Ratos AB (publ) (RATOB) Earnings Call Transcript

Good morning, and welcome to this presentation covering the third quarter in Ratos. Jonas Wistrom, your President and CEO; and Jonas Agrup, CFO, will join us shortly to guide us through the results. I will give you a short update on sustainability in Ratos and in the end of the presentation you will be able to raise questions in our Q&A session. This webcast will also be recorded and is available at ratos.com afterwards. Well, we had a really strong result and we can't wait to get started. So Jonas Wistrom, please come and join us. I'll hand over to you.

Thank you, Josefine. And thank you, everyone, for joining this Monday morning. I will start with the overview over this quarter. We have a strong quarter, EBITA is up -- adjusted EBITA is up 18%, reported 100%. Our sales grew significantly to 31%, 7% organic. And also the acquired companies have had a good development, good growth, good sales growth, good EBITA growth since they were acquired. The order backlog is record high. It's over SEK 50 billion. And the order intake in the quarter was some SEK 9 billion and that excludes Aibel. The EPS, which I think is one of the most important key ratios, is actually up 70% last 12 months and Jonas will come back to these targets including return on capital employed, which is almost 11% this quarter. It's also important quarter in the sense that we continue our journey to a more homogeneous group. The acquisition of Knightec was closed in the quarter and we have been within now in August and September. And as you know, we have launched a public tender on Semcon and I will come back to that. So if we look a little bit deeper in the numbers for Q3 and also the year-to-date numbers, again, sales growth is up 31%, year-to-date sales is up 29%. We have very strong cash flows. The cash flow for the quarter is SEK 560 million roughly, which means a cash conversion of 130%. EBITA also good growth, I mentioned the numbers before and in the quarter we had generally strong demand. We had weaker demand in the wind industry and also in parts of Plantasjen. If we go into our business areas starting up in alphabetic order with construction and services. Again very strong quarter both in terms of EBITA, in terms of cash flow, in terms of sales and sales growth 54%, 17% organic, and EBITA increased by 86%. And our profitability also went up. So a really strong quarter for construction and services in spite of the fact that we lost some SEK 25 million in or lost is wrong because it's unrealized loss in currency for Aibel in the quarter. Let's move over to consumer. Consumer had a lower EBITA in the quarter. Net sales grow just a little bit, organic 1% down. This is driven by the dominating company in the business area Plantasjen, who had weaker sales in capital goods, durable goods, so the plants did okay. But those kind of articles that hardware; barbecue equipment, furniture, et cetera, they were down significantly in the quarter. We've also had extremely high energy costs and logistics costs in Plantasjen in the quarter, which affect the business area. One could mention that all quarters in the business area in Plantasjen is stronger in 2022 than they were in the pre-pandemic years, 2018 and 2019. Coming into industry, here we have EBITA growth, very much because of the acquisition of Knightec that has been with us 2 months this quarter. General strong demand; however, as you have seen from the big wind market manufacturers, it's been a very weak year for wind and that has affected Diab who is running their cost restructuring program. And we said in the beginning of the year that the results will show off during the -- this year. And actually in this quarter, we have seen some improvement due to the restructuring program, but there is more to come. Net sales is up 16%, but that the organic sales is down. As you who have followed us for a couple of years, you know, we started off 2018 with a, you can call it restructuring program, an EBITA increase, debt decrease program that went on for '18, '19, '20, we managed to increase EBITA as an average of 86% during this period. In 2021 we started to perform acquisitions, not to be -- not to sort of make acquisition to make arbitrage on our multiples or anything. No. It is to build a solid company group. And we'll also be a more homogeneous group going forward with more soft synergies. Then you might ask, what kind of group will that be? How will it look like? Well, the clue is to look on what have we acquired? And what have we divested and what are we going to divest? The picture will be more clear. Vestia that was a adjacent company when we announced it is actually kind of a platform today in the SSEA group. They have also former HENT Sweden. In the infrastructure business, Presis Infra was acquired in the end of last year, has had very good development since then in infrastructure services which we like. NVBS, also infrastructure projects and services, acquired in Q2. And Knightec, professional services in technical consulting industry is and will be a very important area for Ratos. Why? Well, engineers is -- it will be a great demand of engineers for many years to come, even though of course they are also affected by business cycles and so on. But over time we'll see a strong demand on engineers, not the least to make our world much more sustainable. Clever politicians and great engineers stands for a big part of the journey to a more sustainable society. If we look on another thing we did in the quarter was that we had a public offer to release the public tender for Semcon and of the same reason as Knightec. And I just put down the Semcon numbers for sales and EBITA, so you get a feeling of the size of this company. And we're in good hope that Semcon will be with us this year. We have 52% of the shares already in our hands through irrevocable, and we believe the speed will come through. So with that over to you, Josefine. And I apologize for my little bit of autumn flu here. But I hope everything went through. Please, Josefine.

Thank you so much, Jonas. And I am happy to give you a short update on the sustainability side. We have a very holistic and action based view on sustainability in Ratos as many of you already knew, you who have been following us for a while. In the quarter, the positive development continued in our companies and you will see on the slide, a short description of 2 good examples. HENT goes from strength to strength. They continue to collect trust as they receive trust to build landmark -- of landmark in Sweden and Norway. And what you can see on the slide is a picture of the of the Giga Arctic battery factory, which is to be built by FREYR in the north of Norway in Mo I Rana. And this will be the beginning of a very -- a new industry in Norway building battery factories. A few words also on our innovative consultants in Knightec, which is our newest member in the growing and changing band of siblings in the Ratos family. As you can see, the example covers a school collaboration, which was initiated by Knightec in 2008. Now they are taking the next step together with their customers. And this is a company with a strong commitment to society and the conviction to work together with its customers for positive impressions and changes in society. This school example -- this school project is an example of that. So it's going to be very exciting to see where it's going to end. Lastly a few words on EU-legislation. As you know, there's a lot going on in that area coming up. It will contain the new CSRD, Corporate Sustainability Reporting Directive, which will be the next step of the NFRD directive that we're using today. And in the CSRD, there will be a more comprehensive and clearer view and clearer requirements for sustainability information based on ESG. And our examples from the quarter, as you might see, they mirrors very well the broader take on sustainability, which we have to take into consideration going forward. So Ratos is very well equipped to meet the new demands. With that I hand over to our CFO, Jonas Agrup. Please.

Thank you, Josefine. So let's move into the financial part. So we start with the net debt. You can see that we have increased net debt as a result of acquisitions made, but we have also increased the working capital mainly in the business area, consumer. You saw that we were actually at the net cash position in Q3 last year. If we look at the net financial items, we are improving in the quarter, we were at SEK 63 million. We had positive FX effects, but we also despite that we have higher debt, we saw lower interest rates in the quarter. And this is due to the -- an effect of the centralized treasury function that we have in Ratos today. In the quarter last year, in Q3 last year, we had interest rates of 2.8%. This quarter we had at 1.8%, so much lower. If we look at the effective tax rate, we were low in the quarter, and this is actually what I expect going forward that we will be below 20% in tax rate. We booked some deferred tax assets in the parent company in the quarter, about SEK 45 million. And we will continue to book these DTAs going forward. If we look at earnings per share, we were at SEK 0.61 already in the quarter, last year we were affected negatively by the revaluation of the Dun & Bradstreet shares. So that's the main reason why we were lower, but we also have lower tax rates this year and also lower interest cost as I explained earlier. If we look at the cash flow from operations, Jonas mentioned, a really strong quarter. Also if you look at the LTM number in Q3, strong quarter for operating cash flow. We saw a good cash flow in the business area construction and services where actually all companies reported positive cash flow in the quarter. Net debt or the leverage net debt to adjusted EBITA at 0.8x. So we are in a net debt position now and this is, as I said earlier, mainly due to acquisitions, but also some working capital increases that we have seen in business area, consumer mainly. This is showing the leverage development going back to the third quarter 2020. You see that certain periods we had the net cash position and this was after the divestment of Bisnode. We are now in the third quarter 2022 at 0.8x and if we would perform adjust for the Semcon acquisition, we will be at 1.9x. And we have secured financing for the acquisition. We have commitment from our main banks, our 3 main banks, it's a term loan. It's 3 plus 1 year and the terms are as we see it, very attractive. If we then move on to this net sales bridge, net sales increased 31% in the quarter. A lot of this increase was acquired growth, 20%, and this is generated mainly from construction and services, where we have 2 large acquisitions in Presis Infra and NVBS. We saw organic growth of 7% and we saw organic growth in not only in construction services, but also in some parts of the industry. And we had a positive FX effect. And you can see that we had a negative effect out there. And this is within business area industry where we have ceased our operations in Russia and Belarus and that had a negative impact of SEK 12 million on top line. If we look at adjusted EBITA, up 18% in the quarter, a lot of required growth. As you can see in EBITA, organic growth we have a negative effect and this is mainly attributed to Plantasjen and Diab. And in Plantasjen, we saw lower sales levels, but also higher cost for energy and also higher costs for warehouse logistics in the quarter. And then of course Diab, we had a negative effect also where we see much lower volumes in the wind segment. Positive effect from FX, SEK 22 million, and this is caused by the weak Swedish kronor mainly against the Norwegian and Danish kroner. And then if we move on to earnings per share, and as Jonas said, this is a focus area for us. We see an increase of 70%, which is a good increase in the quarter. And if we look at return on capital employed, we are roughly on the same level as seen in the third quarter last year, so we are at 10.6%. So by that I move back over to Jonas Wistrom.

Thank you, Jonas, for numbers. So let me try to sum this up. We have mentioned the strong EBITA cash flow and growth figures. The demand is still good. But we're all of course seeing a lot of dark clouds on the sky. I've been in business for quite some time and I can't help reflecting a little bit about the last crisis, the Lehman crisis. It was another kind of crisis. The demand just fell down dramatically in a very short time. It is quite hard to foresee what will happen in the future, obvious reasons. We see the inflation. We see customers are more reluctant to buy. I don't know if it's a good translation from Swedish, but things you buy more seldom like furniture, et cetera. In any case, to have a strong balance sheet is very important, I believe, and we believe, and we're also happy about the fact that the order books are so strong, and the order intake is also very strong. And if we look into the construction and services area, I think it's worth to mention that 70% on what we're doing in construction is actually partnering or cost plus business and less than 5% is within residentials. In fact it's quite much lower than 5%. So we will do our best to keep our strong financial position and use our order books and perform them in a good way going further. But I want to reiterate the fact that you have seen one more step in the quarter of the journey to -- and our work to be more structured that is more homogeneous and with more soft synergies between the companies. We see a lot of them in many areas, including the sustainability area. And I do also believe that we will see another step with Semcon coming in later in this month or beginning of next month. All in all, I'm quite happy. You always want more, but we -- this is the best EBITDA we have done for a very long time, as we can see. And it's a great quarter for Ratos. So thank you very much for attending this. And maybe there is some questions or comments. I don't know. Josefine?

Let's have a look. It's time for the Q&A session and please, Jonas Agrup, also join us. I will have a look. Here we go. I know that we have Victor Hansen from Nordea.

The first question, what's driving the working capital release in your construction business?

Would you like to take that, Jonas?

Yes. Hello, Victor. Well, as you know, the -- our business area Construction & Services is actually quite capital light, and we don't build that much in working capital usually. So we have good profit levels and that's generating good cash flows. But we also received an advanced payment on a project in the quarter. So that contributed also a little bit on the cash flow.

But in general, we -- it's an area we focus a lot on. I mean, I used to say in the office here, EBITA is great, but cash flow is even better.

And then thinking here on Diab restructuring. If you could tell us a little bit more about how it's going and if we should expect the full run rate savings effects already from Q4?

I can't promise you that we will get back to the results we had when wind was on top. I've sort of been wrong before when it comes to the demand from the wind market. We hear about it every day almost. But there has been a low demand during this year. We expected that it will come back. We -- but I can't promise how much. What I can promise is that we will be less dependent in the future on this market that has actually been quite volatile. We have 50% of our sales in the -- is within marine industry and aerospace, and that business is doing great, really great. And I'm also happy that Johan Arvidsson, the new CEO with very long experience from the industry finally came in now just 1 or 2 weeks ago. So you will hear much more about Diab in the coming quarters.

I'll do one final question here. And if you could provide some sort of update on your M&A pipeline, perhaps split by platform and add on?

Well, those are just the things we want to answer, as you understand. The -- I can say that I've been talking before about that out of 200 sort of companies in the long list, we have sort of went further with 20 and may be acquired 6 or 7. The M&A market is softer today, valuations are coming down, but not in the speed as it has been for public and stock-listed companies. And we will also -- so we will be even more cautious going forward and more selective, but it looks good.

The line is open for Rasmus Engberg from Handelsbanken.

Coming back to first your comments about being homogeneous. I think a lot of people think that there is one division maybe that makes you less so than what would have been the case. Is there a reading in that?

I won't answer any of those questions. I can say what I think is important is that the companies that are to be acquired, they know about it, but I won't tell anyone else.

Right. Then the other question, if you could elaborate a little bit on what's happening now with Semcon? How does it -- how do we proceed from here? I mean there's the acceptance period that ends this week, if I'm correct.

Yes.

And what happens then? Is it -- do you need to be at 90% or will you prolong or?

Yes. We want to be on 90%, and we hope that we will be that when the period is out. If not, we will come back with new communication.

And then just a housekeeping question. This SEK 25 million that you sort of lost in Aibel, is there anything else in the business working the other way? Or should we sort of think that next year this SEK 25 million would sort of drive your earnings or?