Vestum AB (publ)

And welcome to our presentation of Vestum's report for the first quarter 2024. My name is Simon Gothberg and I'm the CEO of the company and together with me I also have CFO Olof Andersson. Let's have a look at some highlights from the first quarter. Demand remained relatively stable throughout the quarter however with a Slightly negative organic growth of 3.5%, reaching sales of 1.24 billion. Adjusted EBITDA came down a bit to 100 million in comparison to 119 million in the same quarter last year. And the margin in Q1 2024 came in at 8.1% in comparison to 9.3% last year. And this drop was mainly driven by seasonality effects from an early Easter, strong reference figures from last year, and a somewhat weaker market in some of our segments. That said, the strong development in the water segment continued, and we have now successfully delivered increased sales and profits for five consecutive quarters in this segment. Cash flow generation was strong in the quarter, with operating cash flow amounting to 210 million with a cash conversion of 151%, and while free cash flow per share grew by 96%, which is quite outstanding. This means that leverage remains at 2.5 times EBITDA, which is within our financial targets. We've also completed the strategic review and successfully refinanced the outstanding bond of 900 million, with bank financing and existing cash. And this could be done thanks to a very strong cash flow in the last couple of quarters. And we have now an improved capital structure with lowered interest expenses of roughly 30 million while significantly reducing risk. So after spending the last two years focusing on the balance sheet and ensuring that we have the right capital structure in place, It's also great that we're now back at pursuing acquisitions again and now mainly with a focus on the water segments. Let's have a look at the segments and starting with the water segments. As mentioned, demand remained strong for our products, especially in the UK, which is our largest market. The quarter generated sales of 215 million and a beta of 43 million with a margin of 20%. And this means that we generated organic EBITDA growth of 39%. On an LTM basis, we're now above 150 million in EBITDA with a margin of 20%. And the underlying market here is driven by underinvestment in water infrastructure and climate change. And we're expecting continued stable demand going forward. As mentioned, we are now actively pursuing acquisitions to the segments. Moving on to the services segment, here we're exposed to the installation industry, mainly in Sweden, which continues to face a tough market with lower demand from property owners. Sales is now at historically low levels, but should also mention that the first quarter was impacted by the early Easter that occurred in March this year compared to April last year, which meant three and a half less working days in March. The first quarter generated sales of 415 million and an EBITDA of 32 million. As with the previous quarter, I think it's fair to say that we've done a good job in defending our margins as we managed to generate 7.8% EBITDA margin in Q1, which is basically in line with the same period last year. On LTM basis, we are still at a double-digit EBITDA margin of 10%, which stands out in comparison to the industry as a whole. Lastly, let's have a look at the infrastructure segment. We experienced continued stable demand with sales of 610 million, although we beat the decrease to 37 million. And this was mainly due to the early Easter and strong reference figures from last year. And we have during the quarter won several new projects, which will generate profits throughout the year. On an LTM basis, the segment generates sales of 3.2 billion and an EBITDA of 323 million, corresponding to a margin of 10%. And as for the services segment, we are humble about the short-term development as we're facing an uncertain market. But we think that we are very well positioned with high-quality players in growing niches of our infrastructure. Now over to Olof.

Thank you. We'll proceed to have a look at our net sales and EBITDA development over the past couple of quarters. And we begin with a chart on the left, which shows net sales, where we were down slightly compared to the same period last year. And this graph also clearly shows how Q1 is a seasonally smaller quarter driven particularly by the infrastructure segment. If we move on to the chart in the middle showing EBITDA development, you'll see that EBITDA was weaker than last year, driven by the services and infrastructure segments, as Simon mentioned earlier. And finally, in the chart to the right, the EBITDA margin followed the same pattern as EBITDA, decreasing by 1.2 percentage points compared to the same period last year. Looking at net sales growth, Q1 decreased by 3% compared to last year, and the organic growth was negative 45 million sec, corresponding to a drop of 3.5%. Moving on to operating cash flow during the last 12 months, we continue to see strong operating cash flows and cash conversion, and the development in Q1 was driven by a positive networking capital development. So that was operating cash flow. Now let's look at free cash flow. And we define free cash flow as cash flow from operating activities. So that is including interest and taxes paid. And then change in networking capital. And then we subtract capex spending, i.e. investment in fixed assets. and we also subtract leasing amortization. So basically free cash flow is cash that can be used for dividends, acquisitions and repayment of debts. So for the last 12 months, the free cash flow amounted to 496 million SEK. And that was an increase in a sequential increase up from 421 million SEK in the previous quarter. Let's move on to net debt and leverage development. The net debt is represented here by the pink bars and amounted to 2.0 billion SEC down from 2.5 billion SEC same period last year, which corresponds to a decrease of 20%. Leverage remained at 2.5 times sequentially from last quarter. And it is worth noting that When taking into account earn-out debt, the leverage multiple actually decreased from 2.8 to 2.7. As Simon mentioned earlier, we've revised our capital structure by in April redeeming the bond that was maturing in the autumn of 2024 using our cash, but also by increasing and extending our credit facilities. So we don't have any remaining bond or credit facility maturities in this year or the next. And by that, I hand it back to you Simon.

All right, thank you. Let's summarize. So the quarter generated stable volumes and profitability, however slightly lower EBITDA margin in comparison to last year. And the water segment continues to generate high growth. And I think with our market leading product technology specialists In water infrastructure, we feel confident in continuing to deliver strong growth and profitability going forward. And cash flow has been very strong. We have now generated an LTM free cash flow of half a billion SEK. Thanks to a solid cash flow, we remain within our financial leverage target of two and a half times EBDA. The strategic review has been concluded and we managed to significantly improve the capital structure leading to lowered annual interest expenses of roughly 30 million. We've also streamlined operations with divestitures meaning that we have reduced operational risk while also strengthening the financial profile for remaining operations. And in addition to this we have completed a reorganization and office move in January 2024 leading to annual cost savings of approximately 10 million. As mentioned throughout the presentation, we are now actively pursuing acquisition opportunities and this will be focused on the water segment as this is where we are expecting highest growth and where we have extremely well positioned platforms that are keen to grow with acquisitions. On a final note, economic cycle uncertainties remain high, but with a strong focus on efficient capital allocation and well positioned businesses in the growing infrastructure sector, we feel confident on delivering profitable growth over time. And with that, we open up for questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Carl Bockvist from ABG Sundal Collier. Please go ahead. Carl Bockwist, ABG Sundal Collier, your line is now unmuted. Please go ahead.

Good morning. My first one is on the cash flow progression which has been very strong recently and how we should think about it in the coming quarters given seasonality patterns, the effects of how the current group's cash flow management looks compared to how it looked a year ago. and also what other internal efforts you are taking. I'll start there. Thanks.

Hi, Carl. This is Ole speaking. So cash flow, as we've mentioned in our previous presentations, cash flow is a very high focus for us, especially when it comes to optimizing the network and capital development. However, we should, of course, I mean, as we've said previously, from quarter to quarter, the net win capital will vary quite a bit. But over the long term, we hope to see a steady positive trend. And I think we're seeing some positive signs here because we've had a couple of quarters now with strong cash flow development. So to some extent, of course, that is seasonality effects. But to some extent, that is also... reflecting a positive development, i.e., effects from our work with optimizing the network and capital. However, it's, I'm going to be honest and say that it's quite difficult to identify exactly how much is due to seasonality effects and what is basically underlying improvements. What we have said is that we're trying to achieve, we're aiming for a cash flow conversion of 100% over the long term. And that's a very challenging goal for us to achieve. And we might not be there every single quarter, but that's what we aim for. I can't give a much more detailed answer than that, I'm afraid.

No, understood. But it's also clear you've done a lot of good work on the working capital side. If we just look in terms of working capital in relation to sales and so on, it's been coming down for quite a couple of quarters now. And yeah, this one might also be difficult to answer, but do you have a sort of, based on how the current group looks, if there is a level where you feel the group should be at when it comes to working capital based on how it looks today? might be a range as well.

It's difficult to say but you know eight to ten percent wouldn't be too far off.

Understood. That's helpful, thanks. And sticking on the financial and more short-term oriented question, the timing and the financial impact from the Easter effect, how How much or how do you feel that this could reverse in the second quarter?

Yeah, sure. Hi, Carl. It's Simon here. Yeah, well, I mean, so March is definitely the biggest month for Vestum in the first quarter, right? It's basically the same size as January and February put together. And then April is roughly the same as March. And now, obviously, Easter fell in March and not in April. So there should be some sort of rebound in April versus March. But it's super difficult to quantify that in terms of sales and profits. But we can say that there has been an impact, for sure. But it's difficult to give more details than that, I'm afraid.

Understood. And shifting to... to water, the strong performance there. You mentioned the UK, but how are things progressing in other regions or verticals, how you would like to distinguish them?

Sure, thanks. I think as we mentioned in some of the comments on the segments in the report, the Nordic region is growing as well. We're seeing growth in essentially all of our core markets here. But the UK market stands out. And that is due to two factors, really. One being the UK water infrastructure market is heavily underinvested. And I think we're expecting record amounts of investments going into that market in the next couple of years. So that's one thing. And the other thing is obviously climate change with the floodings and droughts. And for us, it doesn't really matter whether it's a flooding or a drought. As long as the duration is long, it's good for our products. And there's been a bunch of floodings in 2023, which means that the water levels are still too high, meaning that our equipment is still being used. And now, I think two weeks ago, there was a new flooding in the southwestern parts of England. And whenever this occurs, it's quite disastrous for societies, which means that customer behavior has almost shifted towards using these type of products for a longer period of time. And I think that's what we're seeing now. So that market is progressing very well, and I think we're expecting that to continue.

Understood. I have a couple of more, but I'll get back in the queue first. Thank you.

Thanks. The next question comes from Johan Lankvist Sundin from Carnegie. Please go ahead.

Hi Simon and Olof. Thanks for taking my question. I have two actually. We can stay here at the water segment. Just to get the feeling for getting the expectations right for the rest of the year. How much of a one-off should you say that the kind of growth and the margin in Q1 was? Or how much of that margin improvement year should we extrapolate in the expectations during the rest of the year?

Yeah, sure. Hi, Johan. Thanks for that question. Simon here. So, I mean, as I think I mentioned before, the sort of cherry on top or sweetening the cake, it's always the extreme weather, right? If there's a lot of floodings or droughts or of the sort, that's going to help our businesses and the margin. And that's what we saw in Q2 last year, right? We had a margin of 22%. There was a lot of droughts going on. And that really helped our companies in the Nordic region. And now in Q1, there hasn't been a ton of floodings, but there were a lot of floodings in 2023. And as mentioned, the water levels remained high. So that helped. But this is only, again, the sweetener in the cake. There's also a huge part of the driver here, the sort of underlying growth driver, is the water infrastructure underinvestment. And this could be, you know, investments going into nuclear power stations or what have you, wherever you need to move water or clean water. So, you know, it's difficult to say if 19.8% is, you know, abnormally high. It is a high figure. And I think what we're expecting is along the lines, as we're showing in the slide here, between 17 and 22%. We should be between that going forward as well as we have been in the last six quarters.

Okay, perfect. Still a pretty wide range, but I get what you mean. And then the similar question on the infrastructure segment and basically on margins there, how Given the project you won, as you highlighted, how confident are you that the margin should not drop with a similar amount in Q2?

Yeah, I mean, we're not going to guide on Q2 figures, right? But what we can say is, just to repeat what we said in the report, Q1 was affected by the early Easter, it was affected by by us being between product completions and starts, which basically means that I think 6% is a low figure and 10% last year was a high number, right? So maybe somewhere in between is a good way to start looking into the first quarter at Western going forward for the segment. And I think for the remaining part of the year, what we can say is that we have won a couple of new products that

about to start now for for many of our businesses it's not one or two it's it's it's several in in several of the companies if you will and the price levels on the on those projects are there as it should be or have you cut down prices to safeguard utilization and kind of add-on projects are there a good scope for that which can be good for mornings ahead or any difference compared to what it used to be?

I think that's a good question. We don't communicate order book because we think it's really all about the profitability in the order book and also when those new products are about to start. So without more information, it doesn't give a lot of information. We are very keen on taking the right projects to the right margin. That's more important than utilization, although utilization remains at solid levels. So I think profitability is definitely of the highest essence.

Okay. Thank you, Simon. I'll get back in line. Okay, thanks.

The next question comes from Jacob Marken from Danske Bank. Please go ahead.

Hi, guys. Some of my questions have already been answered, but I was wondering if you look at your projects that you have in your pipeline and if you look into H2, how are you seeing H2 compared to how you saw H2 last year? So if you

you when you stood here last year do you think the market condition and your pipeline looked the same or has anything shifted in in how h2 looks looks from here yeah i mean uh hi uh jacob and uh and thanks for that question uh you know since we don't communicate order order um backlog order or order intake uh we're not going to do that now either, right? But what we can say is that we don't really have a changed view on H2 now in comparison to the last couple of months. So, I mean, I think that for a business like ours with infrastructure, water, and services, the first quarter is obviously the smallest one, and then it picks up throughout the year. And if there are any changes now in comparison to the last couple of months, it might be that there are some more sort of light glimpses going forward. But I mean, it's too early to say. The market uncertainty remains relatively high. And I think visibility is now in comparison to two to three years ago, it's more limited. And that's what we're seeing, really. We don't really see it in the in the figures so much, but we do see it in a more limited visibility, I think.

Thank you.

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

Yes, thank you. Some of my follow-ups have been answered now, but sticking on all segments, but perhaps especially infrastructure, if we look into the future quarters and just compare to the numbers you've provided now for last year, is there anything worth highlighting from your side, apart from water being at a very high or good 22% level? I mean, the 9% in service and the 12-ish in infrastructure, are those fairly representable profitability levels, or would you say that, you know, for example, infrastructure could also be a bit on the high side last year when we think about how the market is this year?

Yeah, hi, and thanks again for that question, Carl. I mean, we're getting very close to to guiding on specific figures. I mean, what we can say in terms of last year, right, if we were to focus on 2023, I think for the infrastructure segment, 12% in Q2 is a high number. That's not to say that it's not reachable this year, but 11.8% in a given quarter for the infrastructure segment is a high number. Q2 should be a good quarter for us. I mean, in Q3, there's there's July and in Q4 there's December. So in Q2, we don't really have those holidays or vacations that disrupt the quarter. So, I mean, it should be a good quarter profitability-wise. That said, I mean, 12%, yes, it's a high number. And looking at the services segment, I think, I mean, Looking at services overall, we're exposed to the installation market, which is expected to, I think, see a negative organic growth of 6% this year. And I think first half would have a higher negative impact than the second half. So I think what we're seeing is really just that, right? The same as the installation market is seeing. The first half should be a little bit tougher than... than the second half of the year.

Understood. That's helpful. Thank you.

There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

Right, very good. Simon here again. Yeah, there's been a written question and it sounds like this. Can you elaborate a bit on the acquisitions you are pursuing? Yeah, sure. So I think what we are pursuing now is really acquisitions in the water segment. I mean, the water segment performed 39% organic EBITDA growth in the first quarter, a margin of 20%. And And here we have super strong platforms that are also sort of eager and keen on growing with acquisitions. And they have also some very solid structural capital, which means that they could absorb more volumes in terms of acquisition. So this is where we will allocate our capital going forward towards the water segment. We are seeing some really interesting activities going on in the UK market where we would like to add some more aspects that would give us more connectivity, that would give us a sort of higher technology height to that business. So I think we are expecting to be able to complete just a couple of acquisitions this year. All right. I think that was the last question. So with that said, thanks, everyone, for listening. Thanks for all the questions and wishing you a great weekend once you get there.