Sdiptech AB (publ)

Hello everybody and welcome to Stiptech's presentation for the second quarter. My name is Anders Mattsson and I am since 1st of June the CEO of Stiptech and today I also have with me our CFO Bengt. I will start with a short introduction to Stiptech. Stiptic acquire and develop niche businesses within the infrastructure sector. We look for high quality product-based companies with a strong market position that can be protected. We divide the group into four segments, supply chain and transportation, energy and electrification, water and bioeconomy, and safety and security. The key drivers for our business are an aging infrastructure that constantly needs improvement and upgrades, We foresee continuous investment into our selected segments to increase the efficiency and safety and sustainability in the societies. Geographically, we have a strong footprint in the Nordics, UK and Italy. We are today 41 companies in the group and since 2017, we have grown profit by 32% in average per year. So some highlights from the report of the second quarter. It was no doubt the challenging quarter for us. Net sales decreased with 4% to 1,288,000,000. That is minus 4% organically, additional minus four due to currency effects, but plus four thanks to new acquisition coming into the group. We had a stable demand in our core portfolio. which is good to see, but we had a lot of customers postponing orders and sales later into the year, and that is due to the overall uncertainties in the markets. If we look at adjusted EBITDA, it decreased with 10% to 242 million in the quarter, minus 9% organic, additional minus 5 due to currency, and plus 4 due to the new acquisition coming into the group. That resulted in an adjusted EBITDA margin of 18.8% compared to 20.1% last year, the same quarter. And adjusted EBITDA dropped, of course, as the result of the lower sales. We also had some high comparables due to specific project deliverables in quarter two last year. An example of that was strong deliveries into the Olympics, for example, last year. Cash flow, 121 in cash flow, corresponding to only 45% in cash flow generation. That is for us a relatively low number, but it was affected by inventory buildup in specific companies that have orders and deliveries to come in the second half of the year. So as a group, we are not happy with the developments in the last quarters. That is the reason why we have initiated a number of strategic actions to restore, very importantly, the organic growth, but also to improve a very important metric for us, the return on capital employed. The first section is around the business area organization. We would like to increase experience and sector knowledge for our key segments. that we work within. I have also decided to include the four heads of the business areas into the management team of Stiptic going forward. We have recruited a new head of supply chain and transportation starting in August. important decision is that we've decided ahead of energy and electrification in the uk located located in the uk it definitely makes sense for us to have a stronger footprint uh in the uk and also for the energy and electrification which is a very important segment in the uk for us second important strategic activity is portfolio divestment We made a strategic shift in 2018-19, where we said that we focus only on product-based companies, and we initiated new investment criteria. For example, companies should have at least 15% in EBIT margin to be able to join our group. We still have a number of companies that do not meet these requirements. And the group of companies represent roughly 15% of the sales and 5% of the adjusted EBITDA. And we have decided to divest these companies. We will report them separately from Q3. It will be a one-off effect of roughly 400 to 500 million in goodwill revaluation. And why are we doing this? The primary reason is to allocate capital more efficiently and according to our strategy, where we want to be. We would like to be able to focus more on a core portfolio, which looks very attractive if you're looking at the numbers later. And also, of course, for the future acquisitions to come. And we would like to be more strict on the acquisition criteria we have decided together in the group. And this is nothing new for us, actually. We have already divested eight units since 2021. primarily the service elevator businesses. So we are comfortable that we will manage this in a good way. The third strategic initiative is around fine-tuning our strategy. We have a solid strategy in place, but we need to fine-tune it and we need to set ambition for a partly new management team that we are building up now, especially to start in August. And it's also important to align the day-to-day operation with the long-term goals to see how we're going to reach the goals year by year. So that's important topics for today. And I would like now to hand over to Beng to more of the financial results for the quarter.

Thank you, Anders. Yes, and we will start to talk a little bit about our sales. In the quarter, as Anders mentioning, we had a decrease all in all of the sales with 4%, which was also the organic decline, 4%. But many of our units had a very stable demand coming in, ticking in. And even though some companies see that customers are postponing or delaying their orders, the demand is still there. So as many times before, when the situation occur, we know that the demand is out there and our product deliveries are important to our customers. So they will come sooner or later. But right now it's a little bit of wait and see in some companies. So as Anders mentioned, we had some extremely good performances last year, especially within the business area, water and bioeconomy, as well as in the energy and electrification. And we will come back to that when we walk through the business areas in a little bit more detail. over time we have had a very steady um sales growth 23 on a compound annual average and of course some of that are coming from acquisitions but as you see in the chart on the right hand side where these circles mention what the organic excluding currency effects have been. The organic growth has been in the sales year on year. So it's a combination of both successful organic delivery and successful acquisitions. And in the last 12 months now, as of the last of June, we see a minus 3% in organic growth, but we're taking measures as Anders was mentioning here to improve that number. Looking into the sales split on the geographical dimension, it has been more or less stable over some time. We have roughly 45% coming in from UK-based customers. And that's also a reason why, as Anders was mentioning again, that we're looking for a new member to the management team coming from the UK, since it's a very important geography for us. Sweden is reducing its part of the pie while exports are increasing as we acquire product based companies. US is of course an important geography to have a look at and as previous quarters we don't have that much sales. It's a few companies selling their products, software and hardware into the US. So far been able pretty much to mitigate any tariffs. So not a huge impact on that directly. It's more of these indirect effects we mentioned with that kind of wait and see approach for the bigger projects that some customers have. Looking on the turnover by revenue type, the product sales is increasing slowly but steadily while installation then is being reduced, especially since last year, since we closed the business in a Swedish installation company. And now also some more than is up for scrutiny in the program that Anders mentioned divestments. So that share, piece of the pie will also probably decrease. We like installation if it's on our own products as we like service on our own products. So a lot of that service, the 25% is on our own product deliveries, which of course is very good when it comes to customer stickiness and retention. Having a look then on EBIT A development with 10% all in all, of which 9% was organic decline. But then acquisition of course contributed and we could see that those acquisitions had a big impact especially for the safety and security area where also some the other companies had a good development so we all in all we had a positive contribution on the profit from the safety and security business area while on the supply chain and transportation and water and bioeconomy we had a negative contribution meaning that profits were lower than last year and EDN electrification was more or less flat versus last year but we will comment that a little bit more soon and on the margin side we saw a drop in the margins because of sales drop with fixed costs that happens then that We get a lower EBIT margin. We also saw some cost increase on wages still. We mentioned that in the Q1 report because of the new legislation in the UK for minimum wages and social fees. And that was also an effect in Q2. We have reduced the number of employees to mitigate some of the volume decline in the companies. So the number of employees is less, but still the cost per employee has increased. We continue to focus on initiatives then linked to profitability. So a lot around the pricing, procurement, and then of course, cost cutting or being very careful about costs all in all. So that will continue. As with the sales development over time, we have had a good EBIT development, 32% on annual average over the years, both then coming from organic growth. As you see in the chart in these circles, a number of years having a very strong positive organic growth, but also, of course, then acquisitions. Taking also view then on cash flow. We see this quarter coming in lower than usual. And as Anders mentioned, we had a 45% cash conversion with 121 million coming in, but it was impacted mainly then from an increase in working capital due to inventory buildups in companies that have strong deliveries in the second half. Some of them seasonal type of companies, but also some other companies having good project sales and also for this project-based sales we saw some increase in revenue recognition this also then hurts the working capital but that will come in as cash soon enough and so we're working with that of course to improve the average over the The last 12 months was 73%, which is in our span of some 70% to 90% on average that we should be within that band. I could also mention then regarding cash flow that we had some heavy tax payments because of the good profits last year in some companies. We had to do some final payments of tax as well in this quarter. But for the last 12 months, we were around 800 million coming in from our operations, which of course is good that we can spend the money on acquisitions and on other capex. Looking on some additional metrics, we see the profit after tax declining, of course, then because of the lower results compared to last year, but also that last year had a profit from a sale of a company. and that improved the numbers with 12 million all in all as an effect on the profit after tax and but otherwise it's also increased tax percentages all in all compared to last year with an increased number of profits coming back countries so that dilutes the profit after tax as the earnings per share as well a little bit Looking at the financial situation, our financial net debt, which is all that we have, excluding the debt for conditional considerations, increased because we paid out some of these conditional considerations, which of course is good because that means that these companies have had a good development during the years we have owned them. But so that increase is quite a lot. But the total net debt, which includes these provisions for the conditional considerations, didn't increase as much because that's more reflecting the result and the new acquisitions coming in. So still a little bit high, perhaps, but still very much under control. And we think a very comfortable level still. then finally before handing back to understand some on the return on capital employed that has decreased since last year mainly due to a lower result all in all but also then because of adding some capital employed through the acquisitions So of course we're addressing that and as was mentioned that we will see next quarter we will make a write down on some of this goodwill and other immaterial assets which of course will make the return on capital employed improve for the group. But the business units themselves are strong, 57% on average for our businesses. The difference is, of course, all the assets that we add when we acquire companies, which is mainly then goodwill or other immaterial assets. So it's a big difference between the group level and the business units level. Of course, very important that the business units have a solid and good return on capital employed. That's what we have calculated with when we acquired the companies. So with that, I hand back over to Anders.

Sorry Bengt, I think you had one more slide there.

Yeah, sorry. Yes, of course, in itself. As mentioned then, that we saw decline in some of these business areas. And while safety and security improved, we saw specifically in the supply chain transportation, we saw this a little bit the effect with postponed orders, which negatively impacted the business area. As we saw in the water and bio economy, we had all these high comparative figures in the number of business units as well in the energy and electrification and there we have this olympic game business unit for example with the deliveries of temporary electricity equipment to the all these events going on in paris um so all in all the different business areas affected a little bit about the overall market but also some very specific reasons for having a little bit less sales and then of course acquisitions contributing to the different business areas On the right hand side, you see the profit development and more or less the same reasonings behind the development on some lower sales affecting the margins, some high comparative figures, some one offs last year, some wait and see in the market and some acquisitions then contributing. So overall, the demand situation looks cautiously promising for the future, for the second half of the year. And the EBITDA margins should be pretty stable at these levels, at least. But with that, I hand over to... Yeah, thank you, Bengt.

So I would like to give you some more information around our strategic action to work with our current portfolio to refine the portfolio. And just to repeat why we are doing this, and that is to allocate the capital more efficiently for our long term strategy, focus on our core portfolio, which we think is very attractive and we would like to add future acquisition within the same type of type of business. And we would like to be more strict and adhere to our acquisition criteria. So now we're going to try to look at the table, the proforma, how it's going to look like after the divestment. If you look at the green line, that's the line summing up the core portfolio that will be StipTech going forward. So if we're looking at the adjusted EBIT A from January to June 2025, we see an EBIT A of 521 million with a margin of 23.1%. That we should compare to the red line, which is the sum of the companies that we would like to divest. That's 15 million in adjusted EBIT A, but with a margin of only 4.2%. The gray line is the core operations, including the central cost. So that would mean that just the DBA for the first half of the year would be 481 with a margin of 21.3%. And that is how we will report the core portfolio in the future in Q3 and forward. What's important here as well, if we look at organic growth for the core portfolio, if we look at first half year, last year compared to this year, we increased in organic sales plus 0.4% and minus 2.8% for the adjusted EBITDA. That should be compared to minus 8% as we reported during the first half year with the current EBITDA. portfolio, the overall portfolio. And as Bengt also mentioned, in connection with this, in Q3, we will have a revaluation of our goodwill. We believe it's going to be around 400 to 500 million, which, of course, will improve our return on capital employed going forward. And this is nothing we will wait to do already started to divest or to initiate divestment. We have talked to the specific companies. We have started to talk to potentially new homes. We would like to be very careful about how to select new homes, how to start the discussions. So we are doing that in a structured way. It's going according to plan. Now we're coming into the acquisition part. Year to date, we have already acquired 40 million. We did that quarter one. We didn't acquire anything in quarter two, but we have a solid pipeline and we expect to welcome new companies in second half of the year. Our prioritized geographies is pretty much the same. It's UK, Italy, Norway. Nordics, Netherlands, but we want to enter into Germany, which so far looks promising. And we do that with our existing team. We have not taken the step to recruit somebody in Germany because right now we have a good team in place that can manage and handle potential targets and discussions in Germany as well. And the last slide before we go into the Q&A, this is a little bit of key takeaways from the presentation today. It's been a lot of information both financially, but also for the future. But I think it's important to mention that we have a solid demand from our core portfolio. Many orders and sales have been postponed into Q3, Q4, but still the demand is there. 95% of the profit comes from our core portfolio with some very strong underlying drivers. We mentioned a little bit the sales organic plus 0.4% showing a very strong portfolio. We are, as Bengt also mentioned, slightly optimistic about the recovery in the second half of the year for the total portfolio. The ongoing strategic actions, of course, is very important now for the future. We're gonna strengthen the business area team. We're adding more experience. We're adding presence in the UK. Divestment of the companies that do not meet our criteria will be accelerated, already started. And as I also mentioning, we will look into fine tuning our strategy, especially around setting the ambitions and the goals for the future. And finally, then in regards to our acquisition pipeline, the pipeline looks attractive. We have our internal team that constantly meet and develop the pipeline. And we look forward to welcoming new companies in the second half of the year. And that was all from the presentation. And I think we go into the Q&A sessions now.

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 Max Baco from Seb. Please go ahead.

Thank you, and good afternoon, Anders and Bengt. Perhaps starting with, I guess, the most pressing question here. I mean, as you mentioned yourself, the delivery during the last four quarters has been quite soft, driven by a number of reasons. But you seem a bit more optimistic here for the second half of 2025, cautiously optimistic. You also mentioned that you built some inventory due to larger deliveries the second half um how how confident are you that it will look a bit better here in the second half is it based on actual order intake that will be delivered during the second half or is it more based on let's say loose dialogues with customers that are of more optimistic nature that's the first question yeah i can start there um i think um

Yeah, we don't have any evidence of exactly how strong we believe the second half year is going to be. But when we talk to many of the companies, the larger companies that have built up the inventory, they have talked to the customer, the customer foresee that they need the deliveries to be able to deliver themselves or to use them in project work that they already initiated. So I would say we are Yeah, we are pretty sure that this will happen because it's a chain of deliveries that needs to happen. And usually many of the projects have already started. But that's what I see when I talk to the major businesses in the portfolio.

Okay, perfect. And then on the two questions on the divestments, you said that I mean, it's progressing according to plan relating to the companies within other operations. Do you have any indication of what kind of timeline we should expect? Is it something that's going to happen during 2025 or is it more a 2026 thing with the divestment of both basically the companies within other operations, but also Mietes?

Yes, so with According to plan, we are very early in this stage. So we have only talked to the MD or the leader in each and every company that will be. divested um and we have started dialogues with potential buyers um so no it will not happen during 2025 it would take longer than that but it's hard to say how how long it will take because of course we are careful about price versus who is the best buyer we're not going to do any stupid things to sell too cheap here of course we have some some of the companies definitely have some core strategic values for another buyer. So we will be carefully looking into that. But Metus, it's a different story. We are still with potential buyers and we have nothing say nothing to share here today with a sign LOI or something like that but yeah so conclusion or answer to the question is we will not stress it it's very important for us to find the best possible home for the companies okay perfect and then the last question on the same topic

I mean, for Miettus, we have seen that you have been required to do some restructuring and so on and so forth in order to be able to divest that company, which has, of course, consumed some cash flow. Will it be a bit smoother process with the companies within other operations? Are they good to go in the current conditions, or will you need to take some costs as well in those companies in order to be able to sell them?

Yeah, I think in specific to me, it was a complex organization, a different story. But some of the companies that are in the other operations that will be divested, we are doing, let's say, more of a turnaround or improvement actions to be able to come out on the other side to be able to sell them. But it's few companies. Many of the companies are looking okay according to their business model. Again, we are not doing this because they are not performing financially. We are doing this because of a strategic shift. So we have both companies delivering good, companies that are having some more challenging time due to the market development and relation to or linkage to the construction sector as well. So overall, We believe it's going to be a smoother journey to do that compared to Miettos, definitely.

Okay, understood. That was all from me at the moment. Thank you very much.

Thank you.

The next question comes from Simon from ABG. Please go ahead.

Hello guys and good afternoon. So first of all you may have said this in the presentation but can you clarify a bit more exactly how you will report going forward now with the new divestments? Will you treat other operations as a separate segment or will it be put as discontinued operations?

I can perhaps answer that. We will not report them in the same way as this Metkus, as a formal discontinued operations, because that follows IFRS standards in detail. Report them, as you say, more as a separate segment. So we will show what is the results and development of the core portfolio, the 95% of the business, of the profit currently. as usual with the four business areas and then we will then comment and report on the other businesses as a whole and that will be all with pro forma numbers etc for some historic periods as well for for all of these so it will be more or less as its own business area even though it's not treated as a business area in itself

I see, I see. So you will continue to sort of comment on the organic growth for the separate areas then, as you did in this report?

We welcome those type of KPIs, which is what we call alternative KPIs, will be on the core portfolio. But we will of course also show the numbers for the profits and turnover for the whole group. But when it comes to focusing on the development, etc. and the return, etc. will be on the core portfolio explicitly.

I see thank you. Then also on the divestments here and you highlighted it you think it would be positive for return on capital that they have been basically diluted diluting over time. Can you be a bit more specific on sort of the magnitude of that impact you think?

and then also how those units have performed in terms of cash conversion if they have been diluted to cash conversion as well thanks yeah to start with the balance sheet as mentioned here that we will do a revaluation of goodwill and other immaterial assets for these companies and when they were acquired many years ago they actually had a higher profit level and so and could defend a higher um goodwill etc in the balance street and um so far they have been part of business areas and it's the business elves that have to um have to justify so to speak the the goodwill and so and that has never been a problem we have a lot of headroom in that impairment testing But when you put these companies on their own, there is definitely reasons for writing off some of the goodwill and so, because they cannot really protect those numbers. So that will be a one-off, a non-cash item, a one-off effect when we look upon that. And we have indicated some 400 to 500 million of, write down all in all but of course we will do that in detail during the quarter at very thoroughly in next coming report and if you you have the numbers in the report here how much the profits are without these companies what the core is and and if you then reduce also the the numbers of this write down and you get a smaller balance sheet you will also have a higher higher return on capital employed all in all so that will affect positively but we don't want to to say a definite number here since it will depend on on these revaluation activities that we will be doing but it will improve the return on capital employed for the whole group and for the core business specifically got it thank you so much that's all something

The next question comes from Martin Wallstrom from Redeye. Please go ahead.

Yes, hello. Thank you so much for taking my question. I just have one question to add on the strategic overview. Comparing it to the core and the non-core, there seems to be quite large differences. And I was just wondering if you could elaborate a bit on how you went about singling out what companies to divest How do you ensure that you're not just kind of developing companies that are currently performing poorly? So some reason on that.

Yeah, I think it's very important that This is not an activity we do. Companies are performing poorly. We have talked a lot since, as I mentioned a little bit before as well, since 2018-19, when we looked into the strategy of Stiptec going forward and we decided to focus on product-based companies. And I think many of the companies here are more service installation type of companies. They buy other products and they use them to install. quite low barriers to entry and hard to scale from a product perspective. So from that perspective, it's been easy for us. We have these companies and how we look at them for a long time. And as we have mentioned before, we had actually divested a number of companies over the year. I think Frigotech was the last company we did last year, but now we're taking a bigger grip on the total, let's say, group of companies according to this analysis. So yes, for us, it's been pretty clear what companies to include in this group of companies.

That was all the questions I had. Thank you. As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Yeah, we have received some written questions in the chat and One question here, it's regarding the expression we say we demand more from ourselves as an organization. We say that in the CEO comment and there are many challenges ahead. And the question is then how will the new strategic initiatives specifically enhance Stiptec's ability to meet these challenges and the overall economic environment? Yes.

No, it's a good, it's a valid question. I've been thinking a lot of this one myself. I was heading up one of the business areas and I think when you acquire a lot of companies, haven't done the succession from the owners, it's actually pretty easy in a serial acquire world. The owners, they drive the business forward as they always have done very successfully. It actually demands a little bit more of an organization when you have done the succession, new people coming into the organization, who is taking those strategic actions, where to go, where do we dare to invest, when say we stop, when we cut costs, all of those decisions. it's pretty clear for me that owners are very strong with that and you need to make the succession happen. We from StipTech leading the organization, we need to be there to support and to have an overview of the strategic agenda and dare to say stop or go in some areas. So that's definitely an area where I think we can improve instead of looking at quarterly or monthly reports looking at the EBIT and EBIT margin. That's pretty simple. More staying on top of that agenda. What's happening with the companies? What's happening with the market? Where are we going? And support the companies, not telling them what to do, support and push them. So it requires a lot from us from the business area side. But that's also why we are looking to recruit more experienced people. with some more knowledge in the specific width. So yeah, it's a very good question, but it's actually more exciting as well for us working with the companies to take that view working with the companies.

Thank you Anders. And as a follow up here, do we have an anticipated timeline to see results from changes, the improvements that we're doing in the different units?

I think short term is what we mentioned short term is the actively pushing and talking to companies about price increases, cost adjustments. And I think we have done that in many of the companies that came into 2025 with tough market conditions and also some tough comparables. So that I think we have already most of them we have already implemented, but the full effect will come perhaps end of this year. The long term is taking, of course, a longer time, but Scaling down or scaling down, making sure that we have a portfolio we believe in. We as a business area can work more and better with those companies as well for the long term. So that's not a short term action for sure. That will take longer time to implement.

Right. Thank you, Anders. And then we have a final written question here. I can answer that. I think it's why was the contingent consideration payouts high in this quarter when the underlying businesses performance has been weak. Well, our earn out setups, the earn out structure we have saying that the sellers of a company, they get perhaps some 70, 80% of the enterprise value day one, and they will get the rest after four or five years if they perform and typically that means they need to increase their profit by year for four or five years. many, many times also above a certain threshold, perhaps 5% profit increase. That's what they must meet and exceed in order for them to get any additional consideration. But it's for four or five years. So if you have one week, year or a quarter or two, that does not perhaps affect the total amount that you pay out. And it's also that what we paid now in this quarter were some larger companies that have been and still are very successful in their development over these four or five years they have been part of the group. So that's why payouts of continuing considerations can seem high, even though the exact development the last quarter or two or three hasn't shown that. But for the company itself, it's always a proof of that they have been very successful over the years with Slip Tech as a group. And now I see it comes one more question, and that is regarding M&A activities. If we can scale up the M&A activities with the current organization. And how many companies are here? before needing to invest even more in the head office, if I understand that question correctly.

Okay. I think we are geared as an M&A organization to handle more volumes from the M&A. We have our... local heads out there in the different markets and we have an internal M&A team feeding them with the sourcing. So right now we do not see any problems increasing the number of deals we're going to do. It's more about being cautious and making sure keeping those strict criteria what we want to buy and not to pay too much to increase the balance sheet too much, of course. That's the two more difficult tasks, actually. But we have that under control. And as we said, definitely we are looking forward to welcoming more companies in the second year now.

Yeah, so thank you very much all for your written questions. I think we... You can do the final remarks, Anders.

Thank you everybody for listening in and good questions. This, I think, was all for us today. It was an exciting quarter two report with, I think, important information where we are going for the future. We truly look forward to that. We're excited about that. So with that, I think we wish you all a happy weekend. Enjoy the sun, summer, and see you next quarter. Thank you. Thank you.