Vestum AB

Hi and welcome to our presentation of Vestern's report for the second quarter 2024. My name is Simon Gothberg and I'm the CEO of the company and together with me also have Olof Andersson, CFO of the company. Now let's have a look at some highlights from Q2. We have successfully continued to reduce financial net debts including earnouts by some 53 million. And we have seen a general positive shift in how our businesses view their market outlook. At the same time, activity was lower than in the previous year with organic growth of minus 9% and a decline in EBITDA margin of 9.7%. As with earlier this year and also in 2023 really, the water segment continues to develop strongly and is characterized by strong structural growth with a limited sensitivity to the economic cycle. This has made us to complete Vestum's first acquisition in two years after end of the quarter, which further strengthens the water segment and our position in water infrastructure. Operational cash flow amounted to 118 million, bringing cash conversion on an LTM basis to 107%. Leverage increased dramatically. slightly to 2.7 times and going forward, we have a balanced focus in capital allocation between acquisitions and reducing leverage. Let's have a look at the segments and starting with the water segments. As mentioned, we are experiencing continued stable demand and profitability with the strongest developments in the UK during the quarter. There are some really strong reference figures for the segments as there was an extreme drought in the Nordics in April, May 2023, which had a positive impact on volumes and profitability in the previous year. And this year, extreme weather was absent, but we still managed to improve the EBITDA margin and deliver an EBITDA of 48 million, which is in line with last year. And we're expecting solid demand and profitability going forward. and we'll continue to explore acquisition opportunities after I've completed a really great acquisition to the segment. Again, as mentioned after end of the quarter, and we currently have ongoing discussions with targets in all of our markets. Moving on to the services segment, here we're exposed to the property market, which remained a bit challenging in the second quarter, and this has impacted both volumes and profitability. The lower margin was mainly driven by our product companies, which constitute some 25% of the segment. We have for the first time since the market began to decline seen a positive shift in market outlook. And this is mainly true for the product companies, but also in installation. although they are more natural or neutral in their growth prospects with an expectation to return to growth in the latter part of the second half of 2024. Now lastly, let's have a look at the infrastructure segment. We are generating lower volumes and profitability compared to last year, mainly driven by economic downturn, but also strong reference figures and project timing. This segment is generally positioned later in the economic cycle than services and water, which means that we are now experiencing a downturn for the first time since the economic cycle shifted downwards. And this, however, shouldn't be exaggerated, as it explains only a part of the decline, as again, some businesses face tough reference figures, while some of the larger companies in the segment are between product completion and project starts. And we have, similar to the first quarter, continued to win new projects and the overall market outlook is now more positive than earlier this year. That said, the performance in the second quarter is expected to spill over to the second half of the year and the short-term market challenges remain Now let's talk a bit about acquisitions. We are very pleased that we have completed the first acquisition in two years. And this is an acquisition of PDAS, a UK market leader in wastewater pumping stations. PDAS is an add-on acquisition to Pump Supplies, which is Vestum's largest company and naturally the largest company in the water segment. And the UK water Infrastructure market is heavily under-invested and therefore growing rapidly and pump supplies has developed extremely well in the last five years and continue to do so. With the add-on of PDAS, we have now further improved our strong position in this exciting market. PDAS generates a majority of its profits from intelligent monitoring systems using remote telemetry and cloud-based technology. with a subscription business model. And this means that roughly 60% of their profits are coming from recurring revenue streams. And we can now use the broad customer base in pump supplies, which have been built over the past four decades to further accelerate growth. Both management teams are super excited and already getting started with working on synergies between the companies, as shown in the slide here, sales and pump supplies. is nearly doubling after the acquisition as PDAS generates sales of some 210 million per year and growing. Now over to Olof.

Thank you. So let's have a look at our net sales and EBITDA development over the past quarters. And let's begin with the chart on the left, which shows net sales where we saw a decrease compared to the same period last year. driven by the services and infrastructure segments, as Simon just mentioned. And if we move on to the chart in the middle showing EBITDA development, we see pretty much the same pattern, again, driven by the services and infrastructure segments. And finally, in the chart to the right, the EBITDA margin basically followed the same pattern as EBITDA, decreasing from 11.6% to to 9.7% compared to the same period last year. And moving on to net sales growth, Q2 net sales decreased by 10% compared to last year, and the organic growth drove that decrease by being negative 9%. Worth noting is also that we had some negative impact on net sales growth due to the divestment of Ploetslager. We'll proceed to have a look at operating cash flow during the last 12 months. And the operating cash flow decreased compared to the previous quarter due to lower EBITDA. And the LTM cash conversion was slightly lower than the previous quarter, than in Q1, which in turn was due to a slightly negative networking capital development. So that was operating cash flow. Now let's look at the free cash flow. And we define free cash flow as cash flow from operating activities. So that is including interest and taxes paid and changing net worth in capital. And then we subtract capex spending, i.e. investment in fixed assets. And we also subtract leasing and amortization. So basically, Free cash flow is cash that can be used for dividends, acquisitions and repayment of debt. And for the last 12 months, the free cash flow amounted to 441 million SEK, down from 496 million SEK in the previous quarter. And the main drivers of the decrease were lower operating activities, including the network and capital development. And let's move on to the net debt and leverage development. And the net debt is here represented by the pink bars and amounted to 2.0 billion SEC down from 2.6 billion SEC in the same period last year, which corresponds to a decrease of 20% compared to last year. Leverage increased from 2.5 to 2.7 times sequentially from last quarter, driven primarily by paid out earn out debt. but also to some extent by lower EBITDA. We reduced the earn-out debt by 127 million SEC from 207 to 80 million SEC in the second quarter. And when taking into account earn-out debt, the leverage multiple increased from 2.7 times in Q1 to 2.8 times. in Q2, driven by a decrease in EBITDA over the last 12 months. And by that, I hand it back to you, Simon.

All right, thank you. So in summary, the quarter generated lower volumes and profitability than last year, but as in the last 18 to 24 months, we have successfully reduced a net debt including earnouts. The water segment, which is rather insensitive to the economic cycle, continues to generate solid profitability with an improved EBITDA margin, 23.7%. We have gladly resumed acquisition agenda after two years of full focus on the balance sheet, and we will continue to evaluate acquisitions in the water segment that can generate high returns. Capital allocation-wise, We're balanced between further M&A and reducing leverage, and we will invest our capital where we can achieve the highest returns at reasonable risk. Leverage increased slightly in the quarter to 2.7 times and is expected to remain above our financial target of 2.5 times for the remainder of the year. Overall, Vestum is positioned early in the economic cycle. And even though market uncertainties remain in the short term, we have seen a general positive trend shift in the market outlook for our companies throughout the quarter.