Ratos AB (publ)

Good morning and welcome to Ratos and welcome to the presentation of the second quarter. With us today we have our CEO, Jonas Wiström, and our CFO, Anna Vilogorak, who joined us fairly recently at Ratos. The following hour will look as following. We will first listen to the presentations and after that you will get the possibility to put forward your questions. So busy hour. I think we should get started. Please go ahead, Jonas.

Thank you, Katarina. And thank you, everyone, for joining us this wonderful summer morning in Stockholm, at least. So we're going to go through the in-dream report for the Q2. I just want to start to say that we're quite happy in Ratos today. This is not only a strategically very important quarter, we're also actually quite happy with the numbers, including the fact that we have an organic growth in a subdued and uncertain market. The fact that we could execute on our strategy towards industry and critical infrastructure, that means that, and you can see it in the report, that our EBITDA margins is actually growing with 3.5%. What is not as easy to see for those who are new visitors to Ratos is that we will have lower volatility in cash flows mainly, but also in EBITDA and of course better EBITDA margins, as I mentioned. This volatility could be over one billion in a quarter. We do also have a strong financial position. Anna will come back to this, but we have still 40% roughly in shares in Sentia with a value of some 2.5 billion SEK. We will also talk about plantation. We have an improved profitability and, of course, much better stability in plantation after financial reconstruction. But there are some special things that is worth to mention about the effects of the reconstruction in the second quarter. So, if we start just to look at our EBITDA development since we introduced the new strategy in 2018, we have actually grown our EBITDA LTM 29% in an average. This quarter, though, were a little bit lower in Edvita than last year. And the fact is, and Anna will go through this in details, but the closed stores as an effect of the reconstruction, we closed down 35% of our stores. Those stores were unprofitable. They couldn't bear their costs. But in the second quarter, if we would have them still, they would have contributed actually quite a lot in this quarter. So that's the reason why Plantagen actually have a lower EBITDA, but a better profit margin. But Anna comes back to that. Adjusted EBITDA margin is up 3.5% compared to the old structure and is up a little bit if we look at the total group. We do have improved EBITDA margins in all segments except industrial services, which I will come back to, including the calendar effect. If we took a look at a sale, sales is down again. We'll come back to Plantation and the closed-down businesses in X-Pin Group. But we do have an organic growth, and I'm quite happy with that, actually. We had also in construction and services, or should we say critical infrastructure, really good organic growth in precise infra. They continue to do very well also on the sales side. In industry, we have a slightly negative effect in sales, and you can relate that to the negative calendar effect for industrial services. I will come back to that. Overall, of course, not the best market in times. It's uncertain and subdued. Consumer down in sales also organically due to quite bad weather, especially in Norway in May. Structural effects, I mentioned those already in Plantagen X-Spin attributes with 6.3% actually in sales. So there we have the bridge. I'm sure Anna will describe it even closer. Let's take a look to industry. We had a good development in product solution, but the negative calendar effects in industrial services were significant. We had one day in Scandinavia. We had two days in Brazil. We had what we say in Swedish, klemdagar or squeeze days during this quarter also. I'm happy to say that in spite of that, Nitech Group, our coming big consultant in or leading consulting in digital solutions and R&D, they actually increased their utilization rate in the quarter, which I think is a sign of strength. They've also took some real good orders here in the end of the quarter. When we're into the industrial services business, we have to mention weaker results in TFS with a continued slow biotech market. I think also it's good to say that we had all our companies in the industry in product solutions actually increase their sales, except for Oase Outdoors. Adjusted EBITDA margin 9.6% in this short quarter for industrial services. I think that is quite okay given that calendar effect. Let's go into construction services, which is critical infrastructure basically today. I was into the sales with organic growth of 15.8%. We have had FX effects, and I will come back to that also, but we have a strong Swedish crown, not the least if you compare with the Norwegian crown, which we see here. I think we do have a robust underlying sentiment for infrastructure. We hear that on the news every day, almost. However, we still have a slow market for electrification of railroads in Finland, which is the core area for the Exbin Group. I'm sure that that market will show itself next year with more orders coming in. Order backlog is good, and this order backlog doesn't include the numbers for Able and Sentia, of course. Adjusted EBITDA up 10%. We have talked much about Precise Infra Sales, but of course they have also a strong EBITDA development. In ABLE, we had a negative unrealized currency effect in the financial items. Operationally, they continue to do very good on the way on a new record year for ABLE, I dare to say. And the adjusted EBITDA margin is 21%. You know that we don't bring in the revenue from ABLE in these numbers. And not Centio also, which was a short time. So, consumer again, Plantagen is in a much better shape and our reconstruction really shows the better profitability and stability. I tried to explain why Q2 was lower in sales and EBITDA for Plantagen. But this is very important for Plantagen going forward. And Plantagen, I want to say that we have very good customer satisfaction surveys and they are the leading business for plants and flowers in the Nordics. Just EBITDA down then because of plantation. KVD continue to increase EBITDA in, I could say, a tough market. I think KVD is doing a great job actually. EBITDA margin for the quarter up again at 23.1%. And that, I think, is a 23.1% is a good way to leave over to you, Anna. So happy to have you here now. And please.

Thank you, Jonas. So let us dig down into a bit more details in regards to financials. And just to set the scene, first of all, this quarter has entailed a large and transforming strategic change of us divesting Aeroteam and listing Sentia. And of course, this will lower our exposure towards the construction industry as a whole. So the construction and services which is left is essentially critical infrastructure. And you recognize the companies. It consists now of majority ownership in Precise Infra and Expin. And on top of that, then we have the minorities, Able, which we've had for a long time. And then adding Sentia to the picture where we have kept the 40% share in Sentia. Moving into net sales and EBITDA bridges, I would say if we turn our attention on the top graph, we see a good organic development, which we are very pleased to see in this uncertain and subdued markets. So posting an organic growth of plus 1.3%. Going into M&A, so we have been active in bolt-on acquisitions in our stable and profitable companies. So I would say majority of them have been within the industry segment and in particular HL display. That is adding additional two percentage points to this picture. So all in all, a growth of three, including these two. Then if we move to the left in the graph, I would say that you see quite a dramatic impact from what we called other. This is actually deliberate operational changes that we have made. One, of course, being Plantation, which we have mentioned quite a lot of times because we are so proud of it. And the other one is shutting down legal entities in Expen, also a deliberate operational decision. But what we can see is of course that if you look at the EBIT margin impact, it's actually accretive. Then moving into FX, Jonas mentioned it, we do have SEC strengthening against many currencies, and for us, especially Norwegian crown is important, giving us a negative impact of 3.3 percentage points, 3.3%. And then looking into the last part, which is our minorities, and this is able effect, I would say. It's unfortunately negative and margin diluting of 0.3%. Able is doing fantastically well, so there is nothing to be worried about. They're actually heading towards yet another record year. But as we are integrating their earnings after tax, we get that financial net impact, which stems from unrealized currency effects. Moving into how this EBITDA bridge looks like, if we were to split it out by our business areas and business segments, we see a good development in construction and services, the remaining part. We also see a contribution from our product solution companies. And then, as Jonas mentioned, industrial solutions have been impacted by that working day impact. The adverse calendar is here, we can see it, and also to some extent subdued markets. Moving into consumer part, it looks very dramatic, but if we were to split that out to 57 million negative, 53 out of those are actually the shut down stores. That was their contribution in the same period last year. So it's a structural impact, you can call it. And if we were to adjust like for like, EBITDA for plantation is on the same level as it was last year. And then just to put it in a little bit longer perspective, if we look at the year to date for Plantagen, we can clearly see that these structural changes and operational improvements are biting. So we see that EBITDA, which is in the boxes, is essentially the same, but we have lost 22% of the top line. Six of them coming organically and the additional 16 from these network of stores closures. And as you can clearly see, the margin then, it's 400 basis points up. So I would really say that Plantation is a much more resilient business now than it used to be. Then just summarizing the EBITDA margin for our business areas, starting with construction and services. And I would say this is a mix of operational improvements, but also the top line growth, which we see in many of these. Construction and services up, very nice EBITDA margin development. And on the left hand side, the 8.7, that is construction and services according to the old structure. Product solutions decline. Again, there is a large share of that which is calendar related. Industrial services slightly upwards, but still in the right direction. And then consumer, as you can say, it's a good EBITDA margin increase. Now working ourselves into networking capital. And again, it's a bit of a difficult quarter because we do have this group total, which then includes Sentia and Airtim. But we try to adjust the networking capital for the new structure. And what we see quarter over quarter comparing with last year is actually networking capital in absolute terms is down slightly and also in relative terms. So networking capital to sales is actually also down slightly. What I would say now is that we will have a change structure here, has to do with us exiting construction market, which normally comes with very large prepayments, which you normally see in contract liabilities. And that's where you in the table can see quite a significant decline. And to Juna's point, we will have a much more predictable networking capital and much lower swings in the new ratos. Then taking a step into the cash conversion, so networking capital actually contributed positively. The same goes here. This is for the old structure cash flow. If we were to adjust for the new structure, I would say the decline is similar. What is happening here, I would give some credit to Expin Group, a very good cash contribution versus previous year. So they are also moving up in the right direction. But of course, considering plantations, fewer stores and a bit more of a headache with weather in May, that I would say is the biggest decline. But many companies are doing really well. KVD, Diab, a lot more to mention, which are doing great in the cash. And the cash conversion was above 100, which is good to see. And then here we actually see our gearing, our balance sheet leverage. As we communicated earlier, we knew that disposal or listing of Sentia would have negative impact on our net debt. And why is that? Again, going back to the prepayments. So we have shifted upwards and I'm talking now about the adjusted leverage, which for the quarter landed at 1.7%. 0.8, the reported one, is of course favorably impacting of us delivering capital gains of almost 3 billion SEC for the divisement of Airtime and Sentia. So I would say 1.7 is a better number to look at and to be compared with 1.2 in quarter two last year. What I also would like to mention is that that 40% stake in Sentia, that is worth currently 2.5 billion SEC. And if we were to liquidate that asset, that will actually lower the gearing by 1.2. So ending this presentation of saying that we do have a very strong balance sheet and hence a lot of flexibility. And then turning to you, Jonas, to conclude on the second quarter.

Thank you, Anna. Thank you so much. Well, again, major milestones towards a more profitable and stable or resilient Ratos. Very important, not the least in these times. I think I said the most here. I think what I want to mention here is that you have been with us for a long time. You know we work hard with operational improvements. We will take one step more given the market. There is always more OPEX to take out in all companies, even in the most successful companies and so on. So we will have an increased focus on operational improvements. And again, I'm happy we had the organic growth in this market and we will fight for that in next quarter as well. So thank you so much. I leave over to you, Katarina.

Thank you, Jonas and Anna. Thank you. With that, we will open up for questions and we will do it this way that you please use the functionality of raising your hand in the Teams function and we will take them in the order that you raise your hand. So I understand we have a question from ABG. Henrik Hintze, please go ahead. Henrik, I think you're on mute. I get information about. Here we go. I can hear you now.

Okay. All right. Now you can hear me. So first of all, on industrial services, I was just wondering if you could.

Sorry, Henrik. Two seconds. Two seconds. We have a problem with the sound. Bara ja, inte gymnas.

Vänta, vänta. Jag tror jag har det nu.

Okay. Sorry, Henrik, for interrupting you. All right.

Can you hear me now? Yeah.

Yes, we can hear you now.

Okay, good. All right. So first of all, I was just wondering if you could quantify how much of the decline in industrial services is attributable to calendar effects versus a weaker market. And you also wrote something about this partly being offset by cost synergies in Nitech. So if you could mention anything about how much that may have been as well.

Yeah, it's difficult to handle the klemdagarna. But Anna, do you want to answer that?

Sure. I would say when it comes to calendar effects, we've said roughly 10-11 million seconds. both on the bottom line and top line. As you understand, the consultants, when they are off, then they're off. So it's 100% all the way down to EBITDA. So that's one. I would say when it comes to subdued markets, in that segment, we also see TFS, which Jonas mentioned as well, quite slow biotech markets having an impact on them as well. So that's the other impact.

And we had also a geographical mix with a lot of business from Brazil.

Exactly. So it was a mixed negative as well on the gross margin side of having quite favorable development in Brazil versus then a slower performance in Scandinavia.

All right. So while we're speaking about this segment, you also wrote that Nitexo somewhat improved utilization rate. Could you give us any comments about what you expect in the market here for the consultants and maybe also while we're at it? uh you mentioned that the uh integration process will be completed in q4 and that you expect further cost synergies from that so if you could say anything about the magic magnitude we we should be expecting there that would also be interesting

Yeah, when it comes to cost synergies, I normally don't do forecasts, but I would be disappointed if it didn't was at least 50 billion in cost synergies. Intake synergies, sales synergies, they're very hard to quantify is my experience, but there we are. But you had one more question, I think.

Yeah, on the market, you mentioned that utilization was up a bit. What do you expect here going forward?

Well, if I should say something, I expect that we will have the same market in Q3 than in Q2. We saw actually June being a little bit better, not the least for Nitech with some new projects, important projects. But I think you should be cautious in these times. It's a very uncertain environment. But this also makes the fact that we go together, Semcon and Nitech, it's very, very important. And we create a lot of synergies, so we'll be much stronger in a weaker environment. But I have no forecast for a much better market in Q3.

Right. One final one from me, then I'll pass it on. But it was good to see the completion of the air team divestment and sent the IPO in the quarter, of course. So now I'm just wondering, how do you judge your ability to make further progress on your streamlining strategy in H2? And also maybe if you could comment a bit on how you decide whether to go down the divestment or IPO route for other subsidiaries which you may want to divest.

Yeah. Well, you know, I'm a boring man. You know that we want to divest consumer. We have stated that before. I want to underline that KVD is stronger and stronger for every quarter. The same goes for plantation, even if we have this special effect in Q2. But When this will happen, I won't give you a clue at all. So we have learned to communicate when we have done something rather than say that we're going to do something.

All right, fair enough. It's a great segment to acquire.

It's great companies. No, but really.

Okay, thank you, Henrik. Do we have any other questions? Yes, so please go ahead, Julia from Handelsbanken.

Hi, good morning. I have two questions. So firstly on plantation, given the performance in Q2, Q2 being an important quarter for plantation, do you think that the Q2 performance will be enough to reach mid single digit margin for the full year?

Yes, I would say like this, Julia, that's definitely something we are aiming for. But like in this quarter, nobody could predict a very cold weather in the month of May for Norway. So, of course, there are always things which are not within our span of control. But I would say, yes. That's definitely what we're aiming for, not least considering the good savings that we actually have, both from OPEC side, but also from the rent cost, the leasing side.

Absolutely.

Okay, understood. And another question on both your comment on overall subdued market and also I read that you want to focus more on doing Bolton acquisitions. And so my question is, where do you see the most opportunities for Bolton acquisitions aside from HL display?

Yes, I think Anna mentioned that we want to do add-on acquisitions where we can find synergistic such in companies that are performing well. We don't want to replace organic growth with add-on acquisitions. It's the other way around. We want to have organic growth before you do acquisitions. So you should look at companies with good organic growth, good profitability. Those are the ones we will focus on. And Anna, I think you mentioned the Diab. And Diab actually did one acquisition in the end of last year, coming in in January. Developed very well, by the way. Very well developed in that. And... Of course, we want to do acquisitions, add-on acquisitions in industrial services companies as well, like Nitec Group. I mean, in my previous job, we did 65 M&A add-on acquisitions, which was very profitable. But we were very keen also to have an organic growth on a good level.

Okay, I understand. And just a final one for me then. So I note that the minorities was larger than expected. Was there anything particular that we have missed here or is this an effect of the divestments in the quarter?

I would say you haven't missed a lot. Of course, you have two sides of the coin. Partly it's the organical performance and then partly it's how the minorities perform. So as we mentioned, the able, even though the underlying EBITDA was great, you had this happening in the net financial items, which was negative. But I would say over time, you should rather look at it that way. rather 10 to 12% of minorities than something higher. And it has to do, of course, with the divestment. And Sentia's was quite large. So a lot of result has kind of left the continuing operations.

Okay, I understand. That's all for me. Thank you.

Thank you. Thank you, Julia. Do we have any more questions? Linus, are you with us?

Yes, hi, Linus here. Just a quick question for me here. On the organic growth here of 1%, how much is attributable to price and volume?

I would say on overall level, the majority I would call volume and not so much price.

Right. And Given Sentia and Airtime are now more or less gone, of course, you have a bit of stake in Sentia left. How should we think about the remaining construction exposure ahead?

We have no other construction exposure than those two.

Okay, cool. That is very clear. And just a last question here on capital allocation. As you mentioned, you have some 2.5 billion in Centia shares that you might liquidate in the future. So regarding capital allocation, is it M&A buybacks or dividend that you are thinking about? There is buybacks on the menu, so to say.

I leave it to you, Anna.

No, I think we need to see this in a broader context. Of course, you should have a strategy for your capital allocation. And I would say all the things are on the table, whether you find that you create better shareholder value of assets adding a bolt-ons, which you can buy for good multiples and you do have a lot of synergies, operational synergies, that that makes sense. But what we've said is that we are, as you might be aware of, this kind of three-year strategy with financial target is coming to an end. And we would like to kind of come back to you guys and have a view on the capital allocation strategy. But I would say everything is of course on the table. If you can create more value with one than the other, then that should be considered.

Okay. Thank you. That is clear. I'll jump back.

Thank you.

Thank you, Linus. Okay. With that, I think that was the last question from the audience, our viewers. Jonas, I turn to you. Any final message today to our shareholders?

We're working hard to increase shareholder value, and I think capital allocation, which you were into, is, I think, a quite important part of creating shareholder value. So we're on that. I want to say, if it's okay, Katarina, that I really want to thank you for joining us this fantastic morning. And maybe I can wish you some relaxing holidays in a beautiful environment. I recommend the Stockholm Archipelago, but there are other ways to go, of course. But I want to thank you and looking forward to see you in next quarter. or in this quarter, but after summer. Thank you so much.

Thank you. Thank you.