, which is also about Plantasjen. Plantasjen is the #1 player in the Nordics. This market, even before COVID, was actually growing. We do have a favorable megatrend around green living, and it goes for all generations, young people as well as older people. It's a big market. It's -- we estimate it to EUR 3.5 billion only in the Nordic. It's quite resilient and noncyclical. In terms of business cyclical, it's a noncyclical consumption demand. And of course, again, we had positive effects from what they call staycations in 2020. The key success factors going forward here is to really be the most inspiring Nordic garden center and also to have sales growth through new channels like online, click & collect and services that our customers really like. And I just want to tell you once again how great job I think the new management team in Plantasjen has done during the year in gross margins and so on. So with that, let's move to Slide 14 and business area: industry. If we look at the EBITA growth here, we're up 161% in the quarter and for the year, 49%. We had an organic growth increase in the fourth quarter. And this comes very much from Diab, who had strong growth in spite of quite negative currency effects. In fact, Diab grew 15% in the fourth quarter. Good demand, but also increased production capacity. The wind segment in China, which is Diab's largest market, is growing. And we have gained market shares in also new products made from the material PET. The marine segment was down during the year, but we saw signs of recovery during the last quarter. EBITA increased 37% due to higher operational efficiency. We have not just invested in production capacity, but also in automation to be competitive in the future. EBITA and sales development is strong for the full year, in spite again of significant negative currency effects for Diab. HL Display has been affected by COVID-19. Net sales was down in the quarter and in the year, but actually up organically in the quarter by 2%. It's impressive to see how both the EBITA and EBITA margin were strengthened through good efficiency in production, logistics, favorable product mix and ending the full year very strong. I think best profit margin ever in spite of the negative sales, which was down 5% for the year. Also, LEDiL was negatively affected by COVID. Net sales continued to decline in the quarter, although we saw a recovery of the order intake in Q4. And EBITA increased compared with last year, due to much lower costs, higher operational efficiency, both in the quarter and for the full year. Last, but not least, TFS. TFS is very dependent on being able -- to be able to do clinical trials in hospitals, which has other priorities today. So we had a negative impact throughout the year. But I'm impressed to see the strong EBITA development in the fourth quarter and for the year, driven, of course, by last year's restructuring program that took place in Q4, where we reduced the staff and we changed the CEO. So we will see TFS earnings improve as the pandemic gradually decreases. Now let's move to Slide 15, just to comment a little bit further on Diab, which I really think is an ESG company well positioned to take on an important part in the increasing demand for renewable energy and wind power. And the fact that the turbines are getting larger is really a good thing for Diab's capabilities in lightweight material and design. Again, I just want to mention that the China's market has been affected of new spread of virus, which may affect the first quarter of Diab. If we look at China, they, in September, stated that they will have 0 carbon footprint in -- and expected to -- this is expected to fuel by -- and now I forgot which year it was, expected to fuel market further. And again, it's our largest market, and it represents about 1/3. So now let's try to summarize this year. Well, all in all, it feels very good that we have delivered on our plan, our 3-year plan, and we're now ready for our next step in the journey to the quite different Ratos, which is a company groups. In these 3 years, all companies have stabilized, 10 out of 11 companies has a debt to EBITA, and the EBITA margin and the EBITA growth has more than doubled. Our earnings per share is up almost 4x, and the dividend is up, 46% is the proposal from the Board of Directors. Our leverage is going down. We launched new financial targets, and we have had a very good EBITA growth. So with that, I want to thank you for listening. And maybe there is a few questions, Helene?

Yes, let's open up for questions, please.

[Operator Instructions] Our first question comes from the line of Derek Laliberte from ABG.

And congratulations on a strong Q4 and full year, and good to hear that things are going in the right direction. I was wondering about this EBITA target of minimum SEK 3 billion in 2025. How have you come up with this target? And then how much of the growth here is to be driven by the current portfolio, how much by new acquisitions and how much by bolt-on acquisitions in the current holdings?

Derek, yes, we have actually a quite detailed plan for this, which I'm not going to tell you all the details. But you could say that acquisitions is around SEK 1 billion in this -- during these 5 years to come.

All right. And then Plantasjen then, just I know you mentioned a few things, but I'm just trying to get a sense of what's been done here. We know it's been a great year, boosted by not least the pandemic. But as you're right, you've also done some substantial improvements, especially with the new management teams in the stores, the customer offering, gross margin improvement, et cetera. So wondering, is this a result of sort of a longer process because it seems like these improvements are more of sort of an immediate type? Just wondering if you could give some details what's been done exactly and why this couldn't be identified before? Because it seems like some of these things are almost overnight. I don't know if that's clear or not, but.

Well, I think overnight is maybe to put it for. But they have been working very hard, actually, since end of May. And of course, the management before also did a good job when it comes to better custom offering, better assortment, et cetera. But I'm impressed of the new management, again, working with gross margins and logistics. And I think we will see a new -- not a new brand, but a brand meaning something different in the future. And that, of course, takes longer time. But I urge everyone to look on how much the EBITA is growing in millions and how much the sales is growing in millions, and you can see there is some efficiency there also made.

And the next question comes from the line of Hjalmar Ahlberg from Kepler Cheuvreux.

Just a question first on this margin improvement that we've seen during 2020 and 2019 as well. Now going into '21, '22, we might see some top line growth as well. And do you see continued operating leverage here as well? Or do you think, I mean, profitability has have come to a good level, obviously, more potential there?

Hjalmar, I think that is a good question also. I mean we are -- good profitability for us is if the profitability is better than the peers, the peer group for the company. We will never have plus 10% profit margin in pure construction companies, so as an example, and we want to see more -- that level is a good result in other companies. So we benchmark each company versus their peers. And we want to be the most profitable company in our sector because that's the ultimate proof that you're doing something good for your clients. You create value for your clients. You have a staff that is developing and feeling fairly happy going to the job in the morning, and you have an efficient operation. So we will not sort of focus less on profitability increases. Some of the companies, yes, they have achieved that. But we are -- many companies have not achieved that, and this will -- work will continue. And if we talk about add-on acquisitions of companies, we think it's important that you have a profitability level that is good. That's my experience from acquiring more than 60 companies in my previous job. And it's a culture thing. So we want the company not only to be stable, but also have a profitability that can create a good culture together with an acquired company.

Got it. And since you mentioned acquisitions here and you also said that your target included around SEK 1 billion acquisitions, do you see -- do you think it's challenging to achieve this? Or is it a lot of acquisitions out there? So it's more about execution rather than finding right companies?

No, no. I mean, it's always challenging to acquire a company, and you can't rush it. It's very important that the companies we are going to acquire, really, will add value also by synergies. Well, the COVID-19 also affects the M&A market right now. I mean it's quite difficult to arrange management meetings, which I consider to be very, very important part of the acquisition process, et cetera. So valuations are high. And COVID is making it a little bit difficult, more difficult here, the first half year, I think. But we have been working for this for some months now, and I feel confident that we will make this journey until 2025.

Got it. And how about the organic growth? I guess there's a lot of difference between different companies. But is this the underlying market growth? I mean you mentioned Diab, of course, that does have good market growth. But is it also that you're taking market share in other companies or anything to add there?

Yes. Organic growth will always be more -- the most value-adding growth. So we will not shift focus there. Organic growth will continue to be important for all our companies.

[Operator Instructions] Our next question comes from the line of Mathias Lundberg from SEB.

Can you hear me?