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Edited Transcript of SDIP PREF.ST earnings conference call or presentation 11-Feb-20 8:30am GMT

Q4 2019 Sdiptech AB (publ) Earnings Call

STOCKHOLM Feb 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Sdiptech AB (publ) earnings conference call or presentation Tuesday, February 11, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bengt Lejdstrom

Sdiptech AB (publ) - CFO

* Jakob Holm

Sdiptech AB (publ) - CEO

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Conference Call Participants

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* Fredrik Nilsson

Redeye AB, Research Division - Equity Research Analyst

* Robert Redin

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Sdiptech Q4 reports 2019.

Today, I am pleased to present CEO, Jakob Holm; and CFO, Bengt Lejdstrom. (Operator Instructions) I will now hand you over to Jakob Holm. Please go ahead.

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Jakob Holm, Sdiptech AB (publ) - CEO [2]

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Thank you very much. Hello, and welcome, everybody, to Sdiptech's year-end report 2019. So to start off, we would like to just -- we're very happy to present a strong report, summing up the numbers for 2019 and our business. And we are really improving on many KPIs, and a few of them I would like to start off by also mentioning. We'll come back to them. But our operating profit growth has been 48% over 2019, of which 8% was organic and 39%, driven by acquisitions. We've also improved our operating profit margin significantly from 11.8% up to 14.4% at the year-end. So we're very happy about that. Our cash flow generation is above 100%. Very positive. And also we're very happy to say that our earnings per share grew 88% over the year. So we're very happy to present this report.

With that said, we can move on to the next page. And as always, I have Bengt Lejdstrom, our CFO, with me on this presentation. And Bengt Lejdstrom has been with us since 2018, as you all know.

We move forward to Page #3. A brief introduction about some data points on Sdiptech. We are an infrastructure technology group. Our business is decentralized in 32 business units. And the fresh numbers that we are able to present today: our net sales at approximately SEK 1.8 billion; our profit margin EBITA* has been rising steadily throughout the year, and as I said is over the past 12 months at 14.4%, very important to us; and our growth in EBITA, we've already mentioned that, but we're very happy to present that number as well, 48% up. And we will come back to the more details in numbers lately (sic) [later] when Bengt will take you through that.

We can move to the next page, 4. The brief agenda today, I will just start off by talking about the infrastructure challenge. Why is this important? It's important to us because it really drives the growth in our business segments, market segments. One slide on our business areas, and then over to current trading piece of the presentation.

Move to the next slide, #5, please. So the drivers behind the infrastructure challenge is of -- they are worth mentioning and repeating. One important aspect is that the infrastructure surrounding us is aging and there is a need to rebuild it. The capacity requirements continue to grow. Our consumption of water, energy, transportation volumes and so on continue to grow. In the urban areas, the strain increases. So all in all, there's a growing investment gap, which really drives the solid underlying growth in our market segments.

Finally, I always want to also mention that the human drive for increased sustainability, efficiency, and safety is really also imperative to the characteristics of our markets. This drives stricter regulations. And just to mention 2 examples, one thing from Sdiptech, one thing is that we are working hard to upgrade cooling systems to meet lower emissions and reduce global warming potential. So that's one example. Another example is our power quality monitoring systems, where there's an increasing demand for those because they are an important enabler to shift to more renewable sources of energy.

So with that said, we can move on to next page, #6. And here, we present 3 examples of the infrastructure challenges. We start off by the left one. 23% of the freshwater networks, there's a loss in distribution by -- because of leaking pipes. The second example in the middle is a positive data point indicating the reduction of car crashes after speed camera installation, about 20% reduction there. And the third example on the right-hand side is related to an increasing cyber threat that is moving into our mobile cellphones.

And we have companies that are addressing these challenges and opportunities. If we start off on the left-hand side with Auger, whose clients are in the insurance industry. So Auger's core business is to fix leaking pipes and wastewater systems, and the driver in that market is really slow, steady but inevitable growth due to aging infrastructures. RedSpeed International develops traffic monitoring and safety systems, and the driver there for growth is really the increased regulations for safer traffic and transportation. Cryptify, the third example, delivers software for encrypted mobile communication, and the driver there for the underlying growth is really the increasing cyber threat that, as I said, is moving into our cellphones. And Cryptify has a great solution to ensure encrypted mobile communication.

We move forward to Page #8 -- or it says 9 actually on the slide here, but the next page. Since we are focusing on U.K. as a growth market for us, we think it's important also to share our views on how Brexit is expected to impact Sdiptech, and the impact is expected to be small and definitely manageable from our point of view. Starting off with the export to U.K., which is the normal concern with regards to Brexit, our exporting companies, they have a low share of revenue of export to U.K. So we don't expect any significant impact there at all. Then we have our U.K.-based companies. They do purchases from outside U.K. However, we have built up our inventories.

Once again, we've done it a couple of times. We've also done it this time. So we've built up our inventories just to ensure that we have a buffer in case there would be some disturbances at the border customs. We've also redirected our routes. So instead of having shipping go through the European Mainland and Rotterdam, we are redirecting the routes directly to the U.K. just to avoid the potential problems. So we are comfortably prepared for any negative Brexit impact. On the other hand, we, in the future, expect some positive impact due to increased infrastructure investments by the U.K. government. But we'll see more about that in the future.

With that said, we move forward to the next page, #10 -- #8, oh, sorry. Bengt helped me. I have some problems with my page number. It's actually Page #8. We move forward then also to Page #9, about our business areas. And I will just briefly mention what I think is most important at this stage in the presentation. Our 2 left-most business areas, Water & Energy, Special Infrastructure Solutions. These are our 2 largest business areas if we look at the profit levels, which is, of course, the most important KPI in terms of value. These are our growth areas in terms of which areas we do acquisitions. And both of the areas have delivered a strong organic growth in 2019 and also in the fourth quarter.

As a result, we've seen profitability improvements due to that, and we've also had acquisitions with profit levels above our average level in the business areas. So we have a positive trend with growing margins. And we actually ended up above our expectations, which we didn't expect actually, but Q4 was above our targets. But Bengt will come back more to that.

Our third business area, Property Technical Services, which is our smallest business area in terms of profits. We've had a clear profitability focus there since 2017. And we are very happy to announce that the elevator business, which we've had challenges in terms of profitability throughout 2017 and 2018, our profitability improvement program that we started to launch in late 2017 has really paid off. And 2019, we've really been reaping the benefits in effect of that program. And the profit levels in this business area -- or actually in elevator business, to be specific, the profit levels in 2019 are significantly above the profit levels of 2016, which was the year before we listed our B shares. So we're very happy to say that the results are very good there.

With that said, I move on to Page #10, which is the final page for me before I hand over to Bengt. Just to sum up our acquisitions over the year. We did 4 acquisitions. I think that all of you know, our target for acquisitions is to acquire totaling SEK 90 million EBITA per year, and we ended up more or less spot on that target. And we -- that target continues for 2020 as well. And I think you should all expect acquisitions, they don't come as steady as you would like and expect. But the acquisitions, we do acquisitions when we see that we have a good business opportunity. And with that said, the acquisitions can occur infrequently. But our target, we are very comfortable with and it still remains.

With that said, we move on to Page #11, and I hand over to Bengt.

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Bengt Lejdstrom, Sdiptech AB (publ) - CFO [3]

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Yes. And I will guide you through a little bit more of the numbers for the current trading. So we can turn to Page #12 then. Here, you can see the development of our group sales and our profit, our EBITA*, our profit measured excluding the effects from adjustments in the balance sheet relating to acquisitions. So this is the true profit from our operations.

As you see, we have increased our sales very steadily through 2019 quarter-by-quarter. I think it's actually around 22% every quarter year-on-year, more or less. So we ended up 22% eventually for the full year. Of that, it was only a little bit above 0 in the organic. And excluding currency effects, it was actually a little bit below 0%, the organic growth, but that's because of, as just Jakob mentioned, about the Property Technical Services program for profitability. The other 2 business areas have had positive organic sales growth throughout the year.

Looking at the profit. You see that the profit has increased even further at 48%. And of that, through the year, we have an organic profit growth of 8%, as mentioned. And that has been mainly then in the 2 business areas, Water & Energy and Special Infrastructure. But also Property Technical Services had a positive growth in the last quarter. And as the profit growth has been higher than the sales growth, we have had an increase in our operating margin. So it's now at 14.4%.

If we look to the right in the picture, we see the distribution of our sales. That is where our customers are. Infrastructure business was typically quite local or regional. So most of our companies do not have any major exports. Of course, there are some exemptions. But the distribution of sales are more or less related to where we have our companies. So 55% of revenue come from Swedish customers and 25% from U.K.

And you will see that number increase a little bit further the next 2 quarters since we have the Auger acquisitions which we made in August, and that one will be rolling in with our customer base in the near future. Apart from Sweden and U.K., we also have turnover in Europe, mainly Germany, Austria and also Norway, and then we have a spread of different countries in our export business.

If we turn to the next slide, #13. We have some quarterly highlights. As said, the sales growth was good. It was actually a little bit beyond our expectations since we had -- for the strong end of 2018. But we increased sales altogether with the quarter as well as for the full year with 22%. And we had good performance throughout the organization, especially positive to see that Property Technical Services had a growth organically of 5%, which we think completes and concludes the action program within the elevator operations.

Looking at the profit. We had also a very strong organic profit growth in the quarter, 21% if we look in fixed currencies, and in total, an increase of 48% of EBITA*. The margin was actually up to 16%, but the quarter 4 is typically a strong quarter for Sdiptech. So as we can see, last year, it was also 14%.

Looking at the cash flow. We have had a good performance throughout the year, and we ended also the quarter strong with above 100%, which is our goal, to have a positive cash generation. Perhaps that will -- cannot go on forever, but at least for now that's our goal. And we actually had a cash generation of 128% during the quarter, mainly for having accounts receivables coming in, and we also had some positive cash flow from taxes -- getting a tax, so to say, repayment.

To add to this picture, which is not in the text, is that the central costs for quarter 4 was a little bit higher than it usually is. We have had some extra costs for some projects and also with [our IT] activities. And -- but we also have increased our staff at the headquarters, building up our internal acquisition team for mergers and acquisitions, and that team is now in place. And the costs for that team is perhaps also rolling in a few more quarters since staff has been joining during 2019.

So you will see a little bit higher level of central costs, perhaps not in the range of SEK 10 million because that was a little bit extra during this quarter. But on the other hand, we do not have external acquisition costs as high as previously since we don't have that external team any longer.

Looking at the outlook. It's still positive. As Jakob have mentioned, the infrastructure segment has a very strong underlying long-term demand with a lot of investments needed. So we don't see any real signs of a downturn in the near future. So the coming quarters, we have an unchanged positive view.

Let's turn to next slide. That's a little bit more details about Water & Energy. As said, they had a strong growth in sales in the quarter and also had some acquisitions then compared to last year. And as you can see in the diagram on the left, have had steadily increased both in the sales and in the margin levels. And the profit for the business area, Water & Energy, increased with 33% in the quarter, of which 4% was organic.

The EBITA margin continued to increase and was nearly 23%. We have made a revisit of the guidance we make on the margins since now we have had a number of acquisitions rolling in through the year. So we have increased the guidance for this business area from the 16% to 18%, which we had during 2019, to be 17% to 20% for the full year 2020.

The spread in the margin there is more related to that our company's -- or our company's customers have business which is a bit project-related. So the order intake can be varying between quarter-by-quarter. So it could vary a little bit, the margin, quarter-to-quarter. But all in all, between 17% to 20% we expect for the full year. And right now we are 13 units. And the Water Treatment Products, which was acquired last year, will then have been joining us for a full year from now in February.

If we turn to next slide. We have the Special Infrastructure Solutions. Also there, we see a continued strong growth in sales. It was 49% in Q4, 6% of which was organic. We have made 3 acquisitions to this business area throughout the year. So that also of course, explain the very strong growth in sales. The margins, however, have been quite steady between 21% to 22% throughout the year. And so we have also then increased our guidance for this business area to 20% to 22% for the full year of 2020. It was 18% to 20% last year. So due to the acquisitions, we have increased that guidance a little bit.

We had a good profit growth, not the least from our acquisitions, but also a very strong organic profit growth in the quarter, in total 20%, and a very strong margin then concluded the year. But as I said, the quarter 4 is typically a little bit stronger, margin-wise, than the other quarters.

All right. So let's take next slide, 16, which is our third and last business area, the Property Technical Services. Jakob has mentioned that the elevator program -- the profitability program for the elevator operations have concluded with very positive effects. Now also the sales have been coming back, and we had a 5% organic increase during the quarter. So -- and that, of course, is very nice to see.

The margin levels have been quite steady around 7.5% to 8.5% throughout the year. And that's also our guidance. It's a little bit higher, it's 8% to 10%, which has been for the full year of 2019. We haven't really been in the upper part of that due to that our business with shell completion has had a bit lower activity during 2019. But we expect that one to have a better performance during 2020. So the margins should be in that area, between 8% to 10%.

We had a very strong organic profit growth in the quarter mainly due then to the elevator business. It was 72%, making the profit to SEK 16 million. Right now, we are 9 business units, which is the same as 2019 and 2018. We haven't done any acquisitions there for the last 2 -- more than 2 years. So -- and that is also our ambition, not to make any further acquisitions within this area.

So with that, I hand over back to Jakob.

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Jakob Holm, Sdiptech AB (publ) - CEO [4]

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Thank you, Bengt. Well, I think we -- it's time to open up for questions while we have this final slide.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Fredrik Nilsson from Redeye.

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Fredrik Nilsson, Redeye AB, Research Division - Equity Research Analyst [2]

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Fredrik Nilsson from Redeye here. Nice report. One question regarding the increased guidance. You claim that the recent acquisitions, however, your last acquisition was made in August. Why you raised the guidance at this point? And do you see an underlying improvement in margins as well?

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Bengt Lejdstrom, Sdiptech AB (publ) - CFO [3]

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Well, yes, it's true that our acquisitions were made during the first half of 2019. But of course, we want to see that they are coming in to the group as we expect, so we don't change guidance from one quarter to the other. It could be a little bit volatile when -- depending on our acquired companies. So we prefer to let's see how it develops and perhaps change the guidance once a year. So -- but as you say, it's also not only because of acquisitions, we have had some good development in other companies as well.

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Jakob Holm, Sdiptech AB (publ) - CEO [4]

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I think, Fredrik, is we had tough comparable numbers in especially Q4, especially for Water & Energy. And it was actually above our expectations that we managed to meet those comparable numbers. So the end result was above our expectations and above our guidance as well.

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Fredrik Nilsson, Redeye AB, Research Division - Equity Research Analyst [5]

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Okay. One more question, if I may. The organic growth in both Water & Energy and Infrastructure Solutions was strong in the beginning of the last year. Would it be too aggressive to assume an organic growth in line with your target for the beginning of this year?

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Bengt Lejdstrom, Sdiptech AB (publ) - CFO [6]

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So our target is -- regarding profit, and we have a target of 5% to 10% organic profit growth, which is still our target. So -- and of course, it could be up and down through the quarters, but that's our long-term target. So we intend to try to reach that, of course.

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Fredrik Nilsson, Redeye AB, Research Division - Equity Research Analyst [7]

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Okay. One last question for me. The margin in Property Technical Services decreased relative to Q2 and Q3, despite good growth. Is that mainly because of seasonality?

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Bengt Lejdstrom, Sdiptech AB (publ) - CFO [8]

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Well, perhaps 2 things. You have the seasonality, that the third quarter is typically very strong for this business area since some of their business is not so hectic during the winter months in the building sector. But it's also because of this shell completion business that didn't meet the expectations during the fourth quarter, really. But we think that is -- will be a better situation now for 2020. So it's a little bit lower than we expected.

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Operator [9]

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(Operator Instructions) Our next question comes from the line of Robert Redin from Carnegie.

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [10]

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Yes. Something on acquisitions. I mean you clearly state that SEK 90 million is still your target and acquisitions come and go. But could you say something about the pipeline now going into 2020, maybe comparing to what it was like going into 2019, say?

And secondly, on multiples paid, are they still around the 6x level you've been in the past when you sum up 2019?

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Jakob Holm, Sdiptech AB (publ) - CEO [11]

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Okay. Well, as you know, we closed a number of acquisitions, starting of 2019. So at that stage, we had a pipeline that was -- where our cases were in the final stage. So from that point of view, it was a very strong pipeline, but it was stronger than normal. And it goes up and down, as I said. And on an overall basis, our pipeline is equally strong as it always has been if we have a look at all the stages in our acquisition process.

So we have a good number of candidates. We are working on them in a very structured fashion. And we are very comfortable to reach our target for the year. The pipeline right now is not at the same level as it was last year. But as I said, it goes up and down. And on a long-term basis, it is steady. And when it comes to multiples, it has been throughout the year 2019 on the level between 6 to 6.5x operating profit EBIT.

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Operator [12]

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Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for any final comments. Please go ahead.

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Jakob Holm, Sdiptech AB (publ) - CEO [13]

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Well, thank you, everyone, for listening. And we say thank you for this time, and we will meet up again in 3 months from now. Thank you, everyone.

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Operator [14]

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And this now concludes today's call. Thank you all for attending. You may now disconnect your lines.