Ratos AB (publ)

Good morning and welcome to this presentation covering the second quarter and the first half of 2024 in Ratos. I am joined by our CFO Jonas Ågrupp and our CEO Jonas Wiström here in the studio and they will guide us through the results shortly. In the end of the presentation you will be able to raise questions in our Q&A session and this webcast is also recorded so you will find it afterwards at ratos.com. Without further ado I'll leave over to you Jonas Wiström.

Thank you so much, Josefin, and thank you all for joining us this very, very busy reporting day. We start off with a rehearsal for if there are any new viewers here. We have three business areas, but we have five segments and that is industrial services, product solutions, critical infrastructure, construction and consumer. And we will go deeper into this area. All in all, I'm satisfied with this quarter where the demand in markets really have been varied. We had an EBITDA increase in spite of a very weak quarter in Plantagen. Our profitability or EBITDA margins increased in spite of the fact that net sales declined with 10% organically actually. But we had very strong order intake. in general or strong order intake in general and very strong order intake in construction actually 72%. We also are happy for the strong development in our technical consultancy companies and in industry product solutions also have developed very well. Our cash flows were strong. I think the cash conversion is like 128% or something. We have improved the return on capital and our other result numbers than EBITDA is increasing more actually than 2%. So all in all, I'm quite happy with the quarter. Let's look at the financials here. Again, sales are down and this is to a large majority or proportion is the construction market. We have also lost sales in plantation in consumer. But EBITDA is up and EBITDA margin is up. So then we go into our business areas and segments, starting with industry that the sales actually decreased. I'm coming back to that when I talk about the segments, both organic, inorganic growth and structural had we 2.1%. The low net sales in industry is mainly due to the wind market but also the CRO market which I will come back to. Industry business area is up and EBITDA margin is also up both compared to the previous quarter or Q2 2023 and the last 12 months. And a very strong development in HL displays. And again, the technical consulting companies has developed well in this quarter. Also, if you take consideration that this quarter was actually one day longer, but even adjusted for that, they developed well. so starting up with them here we had net sales that was down a little bit and EBITDA was flat more or less EBITDA margin grow a little bit if we look if we take a little bit deeper dive here I've already talked about the technical consulting companies But we also have our CRO company, TFS. The CRO market, especially for biotech companies, has been weak since a year. And we have sort of lived on older orders. Now the market shows signs of improvement since a couple of months actually, but TFS as a company took down the result in industrial services. Their EBITDA was down significantly. They're still profitable and so on, but that affected the result in industrial services. Product solutions up 11% in EBITDA. Sales are more or less flat and again sales are flat due to the wind market here. And the beta margin continues also to increase so a really strong yet another very strong quarter for product solutions and a strong quarter for the entire business area. Now let's have a look at construction and services. Net sales are down 12% organically and also the total growth. And construction is of course a very weak market right now and has been and will continue to be for a while more. In spite of that, we actually increased our EBITDA with 21%. And our beta margin also increased significantly. And again, here also both compared to the comparable quarter and the last 12 months. And the order intake was actually extremely strong in construction, but also strong in the business segments infrastructure. So let's take a look here. Sales in construction is down 17%. EBITDA is up. Jonas, how many percent? Many percent. I think we increased in construction 18% EBITDA or so. And EBITDA margin is close to 6%. The order intake here, I think, was 72% in construction. And the order backlog was strong already before in the previous quarter, and now it's even stronger with its high order intake. So all in all, construction have all prerequisites to be able to continue to surprise the market with very strong numbers. Critical infrastructure also a very strong quarter in Norway. Order intake was good and order backlog is also strong. In Sweden with XPIN, We now have delivered all our demands for different stakeholders here and our work now is focused on making X-PIN group profitable and also focused to electrification of rail infrastructure. Last but not least, consumer We are very transparent here, you can see the numbers for both KVD and Plantagen. But this drop in Plantagen, that was in spite of the fact that we actually saved 78 millions in the quarter and still we lose 65 million NOK or 63 million SEK. This affects our group results. I mean, we would have been over 8% or so if it wasn't for plantation. Yes, the weather was bad, especially in June in Norway, which was one of the rainiest months since 1900, I have learned. But these results are not acceptable and we will take further actions to earn money on the bottom line, not just EBITDA in Plantagen. With that, Jonas, I hand over to you and go deep digger in the financials. Thank you, Jonas.

So if we look at net sales, we had a drop of 9% in net sales totally, organically 10%. And I usually also talk about the LTM numbers. So we have LTM net sales now in Q2 of 32.9 billion. If we look at EBITDA, adjusted EBITDA growth was 2% in the quarter. And this is despite the drop that we had in net sales. And I will come back and look more into those details later on. And also I will get back when we look at the EBITDA bridges or the bridge I will just explain a little bit more what happened to the EBITDA. And adjusted EBITDA LTM 2.3 billion as of Q2. If we look at the cash flow, we had a good cash flow in the quarter as you can see. Cash conversion was 127%, which is a good number. Usually Q2 is a strong quarter for Atos because we have high sales and high profits, but also decline normally in networking capital. And also if you look at the second quarter last year, we had an extremely good cash flow, which was actually affected by some positive one-time effects in construction mainly. But if we look at Q2 2022, you can see that we are a little bit more than 30% above that level now in Q2 this year.

In spite of a weaker market?

Yes. And you can see that we continue to have a positive change in net working capital also in this quarter. So then I move on to net working capital where we have a positive trend. You can see that we are now at 0.8% of LTM net sales. And this is the four quarter average that we calculated of the 0.8%. You can also see in this picture that we continue to reduce inventory levels, also trade receivables are down and we see positive trends here in both DIO that we follow on a monthly basis but also DSO and we have a lot of focus on these items. And if we look at the inventory levels, you know that we have been running an inventory reduction program in Plantage and where we see good results. But also in Q2 now compared to the second quarter last year, we have a very good performance also in Diab that reduced their inventory levels quite a lot. So a good network and capital development for the group. If I then move to the net sales bridge, as I said, 9% down and 10% down organically in the quarter. We had some minor acquisitions effects, also a minor effect of one company that we actually divested in the quarter last year. And if we look at the negative organic sales growth, we had actually a positive sales growth in critical infrastructure of 14-15% in the quarter, so they grew nicely. But we had, as Jonas described earlier, a negative effect in construction and then of course in consumer with plantation that had a negative organic growth of 9% in the second quarter. And this was caused by the unfavorable weathering in Norway mainly. We had a small positive FX effect and other was zero. And then if we move to the EBITDA bridge, As you know, we increased to 2%, and this is despite the quite large negative organic growth that we had in the quarter. If we look at the different components, acquired growth, we had a good drop through on the acquired net sales, 7 million, even though it was small, mainly related to add-on acquisitions in product solutions. If we look at the organic growth we actually grew EBITDA despite of the net sales decline and the EBITDA in Plantagen was down 63 million SEK and we had lower sales mainly in construction but this was compensated by Actually good results in the construction companies but also in infrastructure. Critical infrastructure by Abel and Precise Infra had good results. The technical consultancy companies had good results and also HL Display posted a very good result in the quarter. We had a small FX effect and we had a 16 million positive effect and this is related to one of items that we had last year where we had restructuring programs in, for example, HL display.

8 million in negative FX effect for Vita, right?

Yes. Okay, and then we move to the leverage. It's continued down. If we adjust for the reversal of the write down in the holding enable, it continued down as well at 1.2 times, but leverage was 0.7 times. And we saw good cash flows in the quarter, which made the leverage come down. Net debt came down as well, as you can see here, by some 700 million or 650 million. And we continue to increase return on capital employed, which was 10.5% in the quarter. And we also increased return on invested capital, which was 7.7% in the quarter. We have the financial targets. EBITDA should amount at least to 3 billion in 2025. We have the leverage where we have a span between 1.5 to 2.5 times. And we also have a dividend policy, as you know, where we should pay out 30 to 50 percent of the net profit after tax. And we have here added also the outcomes for the second quarter this year. that I leave over to you Jonas.

Thank you, final remarks I'm not going to repeat myself here I think I mean in all in all a good quarter I think where industry delivered Construction was stronger than we expected. And I have all prerequisites to continue to surprise. I hope that. And consumer was negative. And again, I'm so happy that the key ratios, our cash flow, our return on invested and other capital employed are continue to increasing and our financial position is strong and has become stronger. I hope you also have seen that we have, I don't know how many press releases we have launched after this period on order intake.

I think it's four about covering construction and infrastructure.

So that would be my summary, Josefin.

Thank you very much, Jonas and Jonas, for now. Let's open up for questions. So let's do it in some sort of alphabetical order, starting off with ABG and Henrik Hintze.

Thank you, Josefin. So to me, the most interesting point in the report is probably the construction segment. I mean, the margin increased quite a bit despite the lower sales. And I was wondering if you could give us some detail on how that was possible and how we should think about that going forward.

Yes. It's not a total surprise. I mean, Hent is the largest company here, has improved their processes and their business system. And as we have said many times, we're not into residentials. We are in the public sector and have been lucky to be able to select really good and big projects for us. We also have actually a very, very good IT system, which I haven't talked about before. But I won't say it's AI system, but it's a great system that helps them with their performance.

All right. So does that mean that we should anticipate strong margins like this going forward, especially considering that the order intake picked up now again?

Yes, again, I have never promised anything about the future, but the preconditions looks very good, I think. I would be surprised if we couldn't continue to perform in this still quite weak sector.

Okay, thank you. And secondly, maybe if you could give us any update on the X-BIN situation and how that has developed. Any news?

Yeah. Well, all the claims are now sent in. The numbers are there. We know the figures back to 2021. So now that period is over and now we need to put all our resources in to get this company focused and profitable. And I'm sure we'll come back on that in the next quarter. But infrastructure in total is doing very well in the quarter, in spite of that X-BIN, given all the things we've done, are not showing profit.

Okay, thank you.

Okay, was that your question, Henrik?

Yes, thank you.

Thank you. Let's move on to Handelsbanken and Julia Angelis Stramb.

Yes, thank you for taking my question. I was wondering regarding the cost savings program in Plantagen. Did it have full effect in the quarter or can we expect some further effects in the coming quarter?

Hi, Julia. Thank you for the question. Looking forward to meet you, by the way. We saved 78 millions in the quarter on the cost reduction program, and that was in line with plan. And there will be more coming in Q3 and Q4. So I hope that answers your question.

Okay thank you and the same to you and also so is that a correct interpretation if the cost program will continue further on or will you have other focus on plantation?

Yes the cost program will continue And we're not only working with costs implantation, we are doing other things as well, but we need to really improve this and get it sustainable for the future.

Okay, thank you. And just one last question with regards to the falling inflation and lower interest rates, have you noticed any differences in interest for assets that you may want to sell or anything like that?

That's a very good question, actually, and a very important question for us, Julia. Yes, we see signs of improvements, but we are not back to the good old days, if I say so. We have to wait a little bit longer and pray for no further bad news in the geopolitical arena.

Okay, got it. Thank you.

Thank you.

Thank you, Julia. We'll move on to Nordea and Albin Nordmark.

Yes, hello, Albin from Nordea here. Thank you for taking my questions. So firstly, the inventory is down almost 20% year over year. And you mentioned this is mainly driven by Plantagen and Diab. And is this normal levels here? And should we expect inventory to further decline in Q3 as well?

When it comes to plantation, the inventory levels were down roughly 200 million compared to the second quarter last year. We have a program running and it will continue to go down during the rest of the year as well. And Diab, if I remember correctly, they were down a little bit more than 100 million. And so they had also good performance in the quarter. But for Plantagen, we have a target inventory level in the end of the year, and that target level is lower than the level that we had in the end of Q2.

All right, got it. Yeah, you obviously have a good order intake here in Q2, as well as additional orders in July. And we also know that several projects are stretching over many years. So can you give us some sense of how much of the order backlog that is going to be realized in 2024-2025?

I don't have that number in my head, Jonas. Is there anything we can come back with?

Yes, I think of the order intake that we reported now in Q2 and also in this report, most of those orders will be delivered from 2025 and onwards.

That is true.

Thank you. And finally, the reason by the increasing, the uplift in the beta margin in industrial services despite the net sales decline, is it anything that sticks out there?

Well, there is one working day more in this quarter, but I think what has happened is that we have both sort of have a positive effect on the daily gross margin with pricing and also the so important key ratio utilization rate.

All right, then is this something to extrapolate going forward?

This is something they work with every day and will continue to do that.

Thank you, that's really helpful for me.

Thank you, Albin. Anyone else on the call who hasn't been addressed and want to post a question? No. Oh, sorry, Georg. You weren't on the call in the very beginning, but of course, please, Pareto, Georg Atling.

Yes, good morning. Sorry, I was a bit late on the call, so maybe you mentioned some of my questions, but did you mention how much the positive calendar effect was in the quarter, thinking especially of consultants?

No, we didn't mention it, but it was around 13 million SEC positive.

30 million, okay. And then I'm just looking at the margin here in construction services. That's probably the main highlight in the report. Is there anything here that's of one-off character or is this a representative margin of Q2 results in the segment?

No, we didn't have any one-offs in the quarter. So this is representing the underlying business. And I think we talked about it earlier here and you were maybe not in the call then, but we have solid project portfolios in the construction segment. So we think it looks pretty good going forward.

So I've said, hi, by the way, good to have you here. You know, we're not promising any results going forward, but we have really good preconditions for that, to do that. And the project looks very solid. So we're quite optimistic about the future. I don't know if you were there then, but we have continued the high order intake in the very beginning of Q3 here, which you might have seen.

Yeah. And then just a final question, because I look at the numbers and especially on top line looks quite weak across all business areas and yet you seem quite happy with the quarter. So just comparing now to when we spoke after Q1, is it worse than you anticipated? Because I mean, especially on top line, it's surely worse than we anticipated as analysts.

The top line is down 75% due to construction, which is not very strange. And the second largest is plantation and consumer. I think we have explanations for why. I mean, we have a flat sales or sales going down in wind, which is good. So I think I'm sort of not shocked about these numbers at all.

You talked about the CRO market as well, which we think will start to pick up.

Yes, but that's... That's a minor thing of the sales decrease. I mean, 75% is construction and services and then plantation. Growth could be higher, of course, we would, but I'm actually quite happy and looking around to Pearson, so I think I think we can be happy with a quarter also when it comes to sales.

Okay, and just one final question then on Dia, because you talked about the weak wind market for many quarters now. Could you quantify that effect? Because in my models that should be so small that even a weak market doesn't really impact the whole group.

Well, no, I think we can. I don't have the numbers here, but if we meet, we can dig in deeper. Our wind that still exists are in China and in India. Yeah, perfect.

Thank you. That's all for me. Have a good rest of the summer. Hope for a little bit less rain, especially for plantation sake. Thank you.

Thank you. Echo that, Georg. Thank you so much. Last, just a final check if there are anyone else on the call who wants to post a question. No, doesn't seem so. Well, thank you so much for your questions. Thank you, Jonas and Jonas. And this webcast is recorded and you can find it afterwards at ratos.com. Finally, last but not least, we would like to wish you all a very happy summer. And thank you and goodbye.

Thank you.