Sdiptech AB (publ) (SDIPB) Earnings Call Transcript

Hi, and welcome to Sdiptech's webcast. Jakob Holm, who is the CEO; and Bengt Lejdstrom, the CFO of Sdiptech, will be presenting today. My name is [ Mattias Bohlin ], and I'm from Finwire.tv. [Operator Instructions] With that said, I'll give you Jakob Holm and Bengt the stage. Please go ahead.

Thank you very much, and welcome, everybody, to Sdiptech's year-end report 2020. Well, as you know, my name is Jakob Holm, and as always, I have Bengt Lejdstrom on my side. Moving forward to the agenda, first of all to summarize the full year 2020 and then dig a little bit deeper into the fourth quarter, followed by a financial overview from Bengt and to sum up with the outlook, then, for the coming quarters. So we're very happy to conclude 2020 with a very strong report. We have exceeded our financial goals, organic profit growth at 11.3%. Our goal is to be between 5% to 10%, so we're very proud of that. We've also acquired, according to our goals, SEK 91 million of EBITDA in 2020, and we have a healthy financial net debt at 0.84, where our goal is to be below 2.5. Over the year, we also added 4 excellent companies, very definitely high-quality companies that, in one way or another, contribute to more sustainable, efficient and safe societies, so the underlying trends are strong for growth. And we're also quite happy to more and more realize that we -- there is an increased awareness among entrepreneurs and business owners, and an increased interest for Sdiptech in the U.K., so we have the privilege of being able to be quite selective in terms of which companies that we that we move forward with, so we are in a good position there as well. The margin expansion has continued. It's actually have been growing steadily since 2016. We have very much a focus on profitability in acquisitions, but also how we develop our companies. So the expansion over the past year has been 2.2 percentage units on the operating profit. We've also worked hard on the sustainability side. On one hand, our core business is very much around sustainability, efficiency, safety, so that really goes by automatic. However, we've also increased our internal work so that we always can continuously improve. We've implemented a sustainability council to improve our stakeholder dialogue as part of that, expanded our ESG reporting. We've also internally implemented a handbook for sustainable investments, which our acquisitions team work with actively, very important. And then last but not least, we're quite happy to be able to demonstrate resilience during a quite difficult year. So, despite the pandemic, we've added 3.5% organic growth in net sales, so we're, of course, very pleased to present that. We've also had a good cash conversion. For the second year in a row, it's been above 100%. And then moving over to the next slide, our overriding goal is to increase profits every year. Over 2020, we increased our operating profits with SEK 85 million. On one hand, our business model is really designed to increase profits every year through acquisitions, so the contribution from acquisitions, SEK 72 million. And then also, we've -- as you know, we've also had a healthy organic profit growth, very much driven then by the resilience and the growth in sales, but also from the margin expansion. So if we move over to the profitability side, our profitability continues to increase. One important point there is that the majority of our companies, they have scalable business models, and that means if we grow sales, then, of course, the gross profits also grow. However, the cost base is rather fixed, so that means that the operating margin increases at a higher pace than the growth in sales. So the scalable business model is a very important underlying factor for our profitability improvement. But also, we've had an extra high profitability level in 2020, and that is really related to the pandemic. Early up in the pandemic, we took some quick actions from actions to be extra careful around cost levels, and so that, of course, has improved the profitability to some extent. And then, we've had, as part of the pandemic, we've experienced some delays. The demand has been solid throughout entire pandemic, but we've been unable to deliver, so we've had delays, as I think you know, everyone. But then, in third quarter especially, but also in the fourth quarter, we've been able to catch up. So we've had peak deliveries during the past 2 quarters, but we've done those peak deliveries with normal capacity, so that, of course, also brings up extra high profitability. But all in all, our business model really pays off to increase profits every year. Moving over to the fourth quarter, first of all, just to mention the situation around COVID-19. We have, as I said, caught up on delays from the first wave, and we're also starting to resume important investments. One of those categories of investments is to really bring up our delivery capacity to normal levels. We've been cautious to recruit technicians and production capacity, for instance, due to the pandemic, but now we're bringing those levels back to normal again. Right now, there are restrictions in our markets in U.K., in Sweden, Germany, but the restrictions and limitation and mobility doesn't affect us to the same extent, since now we have been [ to cope ] with restrictions. So the effects are small, and looking forward, we are confident about the resilience. The demand is solid, as I've said, and we have good confidence for the outlook. During the fourth quarter, we acquired GAH Refrigeration. GAH is a U.K. leader in the last-mile transportation refrigeration solutions. Difficult word. And I think you can see on the pictures there, on the left-hand side, you can see the product on top of the driver's cabin. Inside of that is where the actual product is placed. And last-mile cooling transportation, that typically involves food and groceries, the key drivers in those markets very much driven by changing consumer behavior towards online shopping. So -- and during the pandemic, that market has had a bit more of a step-wise growth, which is, of course, positive for the company. The company has a good market position. That's really based on strong products, very much focused on R&D and the customer demand to translate those into innovative products, and some of which you can also see on the right-hand side. GAH Connect is a system where the customers' fleet of transportation vehicles can be monitored, the temperatures, the opening and closing of doors and so on, so that the superior service and support can be provided to the customers. And on the right-hand side below [ EFridge ], very interesting product that has been developed, and it is a cooling solution that is adopted for electrical vehicles. The sales is currently not that high. But of course, we and the company expected to be interesting going forward. And then, moving over to our business areas, starting off with water and energy, in the fourth quarter, you can see on the graph to the left-hand side a small decline in sales and also profitability. And that is very much related then to the restrictions that, to some extent, affect some of our business units. One example of that is in the U.K., where we provide temporary electricity and power. The technicians have, occasionally, difficulties to be at the client's site and actually do the work. Another example is a Swedish-based business that focused around exchanging water meters. Same thing there. To some extent, they are restricted to come home to people to exchange the meters, so the work is delayed in the same way as we seen as we saw in the first way. We expect to catch up those delays, but the effects, as you can see, are much less now compared to the first wave. Moving forward to special infrastructure solutions, overall, sales growth very strong, 42%. Of course, a majority of that is driven by acquisitions, almost all of it, actually. We do experience, in this business area, the same thing as in water and energy, continued stable demand from our customers. Organically, net sales up 0.8%. Also, some business units are affected to some extent from the COVID-19. One example is in the air and climate area, difficulties to access properties to actually do the work. But the positive development, from a profitability perspective, offsets the decline, so organically up 0.8%. Profitability is significantly up, as I said, from 22% to 27%, and the profitability levels, they have been extraordinary, as we've already discussed, so profitability is normalizing. Cost levels, especially on the delivery side, are coming up to normal levels, which is according to our plans. And also worth mentioning, the acquisition GAH that came into our numbers from December, the weakest month is December, since all the transportation vehicles, they need to be ordered, prepared and set before the Christmas period that is very important in December. So the contribution from GAH was close to 0, since that is normal for them in December. 4 acquisitions over the years, all acquisitions have been done in this area and currently number of [ units ], 13. And finally, Property Technical Services, sales increased significantly, 17% in the quarter, and we are very happy, then. I think all of you know that, those of you that have followed us a couple of years, we implemented a profitability improvement program in 2017 and '18, and it's definitely paying off now. The business units are much better positioned in terms of having the right customers, the right contracts, those that are profitable. And so, we have, throughout the year, increased our sales efforts, so we are very happy then to see that the -- that, that really has paid off in an almost 60% increase in operating profits now, so we're happy to see the effects there. And by that, I hand over to Bengt as to the financials.

Thank you, Jakob. And talk a little bit the overall financial development. And on this slide, looking at the group sales and the total EBITDA margin development. The group sales increased with 14% over the year, and of that, 3.5% was organic growth. And you can also see it on the development of the profit margins quarter-by-quarter, calculated on the last 12-month figures. And it was improving, as you saw in the beginning of the year and a bit flattened out towards the end of the year. And the quarterly EBITDA margin in Q4 was 16.7%, which was more or less the same as the yearly average, so quite stable in that, then. Looking upon the sales divided by country, we're still increasing our sales in relative terms in the U.K. Our biggest acquisition ever in the GAH Refrigeration has only been included for a month. And of course, they will contribute now this year of 2021 with even higher figures for the share of the U.K. sales. And also, the companies in the U.K. are quite profitable, so the share of the profit is even a little bit higher. But still, half of our sales are in Sweden. Infrastructure business is typically local or regional. It's not that much of export, even though, as we invest and acquire more product-based companies, the share of exports are slowly, bit-by-bit, increasing. And you could see from this pie chart that now it's a 7% of the turnover is then exported to markets outside where our companies are residing. So -- but still, Sweden will, of course, be an important market also for 2021. Looking next slide, we have the EBITDA, the operating results increased 32%. And of that was 11% organic over the year. For the quarter, it was 10% organic profit growth, and in total, 32% of the year and 20% during the quarter, so it's still a quite very stable increase of both profits over the quarter and the full year. As I said, the margin has more or less leveled out now at about 16.5% and 17%. And as you know, during 2020, we were guiding for the profit margins by segment by the different business areas, and that was, of course, we thought it was necessary because of the pandemic and the bit unstable situation. Now we see that they have more or less stabilized, and we think it's better to guide on the full group instead. And we now, for the year 2021, we say that our guidance is the total EBITDA margin, including central costs, at 17%. And that is an increase compared with last year, then, and that was 14.4% in 2019. To summarize some of these KPIs for the quarter and the last 12 months, we talked about the net sales, we talked about the EBITDA, the -- our operating results, and also the margins. Coming to the earnings per share, the result for the quarter was a bit low, and I will come back to that to share with you the bridge from our operating result down to the earnings per share. Even though on the full year, it was quite decent, and that also then includes the weaker Q4 and also Q2, if you remember, which was also a bit weak due to currency effects. But I will come back to that shortly. Our cash flows are very good. We had actually, in the quarter, 137% conversion rate from our profits into real cash flow on the operating side. And on the full year, 109%, SEK 450 million all in all cash coming into our accounts. Sometimes, that is, of course, that we help our newly acquired companies to improve on their working capital to free some cash from both stock in inventories and accounts receivables. But it's also a continuous work in all the companies to be very careful about your working capital situation. Our debt ratios, we have a goal on one of them, as Jakob was mentioning, the financial net debt, that should be below SEK 2.5 million. It's now -- was now 0.8, but we also measure the total net debt, which includes our debt for conditional considerations being paid out in the future, dependent on the results in different units. If we add that debt, we come up to SEK 2.7 million. There, we don't have an explicit target, but it's still decent levels, we believe, since the [ measure ] of that added debt is that, in order for that debt to be paid out, the results have to increase from the levels when we acquired the company. So that means that, to pay those debts, results will be even higher, so that ratio should actually be lower [ realized ], so to say. But that's a bit complicated to our visibility [ into those ]. That's why we concentrate on the financial net debt instead, [ that’s a golden mission ]. I said I would take you through the bridge, and this is a lot of information. I will focus on some of the figures, but it's showing how we come from, well, already net sales down to the net profit after tax, and there are some figures here to look specifically on. If we start for the quarter now from our operating profit, we call it beta [ star ] because it's the best representation of how the business is going. There, we had the increase with the 20% since last year. But then there is a lot of, I would call it bookkeeping exercises, because most of these things doesn't have to generate any cash flows or anything, but it's according to IFRS [ resolution ] and such things that we need to add a number of components. First, I would like to point out is that we, every quarter, actually, we look upon these earnout debts, these conditional considerations that are to be paid out if the results are improving to the sellers of the companies. We did that, and since 2020 was a successful year and a number of companies had a very good development, profit wise, we eventually have to increase our debt reserves or in the balance sheet. So if you increase your debt, that means you have a cost, so it's a bit contradictory. So as the business are developing good and better, we have taken a cost, which reduces the result. But we try to not have to do this up-and-down every quarter because you saw last year, Q4, it was actually the opposite effect. We had to write-down some of this debt because some companies were not performing, so we got a positive effect to the result. So the swing factor here is above SEK 20 million then compared quarter-by-quarter. So that complicates, of course, the possibility for you to try to predict our results in the future, because these effects, you cannot know beforehand, really. Another figure I would like to mention is that when we do an acquisition, we have to allocate part of the consideration, the enterprise value, to different intangible assets, which can be written down. A few years back, we did that more or less 100% of goodwill, which is not amortized. But nowadays, we allocate more to assets that can be amortized. And it's also a bit difficult for you to have an insight in the future, but as a rule of thumb, you could say that 2% of what we acquire a company for will end up as amortizations over per year. I will come back to that a little bit. But as you see, it's quite a lot of number every quarter that has to be taken as a cost on these amortizations. Yet another a bit special figure is the currency effects, and now we look upon the full year, and since we have a lot of investments in the U.K., they are booked in the British pounds. We try to have that net assets as low as possible. But on one hand, we cannot borrow more money than we need, so the debt in pound is lower than the assets in pounds. So that means [ when -- as ] during 2020, the foreign exchange rates, Swedish kroner against the pounds has been then -- well, the pounds have been weaker, so we have to take negative currency effects. In 2019, it was the opposite, and the pound was strengthening, and we took a profit from that currency effect. So, also here, we have a big swing factor from last year to this year of [ 35 billion ]. Sorry about that, our talking device. So -- and that will go a little bit up and down. Now this year, we can see that the currency effects are positive. The pound has been strengthening. And so if that continues, we will have a positive effect in the quarter number one. Finally, as one of these bookkeeping effects is that we also have to book the discounted interest on all our conditional considerations. These are now debts that are to be paid out in the future. We don't pay any interest rate on those debts to the sellers, but we have to book theoretical interest. So these are not money going out in the cash flow. It's kind of a noncash item, but it's still affecting our net results. Also there, we have the rule of thumb saying about 2% of our total conditional debt ends up every year as interest cost. So it's really not easy for you to follow all these numbers coming from our operational profit down to the net profit after tax. But anyhow, for the full year 2020, we increased the net profit by 33%, 2020 compared to 2019, even though in the quarter 4, we actually decreased with a little bit more than 20%. So hopefully, this gave you some more insight into this. Otherwise, we're happy to answer questions later on. You can send emails, or so I will try to help you dig deeper into the effects of all this. And I would like then to end my part of the presentation with some planning assumptions. Going forward, we stick to our financial targets. They are still the 5% to 10% organic profit growth, and we should acquire companies representing SEK 90 million EBITDA per year, even though if they are acquired later on during the year, they will not contribute with SEK 90 million, but as a pro forma. And I talked about the new guiding for the underlying profitability, as it has been strengthened throughout the year, but we say now we will be a little bit better than 2020, but around 17%. And then adding then these 2 rules of thumb for you when you try to project the future that we have 2% of the acquired company's purchase price, that will be amortizations, and that's for new then acquisitions. And for this discount interest, we have as a rule that about 2% of the outstanding debt for conditional considerations. Yes.

Okay. Thank you, Bengt, so we summarize with an outlook. Looking forward, first point is very much around our underlying development, and I think 2020 has demonstrated that kind of resilience. We do have a solid demand from our customers, and we are growing organically in sales, so that's an evidence. And then, at the same time, our underlying profitability is gradually increasing, so that's a combination which is, of course, the best combination -- organic sales growth, combined with margin expansion. Secondly, the prospects for future acquisitions, they are good. They are normal, we should also say. We are well capitalized for further acquisitions, and to some extent, our discussions with entrepreneurs are, to some extent, a bit more difficult due to travel restrictions. But even so, we have a solid pipeline for 2021, and there's no reason to think that 2021 will be different from an acquisitional perspective. On the contrary, the quality of our companies are very good, and it looks very promising. And then, also, we are very well positioned in comparison to strong drivers within societies. There are new efforts towards more sustainable societies. Currently, I think we all experience that. Consumer behaviors are changing. Politicians take a stronger grip around sustainability issues. One example is Boris Johnson that has declared that there will be no new sales of fossil-based cars in 2030, and that is a change over 2020. It's a quite clear message. The Mayor of London [ City ] has also declared a zero vision in terms of death accidents for the city of London. So politicians are definitely taking steps forward here, which will affect the infrastructures, and then also, companies that deliver products and services to the infrastructures. And then, finally, investors put additional pressure on companies in terms of ESG topics. And for us, at the core of our business is really sustainability, efficiency, safety. It's around our current businesses and also on the acquisitions that we look at. These are the kind of trends that we've been looking for a couple of years, so we are well positioned to take an active role in creating more sustainable, efficient and safe societies, and we are very, very proud of that. By that, we hand over to questions.

Now it's time for the Q&A. [Operator Instructions] So the first question is, cost of goods sold have dramatically increased in Q4, reducing gross profit margin. What's the reason for this increase?

Well, we have -- if you compare this with the previous year or the previous quarter, we have, of course, added acquired companies. I'm not sure if that question is really pointing at some very specific item of the cost of goods sold. It's, in general, no specific item that we believe has been dramatically changed from one year to the other, but it's more driven with the acquired companies if you compared with last year.

Okay. And the next question is from Gustav Norrstrom from Nordea.

And the question is, at 16.6% in Q4, you are slightly below your 2021 guidance. In which business area do you believe that you could improve the margins for 2021 versus Q4 2020?

Well, first off, there was some focus on the business area margins last year, and I think the year ended up quite well for both water and energy and the profit. The Property Technical Services, they were quite spot on with our guidance when it comes to the EBITDA margin. [ Most ] Special Infrastructure Solutions, but a bit reduced the margins a little bit towards the end of the year. And a big part of that for the Q4 comes from the acquisition of the GAH, which then added quite a lot of turnover in the quarter, but at more or less 0 profit, as Jakob said. So that reduced, of course, the margins quite a lot, and that company has about SEK 17 million profit margin as their normal profit margin. And so the Special Infrastructure Solutions business area will have a lower profit margin this year, 2021, since we have added that company. And also, then, we are guiding, again, in total for the whole group to be a little bit above last year.

Okay. And the next question is from [ Adrian ] from ABG SC.

And the question is, should we see the 17% EBITDA margin as a target for 2021 or midterm, and why 17%?