Sdiptech AB (publ) (SDIPB) Earnings Call Transcript

Welcome to Sdiptech Q2 2026 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Anders Mattson; and CFO, Bengt Lejdstrom. Please go ahead.

Hello, and welcome to our quarterly report, the second quarter. My name is Anders Mattson, CEO of Sdiptech, and I will be presenting here today together with our CFO, Bengt Lejdstrom. Before we start with the quarter, just a short intro to Sdiptech for any new listener. We acquire, we develop and we create a long-term home for niche companies within attractive infrastructure segments. Today, we consist of 33 companies. We added 2 companies during the quarter, and we operate in a decentralized structure and each company is responsible for the day-to-day operation. We divide the group into 4 business areas, and each segment has a clear and structural underlying growth trends for the future. On the rolling 12, Sdiptech as a group has SEK 4.7 billion in revenues, SEK 988 million in adjusted EBITA and an adjusted EBITA margin of 21.2%. And these are numbers for our core operations, excluding the companies that has been divested over the last 12 months. For today's presentation, I start with some highlights of the quarter. On a strategic level, we are happy that we have completed the divestment program that we initiated last year in August. 11 companies plus our remaining elevator business have been sold. We have achieved a multiple around 6.5x 2025 EBIT for the entire divestment program. And it's important to mention that the logic will be that the proceeds from the divestments will be allocated towards new acquisitions going forward. And that means for us that we are allocating capital where we find it more attractive for the future. From an M&A side, healthy M&A pace, 2 acquisitions in the quarter, and our pipeline has improved over the last 12 months and is now in a good shape for the future. We also experienced a continued solid demand from our diversified portfolio within our attractive infrastructure segments. From a financial perspective, it's a positive momentum with a total adjusted EBITA growth of 11%, organic adjusted EBITA growth of 5%. Cash conversion in the quarter is 70%. And if we're looking at the last 12 months, it is at 90%. And this is, of course, is important that, because we would like our own cash flow to be the primary funding for our continued M&A activity. And it's good to see improved momentum in Supply Chain & Transportation. Energy & Electrification and Safety & Security is having a continued strong demand. Water & Bioeconomy is improving, but still has negative development compared to last year. Coming into the financial development in the quarter. I should also mention here that the numbers we present here are excluding then the divested companies for comparison reason. Net sales in the quarter came in at SEK 1.269 billion, which is a plus 14% growth in the quarter. We had a strong organic sales growth of 11%. In the quarter, we had a negative currency effect of minus 2% and approximately 4.5% is coming from M&A growth. In the quarter, all our 4 business areas showed sales growth and especially a strong development from Supply Chain & Transportation, Energy Electrification and Safety security. The main reason for the solid sales development is not a specific business area or a specific company. It's more the continued structural trends that we see from our main segments, like electrification in general in the society and also improved safety elements in many different areas. If you look into the right side on the slide there, no significant change in our geographical distribution of sales with U.K. as our largest market. Proprietary Products is increasing to 68% of total sales compared to 67% from last quarter. Then coming into our adjusted EBITA, we came in at SEK 258 million, which is a plus 11% growth in the quarter. We had a solid organic growth of 5%. In the quarter, we also had a minus 1% currency effect and then roughly approximately -- or 6.5% is coming from M&A growth. In the quarter, 3 out of the 4 business areas showed growth in adjusted EBITA. And again, the same business areas had a solid development, Supply Chain & Transportation and Energy & Electrification and Safety & Security. We still have a negative development in Water and Bioeconomy, but improved performance compared to quarter 1, and I will come back to that later in the presentation as well. Looking at the margin, adjusted EBITA margin decreased to 20.3% compared to 20.9% last year, and that is primarily due to a growth in Supply Chain & Transportation, which is our largest business area, but also in relative terms, the business area with lowest margin. And with that, I would like to hand over to Bengt.

Thank you, Anders. And let's have a look a little bit more in detail on our cash conversion. On the top chart there, you see our free cash flow per share compared with our earnings per share. And compared to last quarter, we improved the cash flow, and that's not the least from the business and operational side itself. However, we have the CapEx spending, which is also included in this KPI, the free cash flow has been a little bit higher during the first half of the year compared to our target. We have an internal ceiling or ambition of 3% of sales. We are at 4% so far, but some of the investments are done in the beginning of the year. So we're still aiming for the 3% on the yearly basis for the CapEx spending, but still an improvement from last quarter, which is good. The earnings per share improved compared to last year. But quarter-by-quarter, it's still a bit affected by some capital losses from the divestments. All in all, we had roughly about SEK 20 million in net negative effect from these transactions, including adjustments of the earnouts. Looking then at the lower chart, you see the cash flow generation and the cash conversion. We want to be in that yellow marked area between 70% and 90%, and we were exactly at the limits of that. During the quarter, we were at 70%. But on the last 12 months, we are at 90%. And as typically, it's -- during the quarter 2, it's a little bit weaker than the average. We often see inventories, even though that this year, it was lower than last year, but still the buildup was roughly about SEK 30 million to be prepared for deliveries to customers during the second half of the year. We also saw increased accounts receivables from the increased sales. All in all, that part of the working capital increased with SEK 80 million roughly, but the sales again were up SEK 150 million compared to last year. So that number is pretty much what you could expect with that increased sales. So all in all, good, and we typically see then an improvement on the quarterly cash conversions during the second half. Looking then on balance sheet debt. The leverage ratio was more or less the same as the previous 2 quarters, still at 2.8. That's all in. So that's all debt, including the provisions for future earn-out payments. We have as a ceiling there to be at or below 3, as you can see on the left-hand side of this picture. And even though we made 2 acquisitions in the quarter, we're still at the same level as before those acquisitions because of a strong cash flow coming in from operations and increased profit EBITA all in all. So solid development there. And looking at the right-hand side, we see some return KPIs, 3 different ones. If we start at the top, we have the return on the working capital, which, as you see during a number of years have been very steady around the 80%. That's a measurement of how efficient we manage our working capital, the inventory and the accounts receivables, et cetera. And then the next line is the return on the capital employed in the companies. So that's excluding any goodwills and other intangible assets in connection with acquisitions that we have on the group level. So this is from pure operations. And also there, very stable around a little bit above the 60% which is, of course, very good, and you will see soon how it is split between the different business areas. And then the third and the lowest number then is the total return on the capital employed, including all these goodwill and other things on the group level. And that's pretty slow-moving object. We have as a target to come up to 15%. We're still hurt a bit of having the capital losses from write-downs of goodwill and also from the sales that affects this number. But once that has been rolled out, these numbers will improve. And even though we will not reach the 15% this year, it's clearly our ambition, even though, as I said, it could take some time, but the direction is clear. So all in all, that looks very good as well. And then I hand back to Anders for the business areas.

Yes. Thank you, Bengt. So coming into the business areas. We start with Supply Chain & Transportation. We had a good momentum with plus 16% in sales and plus 14% in adjusted EBITA. We experienced an improvement from Q1, and it's good to see that we continue on this positive development in the business area. We had a strong performance from our companies, JR Industries, GAH and ELM. And JR Industries, as you might know, they are designing and offering roller shutter door for the commercial vehicle markets, primarily in the U.K. They have a very good market position, and we've been working with spare parts, improving availability, but also with the pricing of that. So that's part of the good development for JR Industries. GAH used to be one of our top 3 largest or they are still or it is still one of the largest companies in the group. They are producing units for primarily delivery vans in the U.K. We had a slower last year for them, but we saw the orders coming in, and we were building up a good order backlog, and now we can see that we are delivering on that order backlog. So that's a stable business for us. It's continuously you need to replace and you need to update your fleets and you can work with the service element and the spare parts between those replacement cycles as well. So that's good to see for GAH. And ELM, just to mention that [Audio Gap] as well, ELM is our Danish company, producing specific attachments to the forklift industries. They've been having a very good half year 2026, and they have seen a bigger and larger demand for even more customized attachment. And they have been quite bold in pricing those quite large customized solutions. And that's also what we see here. We see good development both in EBIT margin and also in revenue for ELM. So that's positive. On an adjusted EBITA margin for the total business area, we see a slight decrease, and that's primarily as a result of product mix, GAH having lower margins in the business area, and they've been growing in the quarter. You can also see return on capital employed is below the target of 50% for the operating units here, and that's mainly due to the acquisition in quarter 2. When we calculate that KPI, we use the full balance sheet effect, but only 1/4 of the profit. That's how we do it. So that's affecting in quarter 2. Then coming into the new acquisitions, and they belong into the Supply Chain and Transportation business area, RSS or Rail Safety Systems. We mentioned it already in the Q1 report, but since April, they are now part of the group. They are based in the Netherlands and revenue EUR 6.6 million. The company develops and supplies specific patented magnetic safety barriers. As you can see on the picture, instead of digging or interfering with the ground, they have a magnetic system that you put on the rail itself. They have a strong position in the European market and sell primarily to different kind of rail operators. We own a company already Mecno in Italy, and they are making rail grinding solutions. And we see here potential opportunities to actually open doors for each other because they have different customers around the world, which could be something to work on for the future. The other new company is JLM. JLM design and produces specific industrial lifting equipment, and they are especially targeting vacuum lifters and smaller cranes. The company is based, as I said, in Denmark and annual turnover roughly DKK 50 million. And JLM is strengthening our offering within efficient material solutions. We've been looking into that, thanks a lot to ELM making the attachment that I described and all kind of material handling equipment could be interesting for the future to look more into as well. Then we are moving on to Energy & Electrification. Energy & Electrification had a solid quarter with plus 16% in sales and plus 14% in adjusted EBITA. We see a continued strong underlying market drivers, which create good momentum or growth drivers for the majority of the businesses in this business area, especially around electrification in general in the society and also energy efficiency is driving many of the companies in the business area. Phase 3, which is producing specific connectors to all kinds of applications and also Rolec. Rolec, who is our EV charging company, EV charging primarily towards business-to-business customers. So a fleet manager changing or improving EV charging for their fleets in, especially in the U.K. Both of these 2 companies have performed well in quarter 2 with both sales and profit growth. We also see a slight margin decrease year-over-year, but that's primarily due to the product mix, but it's still at a solid level, around 25% in this area. Now we're coming into Water & Bioeconomy. We achieved an improved net sales development in the second quarter with plus 5% sales growth. On the positive side, we see good demand from purified water solutions, especially for cooling applications, and we have 3 companies somehow attached to these kind of strong trends. The business area, as we also said last quarter, continues to undergo operational investments to improve the businesses, and that has a negative effect on the adjusted EBITA of minus 9% compared to the second quarter last year. And some of these investments are not just temporary. Instead, we see these improvements that are needed to secure a long-term development. One example is that we are upgrading a product in the U.K. to meet the increased regulatory demands for how to treat chemicals, for example. And that's nothing that's going to be a quick fix. That's more improving for the future, which will drive some cost into that specific business. Then we're coming into Safety & Security. This business area showed again a strong momentum with plus 15% in sales and plus 20% in adjusted EBITA. We experienced a strong demand in all safety verticals, as we call it. Clean air in hospitals. We have our Swedish company, Medicvent performing strongly. They've been successfully moving into new geographies in Europe as well, which is good to see. We have security around data center with our company, Eagle that has been -- or continue to developing very good. And we have secure communication from our Swedish company, Cryptify, which is also having a good quarter. Margin, as you can see, is at high 30% and improved profitability versus last year. And the primarily reason for that is a favorable product mix, but also a higher proportion of service and software compared to the previous year. And I think it's also worth to mention the high return on capital employed in the business area, and that's highest in the group. And it's, of course, one reason is that we have some software sales, but many of the companies here are quite disciplined in capital efficiency as well. We can learn from these companies within this business area to other companies in the group as well. Then we're coming into M&A. And from an M&A perspective, we are on track to increase our M&A activity for the year. As already described, we had 2 acquisitions that we closed in quarter 2, total EBITA of around SEK 35 million. Our current cash position and also credit facilities are strong. But of course, it's important for us to continue to be selective and very disciplined in the valuations going forward. And I also mentioned that we have been working hard on strengthening our pipeline over the last 12 months, and we feel now we are in a good position that we need to be to accelerate M&A for the full year. And to end this presentation, I would like to summarize the quarter. We achieved a solid growth of 14% in net sales and 11% adjusted EBITA, and that's including the organic growth, as we described. We have completed our divestments, and we can now fully focus on creating value for the businesses going forward. We also have an ambition to increase our M&A activity for the full year 2026, and we feel we are on track on that. And if you can see to the right here, I also would like to make a final remark on our strategic road map that we presented at our Capital Markets Day last year. What we said was that in 2025, we wanted to define new priorities and decided also to streamline our current portfolio. Now in 2026, we wanted to come back on the growth track with an improved balance sheet and new priorities for the group. And with new priorities, that was more focused on return on capital employed as a key metric in all decisions going forward. And then we also said that in 2027, we -- we, as a group, should be performing according to our full potential and coming up to the plus 15% growth and slowly then also start to increase our return on capital employed, which is then a slower KPI to change, but definitely starting to improve that one going forward. And looking then based on the first 6 months in 2026, we still find this road map valid for us, and we look forward to continue this journey that I just described. And with that, we are done with the presentation, and we would like to open up for questions from the audience here today.

[Operator Instructions] The next question comes from Max Bacco from SEB.

Well done in the quarter. Perhaps starting with the Water & Bioeconomy segment, you said here during the call that it's not a quick fix. But still, we saw this slight improvement in profitability versus Q1, which was also what you communicated in Q1. Do you still see, despite everything going on that the profitability should gradually increase throughout the quarter. Is that still the expectation from your side?

Thank you for the question. Yes, I think it's not that we're going to see now a gradual improvement of the margin. We foresee it's going to be around 21%, 22% now as a level going forward. We, of course, then have potential to grow in this segment and some companies are having a great potential to continue to grow and increase margin. But no, we foresee this more as the level going forward for the business area.

Okay. Understood. And then turning to the Safety & Security segment, which saw a nice improvement here in terms of profitability in the quarter. And you mentioned it was driven by better product mix with a higher proportion of service and software. That mix change, would you describe it as temporary? Or is it more of a structural change within the segment?

No, we -- in this business area, we foresee that we continue at a higher level. We have done not only improvement in the, let's say, software and service sales, but in general, some of the companies have been coming up to, let's say, a higher level, and that's the aim to continue for this high level.

Okay. Sounds good.

For the business area.

Yes. And then the final question from my side. You touched upon this partly within Supply Chain & Transportation that mix is explaining the slight decrease in margins here in the quarter. But for the group as a whole, have you seen any impact from cost increases on input material, freight costs and so on? And has that impacted anything so far? And on that topic, how do you intend to potentially adjust with price increases and so on towards customers? I know you have spoken before about a bit more proactive approach to pricing and so on throughout the group.

Yes. In supply chain, I think it's -- we haven't seen any specific price increases on, let's say, raw material side, not substantial at least. Of course, freight cost, depending on the oil prices has been fluctuating a bit. But in general, this business area quite large. It's important to continuously work with the pricing and the purchasing activities, which I think many of the companies now do in the business area. But as you also said, that we have been working on pricing initiatives, how to price spare part, how to price our service offering better. And with these kind of effects or achievements, let's say, we will try to continue to have a stable margin around this level for the business. But it's -- again, it's -- of course, it's a lot of work that needs to go in to protect and to try then to improve the margin. So it's not an easy pick or work here, definitely not.

The next question comes from Simon Jonsson from ABG Sundal Collier.

First on the segments here and then maybe on Supply Chain & Transport specifically. Just a follow-up on JR, the strength that you're seeing right now, should we view that as a new stronger base with orders continuing to develop well? Or were deliveries here maybe a bit unusually high to sort of catch up with the backlog, if you understand me.

I think JR is one of our most stable companies in the group. They have a strong position in the commercial vehicle market in the U.K. and it's all the replacements, they're getting the orders and when new fleet is coming in and being replaced. So JR should not be our star growth company, so to say. It is going more with inflation and then potentially if we take more market share outside U.K., which we then are trying to do together with our company, STORR, who we acquired earlier this year. They have a strong footprint in Netherlands and Germany, for example. So no, and I think what they have done now on looking at the spare part, improving the margin, that's not likely to continue. So they have been, let's say, raising the bar. And now it's more about to continue at this little bit higher level than from a margin perspective.

All right. That's clear. And then moving to some more financial questions on the cash flow. And I think you answered part of my question, Bengt already on the free cash flow. You had some higher CapEx here in the first half. And was that the main reason we say, for the lower generation compared to last year? And -- or were there some impact from you having now a higher organic growth, you will say. Inventory did not -- was not a big problem here, though. But yes, what do you see there?

No, the quarter in itself, I think, was a quite normal quarter as you said, perhaps slightly -- I think it was -- the quarter was better than last year, the quarter in itself and also on a 12-month basis when it comes to the cash conversion, excluding the CapEx and amortizations, including that then affecting and becoming a little bit lower than compared to at least half year ago, but still better free cash flow per share than last year. So I wouldn't say it's any specials. It's more variations within the normal business. When it comes to buildup of inventory, as I said, it's quite typical this time of year. Our most seasonal companies, the Hilltip with our road maintenance equipment for winter roads, salt spreaders and snowplows and salt, they need to manufacture their equipment before the season because they cannot catch up with the orders then, which will tick in if they don't. So they build up inventories and also HeatWork in Norway, which provides these heating solutions to reduce, for example, frozen grounds and groundwork with roads or buildings or so. So they are also very seasonal. So that has an impact on the whole group level still. But I wouldn't say it's any unusual things, though.

All right. That's clear. And if we instead look a bit ahead here to the second half, of course, you had very strong cash flow last year. And as you also said earlier, it's better season, of course. But what do you feel now looking into the second half of this year compared to last year for the cash flow generation and also given that the CapEx levels where they were here in the first half?

Yes, the CapEx should be a little bit more modest second half. And when it comes to cash flow from operations, we had a very strong Q4 last year. And that was perhaps not what you could expect for this year, but of course, that's still to be seen, but that's still traditionally high. So it will be hard to beat that one. But still, it will be better during the second half than first half.

Okay. Clear. Just lastly on M&A, very well done with the divestments and good to hear about the pipeline and recent activity. I also note slightly lower multiples paid here for recent acquisitions compared to history. Do you think that multiples will generally be a bit lower going forward? Or were those deals a bit temporary?

No, I think it's fluctuating a little bit, but we -- when we increase the pipeline and we work, I would say, closer together with the business areas, we create a bigger potential to have better, let's say, valuation, better deals. Then it's increasing the possibility to be around the 6 and not coming up to the 7 and around there, in multiples then. So I think it is -- yes, we prefer to continue like that, but it's nothing that we can guarantee because some of the companies we also see bigger potential to grow with. And then we also are willing to pay a little bit more. But that's -- again, it's about discipline and increasing the number of companies you talk to, so you have the possibility to be selective in the valuation as well.

The next question comes from Anton Ingves from Nordea.

And congrats on a strong quarter here. Good questions already, but a bit of a follow-up. On the strong organic growth, can you elaborate a bit on how much was volume and how much was price? Because you -- for example, you alluded to ELM being quite aggressive in pricing in certain products.

I cannot say more specific about how much volume and how much price there. But I think some of the companies have also had, as we also described it, a tougher quarter from pressure on the cost side. There's nothing unusual in this quarter. We -- I think it's important that we work or that we have the demand, increasing demand. We have seen, I think, some previous years that when we have taken out costs, we've been growing the EBIT, but maybe not the revenue, the top line so much. So I think the focus now definitely is to make sure that we have -- that we push hard, that we get the momentum in some of the good trends that we see to continue to sell and to get that revenue growth, that's very healthy for us. And then I think also what the pricing initiative we did, we did it with 4 companies in the group only, so to say, the most larger companies that we did that initiative with was well performed. So I think we have learned a lot from that. And again, it's not really rocket science. It's about splitting up the different products, the different segments, different customers and see where you dare to increase your prices to be more bold. And I think that's where ELM has been very successful. I mean they are -- they have a unique offering. They are quite fast, designing exactly what the customer wants, putting that in production and deliver that quite fast. And you can charge for that. It's some very specific attachments, for example, that they are selling. So it's nothing unusual, it's being more bold in what the value actually is for what you can deliver for ELM, for example. Hope that answers the question.

Yes, for sure. It sounds promising as well. And so just on the momentum here during the quarter, do you see any change within the quarter and sort of the momentum here heading into H2?