Addtech AB (publ.)

Summary before opening up for questions. Stable quarter at high levels, high customer activity, positive book to build. Good morning everyone and most welcome to Adtech's third quarter result presentation. As usual, we will summarize the quarter and then go over to Q&A. Our third quarter can be summarized as stable at high levels as we write in the report. Our net sales were up 7%, of which 2% organic. And we saw continued high business activity in the quarter on the whole, but with variations between segments. EBITDA also grew 7%, with a strength and margin of 13.6% year-on-year.

And it's our focus on added value product management. I would also like to highlight that we continue to deliver strong cash flow in the quarter and also in the period. And finally, we have done three more acquisitions in the quarter, adding approximately $350 million in annual sales with good margins. And again, I can conclude that our business model has a strong culture with... Entrepreneurial focus is proving its strength. A bit more on the sales, as I said, 7%, of which 4% from macro-stations, 1% currency effect, and then 2% organic. In my opinion, a solid delivery, giving the very tough comps from last year. As you can see in the lower graph, the growth was primarily supported by business area . where we have forest and the sawmill industry deliveries being strong in the quarter. And process technology with process industry in general and also oil and gas. being good good market I will come back with more comments to the market development in IT business area shortly overall

As I said in the beginning, the market situation was stable, but we saw variations both between and within market segments. So we see healthy growth in some areas, some are stable and some shows a bit weaker development. And this is spread across the board, by which I mean it's some companies in all of the business areas. As you know, we have 150 companies. But it's more spread than that we can see it in a particular business area. Very satisfying to see that despite the still uncertain market situation, a weak December month and a normalization of customers' order laying, we had a positive book-to-bill in the quarter. And order book remains well-filled and good quality.

uh primarily driven by continuous strong numbers in the solution and process technology Remaining three business areas adjusted for one-offs at the high level, which is acceptable due to the circumstances. All in all, our company's ability to increase value-add and improving product mix and, as I said, the contribution from acquisition. All in all, 7% growth. Also, pleasing to see that we improved the gross margin across the line, which is a clear sign of our strong positions and continuing price power in the companies. Margin remain at a high level. Margin up from last year and rolled in 12 months, we have a margin of 14%. As you see in the graph. development on operating cash flow. Malin will come back to this in a minute. This is a combination of strong results and high margins. Primarily thanks to clear focus on the working capital improvements. We have had a strong focus on releasing inventory. And we saw good development here in the quarter. So a few comments on each of the business areas. Starting with automation. Slightly down on sales in the quarter. Mainly explained by tough comps from last year.

And more extensive effects from seasonality, meaning a weak December, which affected a number of our companies here. Medical technology continued to weaken somewhat from high levels. We mentioned this already last quarter. It's the stocking effects on a couple of companies in some certain medical equipment and markets. This is partly mitigated by a positive development in process industry and continuous strong demand for companies delivering to defense. Electrification came in on the weak side this quarter, only marginal growth in sales. And for electrification, it's primarily hampered by a weaker development within the battery group, affecting several segments.

And this is a mix of short-term external factors such as market overcapacity on some listed battery products and internal strategic and operational factors such as our factory run up in Tampere and also negative effects from internal restructuring and destocking. You could put it in the way that this year is somewhat the last year for battery group. That is how it is, but no drama really. And I certainly want to underline that our positions in the industrial battery market is very good. has good long-term potential. On the positive side of electrification, good momentum in electronic production and also electrification of special vehicles. And also here, we have a positive development on defense. In business energy, overall market situation was good. Solid net sales at high levels. As we usually talk about, the infrastructure products for transmission continues to be very strong on most geographies where we operate. But also, as we also usually point out, that we will have a stable, continued performance here, but there are bottlenecks in the market. access to contractors and the permit process that is kind of limiting the growth. But also here, we have a really strong position And obviously underlying strong demand for these products.

Market for building installation and mechanical industry continue to be stable in the quarter while fiber optic network remains weak. We have wind power segment being a quite important part for energy business area. And here we can see some positive signs looking into 2024-2025. We have mentioned this before, but I would say this quarter we see a little bit more clear signs on an improvement here for coming year. Industrial solution, very good sales development in the quarter, especially towards sawmill industry with good margins. Low demand for new products in the segment remains. It doesn't mean there are no projects. There are, and we won a few during the quarter.

But the market is still a bit on hold due to the high interest rates and the weak construction markets. In special vehicle segments, business varied between different end markets, I would say, in the quarter. We saw a weakening market in primarily construction, while demand was in forest when mining remained good. All in all, slightly negative development on special vehicles. Finally, process technology. Very good sales, market situation, especially strong for companies within the processing industry, primary oil and gas and energy. We provide different measurement instruments, but also various components and subsystems. Also marine segments still continue to develop positively. This quarter we saw a bit weak development on aftermarket components towards the forest industry. From a very high level, I would add. So this aftermarket delivery has held up very good early this year. but was now affected by the weaker sawmill and wood market. Medical technology, biotech, and pharma, and mechanical industry flattened out also on high levels. Looking at acquisition, of course, an important part of our growth. We have a positive view on acquisition. We continue to feel an excellent on our attractive pipeline.

There are plenty of possibilities in our main focus areas where we put most of our efforts, which is primarily in the Northern Europe. And the financial strength gives us lots of firepower, and we expect to keep up a good acquisition pace also going forward. So far this fiscal year, we still have one quarter to go here, but we have acquired nine companies, of which Kemekvandrens in Denmark was completed after closing, so in the beginning of January. And in total, this adds an annual turnover of approximately 800 million annual sales. This picture is showing some examples and you can see the solutions that we provide in the three last acquisitions we made and all these acquisitions are good examples of how we deliver on this strategy to focus on companies with more value

value add and more own products and solutions with high profitability. So I'm very proud to welcome these three companies, Control Cutter and Norwegian world leading provider to the global offshore market for decommissioning of oil and gas wells. Danish BW Technik designs and builds customized high-tech production solutions to automation industry, where medical production being the main segment. And as I mentioned, Chemek, also Danish, is a high-end supplier of water purifiers. plans and solutions to both municipalities and industrial customers. So very welcome to these three companies. Looking at acquisition pace, and if you look during the nine-month period, it's important to stress our financial target to grow with 15% yearly over the cycle. have to come from acquisitions. And in practice, this means that when we are buying companies with high margins, we don't need the same top line to keep our targets. Of course, the health mix here is But the point is that we're looking at the fiscal year growth. So far, we are above the target looking from an EBITDA point of view. those comments, a bit more details from you, Molly? Yes. Thank you, Niklas.

So, start looking at the left graph.

It's clear that we have had a very solid cost from many quarters.

And with the continued firm grip on costs, we keep our efficiency compared to sales at a good ratio in this quarter as well. Also, our margins remain at high levels, which is a combination of more value add in our offers, improved product mix, and good leverage from acquisitions. This quarter's EBITDA margin came in at 13.6%. When adjusting for the unrealized exchange rate gains, which had a net positive effect on profits by approximately 11 million, and revaluation of earnouts and one-offs that had a negative effect of 8 million, we end up at a satisfying 13.5% for the quarter, compared to 13.1% adjusted margin last year. A comment on group items.

We have a revaluation of embedded derivatives that has affected group items negatively this year, where we had a positive effect last year. Adjusted for this group items would be in line with an average of Q1, Q2, I would say. It's very pleasing also to see the inventory levels in absolute numbers.

It's clearly coming down in the quarter with a continued organic decrease and an improvement. for the management team, and we expect that the high attention in our companies will enable a positive trend also going forward. Thanks to overall efficient management of working capital, as Niklas mentioned, With growth and continued high margins, our profitable working capital continued to improve and ended at a record level of 68% and generated another quarter of strong operating cash flow. As we see here, we have a very strong financial position with a historically low, I would say, leverage of 1.5. uh this ensure comforting headroom to support our ambitions going forward thank you um so looking a little bit ahead, even if some macro indicators are getting more positive, which should potentially mean that investment willingness should improve moving ahead. There is still uncertainty in the markets. and some hesitations on investment and so forth. However, in general, we take a positive stance with three things to highlight relating to ad tech business model and strategy.

First is, of course, the diversification, both in terms of the small scale business that will operate and in terms of spread over both different end markets and geographies. Second, we have over the last year focused on establishing strong positions in areas driven by structural underlying growth, many linked to the green shift that we can also see in the business areas. And you can also see the growth drivers in the bottom here. And third, not least, our strong and well-proven ability to act quickly and adapt to new conditions. This is one of the core upsides with the business model and culture we have. And this also means opportunities, regardless of a general market situation. And as I've said now, we saw a continued high customer activity in the quarter.

The book is well-filled, and the business climate, I would say, is all in all generally stable, but with the variations I have talked about. We are, of course, following the developments very closely. And as I usually say, we keep one foot on the brake and one on the gas, depending on the different situations in our companies. Bottom line, the business model and how we look is always based on a long-term approach and our everyday focus is on creating stable profitable growth in line with our target. of doubling the earnings every five years. So that we always focus on. So from that point of view and summarize that i'm very pleased with the quarters development that's a summary before opening up for questions stable quarters high levels high customer activity positive book to build and increase the margins of 13.6 and improve profitable working capital is generating good firepower and we have the strong financial position so we have the ambition to continue delivering on our acquisition strategy going So over to questions.

If you wish to ask a question, please dial pound key five on your telephone keypad.

To enter the queue, if you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Zeno Engdalen Ritchie from Handelsbanken. Please go ahead.

Good day and thanks for taking our questions. I would like to start off on the order book, which you said strengthened. How did it look on the business area, apart from industrial solution, which I assume was negative? Was it kind of broad or anything standing out?

Hi, good morning.

Well, I would say it's kind of broad where energy the most positive situation. But apart from that, it's actually quite broad. Okay. And And going over to industrial solutions, which showed great margins, even when excluding for the effects gain. Was it like the last quarter due to a high degree of project completions or other good mix? Yeah, I mean, in those solutions, like all businesses, we have a lot of companies, and so the result we see is a summary of the development in all companies. But absolutely, that has contributed for sure. Strong delivery on the projects with good margins. Okay. And since you comment as well, that the order intake for projects in forestry and sawmill being quite low scale. And assuming then that the book scale is below one, when would we see these two, so to say, converge to each other? Yeah, that's a very good question. Unfortunately, I don't have the answer to, but I'm I mean, this market is affected by the construction market and also high interest rates. And that is related to the willingness of the sawmills to invest. We do see some positive signs.

I also mentioned that in the quarter we have had a number of project wins. And these are usually quite big projects. And we look in the pipeline of the projects, it looks good. But there is a hesitation for making the kind of final call on that. It's really difficult to give a concrete answer to that. But, yeah.

Understood. And just lastly on Mene, you mentioned that you're filling the pipeline and have attractive targets. But is there anything, like slowing the process, like if you or them are pushing in the future due to the macro environment?

I would say that, as I mentioned before, we have a clear focus now on a bit more looking at higher margins in the acquisitions. And as I said, we have acquired according to our plan. But with that said, during the year that has passed, it's rather we that has had a little bit of a hesitation. We have prolonged the discussions and processes in a number of cases due to the kind of uncertain macro situation and our focus to to ensure and safeguard the value. So it's absolutely rather on our side that we've been a bit hesitant. But that also means that we have a lot of projects ongoing. So it looks good looking ahead here. Okay, thanks. Okay, that's all for me. The next question comes from Carl Ragnarstam from Nordia. Please go ahead. Good morning. It's a couple of questions. As you said, strength and backlog post the bill. But a weaker month of December, you said. To what extent is it seasonal and to what extent is other reasons behind the weaker December and how would you say that January is looking versus the December pace? From a order point of view, that is. Yeah.

Yeah, I mean, December, we always have this seasonality. For AdTech, December is usually a weak month. This December was weaker than usual, and we get different answers to that. I mean, okay, one less invoicing day, business day, this quarter has some kind of an effect, but We also get seen as that some customers closed down quite early. So it was kind of a short December and also to some extent customers also looking at their inventory levels. So kind of safeguarding the balance sheet during the quarter. I think these are the reasons. And when we look in January without going into details, I would say

It's a normal situation going into January. So we don't see kind of this negative December effect as of now. Okay, very clear. And also looking at the central cost, it looks a bit elevated in the quarter. Does it contain any non-recurring nature items or what's behind it? No, I would say that if you adjust for this revaluation of the embedded derivatives that I mentioned, I would say that The situation is quite normal. It's around the Q1, Q2 levels. Okay, very good. Looking into your set of med techs, sales, that's a bit weak here. To what extent is it down in the underlying market, and to what extent would you say that it's even to a reduction? And if it's the latter, when do you see more normalization? I would say it's a mix. When we look at medical, we have good development on some parts. It's more relating to the end customer situation. Where we see a weaker development this quarter is on respirators, blood blood and lies and those kind of end markets. And I think it's a combination, it's both that during last year, some customers we have here, probably had a little bit too high on the order intake, very long order orders.

So partly it's a destocking effect, but I think also to some extent it's a normalization of the end customer demand. So I I would say that, and this is primarily affecting automation, that to some extent there is also a normalization.

Okay, sounds fair. And also finally on the electrification side, volumes is a tad softer, as you said, partly due to battery companies. When do you see also there a normalized inventory level and also what impact had the ramp of Tampere to the margins and also when is that ramp finalized?

On inventory, I'm not sure what you meant. You said the inventory reduction on the customers.

Exactly, yes.

Yes, exactly. I mean, all in all, I would say I'm mentioned it's part of a lost year in the battery group and what I mean by that is that I think it looks good looking ahead into the next financial year so I would say we we probably face another quarter with the effects of this kind of destocking or normalization of demand on these battery types. on the cost we've had, we're doing a lot of things to make the battery group more efficient. We're closing down one production unit and focusing more on the temporary units. that has meant some costs this quarter was earlier in the year and looking at the temperature What we're doing there is building up an assembly unit. We don't produce battery cells. That is important to stress. We are building customized battery packs. The main focus for TAMP is the special vehicle market, the electrification of special vehicles. And that is a really interesting market. If you look on those customers, how they look on their progress on electrification. It looks very interesting. But it's a long project, and now we're more in the phase of building this up, which means that it's not contributing so much on the top line.

Again, it's long projects. So without going into details how much it has affected this quarter, but it has affected the margins. That is clear.

Okay. Sounds promising. Thank you so much. Thank you.

The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead.

Thank you and good morning. My first one is on automation.

Would you say there are any differences in demand between how you classify the kind of more linear motion and robotics and drives compared to industrial IT and connectivity? Not really. It depends. The short answer, not really. It's actually... Some companies in motion drives have had good developments. and some a bit weaker and same in the industrial light sensors so you can't really see that you can make big difference between those two The medical part is primarily industrial iodine sensors. So if you look on that destocking kind of effect, that is more related to that. Understood. And then, we hear this from several companies. I imagine it's for many from low levels. But right now, how large... share of group is related to defense applications? It's around three percent. Approximately three, three and a half. Just to follow up a previous question I didn't hear a full answer but within sawmills where you you now see good sales and margins, yet demand for new products are low. So is it that you're delivering on prior orders, or do you also have a kind of strong aftermarket business that can

support sales also going forward if we kind of arrive at a situation as the prior question asked like when the weaker backlog finally becomes visible in sales?

We do have some aftermarket sales but it is primarily project based sales and we have order books still for a couple of quarters into next financial year. Let's say all in all, if you look on the whole market, two, three quarters. So it's, but yeah. So the short answer is, yes, there is off the market, but clearly it will not be able to fill up a gap unless we do get some more projects coming in.

But it's important to mention that the project pipeline on the sawmill industry is really good. We just have to... to hope that the kind of macro situation continues in a positive way, that the willingness to invest will increase.

Hello?

Hello? Sorry. Can you hear me now? Yeah. Yeah. Sorry about that. My final one is just on And on M&A, it seems like this quarter, at least when looking at the report, that more required units are about 20%. So I'm very impressed, Steven. I hear your comments about value-add focus and so on. Can you say anything about the pipeline of acquisitions that you were evaluating? Was it perhaps just a bit of an occurrence that these high-modern companies all came in with this core trend? When you look at it as a whole, it can vary. to another, or is it that this pipeline actually has quite substantially higher margins due to the focus on proprietary products and whatnot? Yes, I mean, of course, it varies from case by case. Sometimes we decide to acquire a company with a bit lower margin because a good fit.

But it's clear also looking in the pipeline that the average margin level in the pipeline is historically high. So it should continue as you kind of pointed out that the kind of average you have calculated around 20%. I mean, that is some kind of a focus we have to increase the margins.

Okay, understood. That's all for me. Thank you.

Thank you.

The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Yeah, good morning. Just a brief question on this battery issue that you talked about.

Can you just put it into context a bit? For the full sort of last 12-month period, how big, how much sales is being impacted by this any potential sort of trying to quantify the impact on earnings in the last 12-month period. And just what makes you confident that this will recover as you talk about going into next year? Hi, Johan. I'm thinking out loud. The second part of the question is that can you repeat that? First, I'm just trying to understand better the impact of the battery being lost here. How does that impact group numbers? I'm just interested in the last 12 months sales for that cluster of batteries. And if you can say anything regarding the impact on earnings in the last 12 months from this sort of issue you're having there. And secondly, it was just what makes you so confident that you talked about your