Vestum AB (publ)

Hello everyone and welcome to our presentation of Vestum's report for the third quarter 2024. My name is Simon Gothberg, CEO of Vestum and together with me also have Olle van der Schomp, CFO of the company. Let's have a look at some highlights from Q3. Despite rather challenging market conditions we have successfully improved profitability in the quarter with an adjusted beta margin of 11.5%. The margin uptake is mainly driven by our increased focus on product companies and these companies have market leading positions and have in general experienced a solid market. Products now represent 50% of group evita both in the quarter and on an LTM basis. Looking at overall demand the positive shift in market outlook from Q2 has continued but organic growth remains negative at minus .7% driven by the softer economy. That said then we continue to see very strong demand in the water segment not least in the UK and thanks to solid cash flow in Q3 with operational cash flow of $200 million leverage has only increased slightly to 2.8 times EBDA even though we made a rather large acquisition in August and going forward we remain balanced in our capital allocation between acquisitions and reducing leverage. Now let's have a look at the segments starting with the water segment. Demand has continued to be strong with sales growth of 43% driven by both the PDES acquisition and organic growth. Essentially all markets have performed well and as with previous quarters highest growth was seen in the UK. EBITDA grew by 35% of which 9% organically and the margin was slightly lower than last year driven by the acquisition of PDES. PDES has however performed in line with expectation and continues to improve its EBITDA margin driven by the highly scalable and profitable subscription business of intelligent monitoring systems. And we have also already extracted procurement synergies with pump supplies by significantly increasing the discount supply rate with the largest supplier and we're actively pursuing additional acquisitions to the segments. Moving on to the services segment the property market remained challenging in the third quarter which impacted both volumes and profitability however sales decreased at the lowest rate since at the beginning of the year and the lower margin in the quarter was mainly driven by lower volumes and increased competition in the market. And as in the second quarter we continue to see an improved market outlook with short deadly times to our customers and we expect to be back at volume growth in 2025. Lastly let's have a look at the infrastructure segment. The profitability was strong in the quarter with an EBITDA margin of .1% mainly driven by our product companies. Products represented 30% of the segments EBITDA in Q3 compared to 23% last year and the decrease in sales in the quarter was driven by certain businesses that are between product completion and project start. And as with the services segment we continue to experience an improved market outlook even though short-term challenges remain. Now we have for over a year talked about the importance of products in our portfolio and as mentioned 50% of Group EBITDA on an LTM basis is made up by market leading product companies investing and as seen by the pink bars this share has increased rapidly since 2021 and continues to do so. These companies have leading positions with price leadership and accumulated EBITDA margins above 15% and an EBITDA over networking capital of 67% which I think really stands out. Some companies have own products that can be exported to other markets and some are value-added distributors. Our capital allocation in M&A is focused on acquiring additional market leading product companies and one should expect the EBITDA share of 50% to increase substantially going forward. Now over to Olof.

Thank you. So let's have a look at our net sales and EBITDA development over the past couple of 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 just like the previous quarter by the services and infrastructure segments as Simon also mentioned. And if we move on to the chart in the middle showing adjusted EBITDA development we see pretty much the same pattern with a decrease again driven by the services and infrastructure segments. However finally in the chart to the right the adjusted EBITDA margin actually strengthened compared to the same period last year from .4% to 11.5%. And we move on to net sales development and Q3 net sales decreased by 8% compared to last year with the organic growth being negative by 11% and worth noting is also that we have a negative impact on net sales growth due to the divestment of Florets Lageren in the second quarter while the acquisition of PEDAS in the third quarter contributed positively. We'll proceed to have a look at operating cash flow during the last 12 months. The operating cash flow decreased versus last quarter driven almost entirely by network and capital. And the cash conversion also decreased somewhat compared to previous quarter but still remains quite solid at 100%. 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 pay and change in network and capital and then we subtract capex spending i.e. investments in fixed assets and we also subtract leasing amortization. So basically free cash flow is cash that can be used for dividends acquisition and repayment of debt and for the last 12 months the free cash flow amounted to 379 million SEC down from 441 million SEC in the previous quarter and the main driver of the decrease was the net working capital development. And the free cash flow of 379 million SEC amounted to 69% of EBITDA so basically 69% of EBITDA was converted into free cash flow. Now if you strip out change in net working capital from free cash flow you get a cash free for the last 12 months of 325 million SEC and you're still close to 60% of EBITDA and we think that that is a quite strong number to emphasize when you consider the fact that we still have a quite expensive capital structure with a bond of 600 million SEC with a margin of 638 basis points plus stable. And let's move on to net debt and leverage development. The net debt is represented here by the pink bars and amounted to 2.1 billion SEC down from 2.4 billion SEC same period last year and leveraged increased from 2.7 to 2.8 times sequentially from last quarter driven by the acquisition of HIDAS. It is worth noting that we reduced the earn-out debt from 80 million to 62 million in Q3 and when taking into account earn-out debt the leverage multiple increased from 2.8 in Q2 to 2.9 times again driven by the acquisition of HIDAS and by that I hand it back to you Sami.

Alright

thank you. So in summary we have successfully improved profitability although market conditions remained challenging this is driven by our increased focus on product companies which now represents 50% of group EBITDA both in the quarter and on a multi-annual basis. Cash flow was solid in the quarter with operational cash flow 200 million and free cash flow 87 million. We continue to experience strong demand in the water segments in basically all markets and with highest growth in the UK. We have also successfully onboarded the acquisition of PDAS and further acquisitions are expected mainly in the UK. That said we remain balanced in our capital allocation between reducing leverage and investing in growth but we also acknowledge we generate strong cash flows

and as with

previous quarters in 2024 market uncertainties remain in the short term but the positive shift in market outlook has continued in Q3 and we expect to return to volume growth in 2025 and we have already initiated several growth organic growth activities across the portfolio that will show results next year and with that we open up for questions.

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 Simon Johnson from ABG Sundal Koliya. Please go ahead.

Hello guys first few questions on infrastructure. Can you maybe just elaborate a bit more on the sales volume. If I understand correctly a bit of a product companies in the segment increased year over year and I wonder if that was due to stronger profitability or did you also see sales increase for the product companies?

Yeah sure hi Simon it's Simon here. Well yes I would say that the increase in margin in the infrastructure segment is mainly due by margin expansion for the product companies. They also had a slight decrease in volumes as with the services companies but lesser so. So it's not really driven by volume growth but more so margin expansion driven by I'd say favorable product mix but also efficiency measures. So for example some of these companies are selling more of their renovation products versus products for new production.

Excellent thank you and on the service oriented side of infrastructure you talked about a few companies that are between contracts basically. How should we view that coming quarters or was it more isolated to queue free or how should we think about that?

Yeah I mean I think it's basically the same as in queue two right where we had similar patterns and where we said that we're expecting to see this pattern for the remaining of the year. So I would say that basically what we saw in queue two and queue three we're expecting to see that in queue four as well for the services side of the infrastructure segment. But as with queue two that the order books are filling up and basically the same as the services segment the market outlook is looking a bit better for 2025.

Got it and when you talk about 2025 is it mainly you know you talk about the full year that you expect volumes up but is that true for the first half as well you think or when do you think we should look forward to the volume increases?

Yeah you know it's a bit early to guide on specific quarters in 2025 I would say but I mean if anything looking at the water segment we're expecting that segment really to continue to perform quite nicely although we're looking at some more sort of difficult reference figures in that segment going forward. And in the services segment I would expect the volume growth to be rather you know queue two, queue three, queue four rather than in the first quarter and you might be a little bit faster in the infrastructure segments.

Okay thank you. Just a last one on working capital you had stronger performance on the product companies. I mean how does that translate into working capital changes you had a slight capital increase this year compared to a release last year so I'm just wondering if stronger contribution from the product side has anything to do on the working capital or maybe you can elaborate a bit more about the moving parts in working capital development compared to last year.

I mean this is all of speaking. Now I wouldn't say that the change in that working capital is largely due to the product companies. I think it's now networking capital development does swing a bit between the quarters and I think that has more to do with the dynamics of timing throughout the quarter. So for instance if business after summer has picked up late in the quarter then you will have a larger capital tie-up than if it has picked up early in the third quarter. So I think it's mostly timing aspects actually rather than the company mix.

Okay excellent thank you for that. That's all from me so I'll get back into the queue.

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

Hi guys so first question from my side if you could help us a little with the infrastructure and how we should think about the margin going forward. So very strong margins here of course and I guess driven by the high share of product sales here but how should we think about the companies with larger contracts and projects. I guess those were weaker here than last year as sales were down quite a bit. How should we think about the margin development when they start to pick up? How would that affect margins?

Yeah hi Jacob it's Simon here. Well I mean I would say that historically we've been at margins of above 11% or around 11 and 12% in the segment and as the product companies are growing as a share of Ibita in the segment both organically but also from further acquisitions going forward one should expect that the margin in that segment should increase. And as you correctly mentioned some of the larger infrastructure companies on the services side with projects have come down really throughout 2024 right and as we expect them to to sort of normalize next year it may have you know a slight impact on the margin but again the organic growth for our product companies is quite good in a more normal market and we can control their organic growth in a better way meaning that we can actually export these products and really bring them cross-border to our other markets and again adding acquisitions to the segments one should expect that we will continue to grow with product companies when it comes to M&A and those companies typically have higher margins and price leadership.

Okay perfect thank you that's very helpful and then a question on cash flow so could you just help us with I mean there's been some changes to the portfolio here in the last year and so it's quite hard to look back at it and I mean the market has been been going downwards and stuff like that so could you just help us with what do you think is the normal seasonality here and do you expect the Q2 to be the biggest working capital tie-up quarter how should we look about Q3 in the future and this still like Q4 Q1 where we should expect releases?

Hi so this is Olof speaking so it will swing a bit between the quarters so I think the underlying trend is that you have a networking capital release in Q4 or Q1 and that can swing a bit depending on the calendar effects or bigger projects being finalized in Q4 or not and then typically you see a networking capital build-up in Q2 and then Q3 can go a bit either way actually because it depends a bit on how quickly the business has picked up in Q3 so if you have a lot of intensity in this in the second half of the quarter you will have a like you will likely have a quite big capital build-up during the end of the quarter whilst if that is not the case it might be a networking capital release instead so I would say that's a very general description of the networking capital dynamic.

Okay perfect thank you I'll get back in line.

As a reminder if you wish to ask a question please dial pound key five on your telephone keypad. There are no more questions at this time so I hand the conference back to the speakers for written questions or closing comments.

All right yes so we have two written questions here the first one goes like this you mentioned that margin in the water segment is lower driven by the acquisition of PDAS should we expect lower margins in this segment going forward well so the acquisition of PDAS right so the margin in PDAS is roughly 11 to 12 percent and as seen in the report when we talk about acquisitions right the the PDAS company has increased its margin throughout 2024 which is driven by the highly scalable and profitable subscription business so I think year to date January to November the company had a margin I think nine percent and it was something like 13 percent in Q3 and the margin is continuing to increase in that company and as you may or may not remember from when we made the acquisition they have basically three business areas and the biggest one called proactive has a margin of some 25 percent and it's biggest in in profits but it's one in sales but it's also growing faster so as that continues to grow the margin will continue to to increase and on top of that we have lots of nice synergies with pump supplies and I mentioned some of these in this presentation right earlier with the procurement so in the short term yes the margin will likely come down just a little bit in the water segment but as the PDAS company continues to to generate higher margins the profitability will come back essentially so that was that was the first question the second question goes like this from a capital allocation perspective we are balanced between reducing leverage and pursuing acquisitions that was in quotation and the question is does this mean that you might embark on acquisitions despite leverage being above target well and I think as mentioned in Q2 right we got a leverage of of 2.7 times EBDA and I mean given the refinancing that we did earlier this year we have significantly reduced our capital costs which means that 2.7 or 2.8 times is less of an issue now than it was a year ago that said we are very serious about our financial target a maximum two and a half times so if we are to you know if we were to stretch our leverage to above three times we wouldn't make acquisitions but we also acknowledge that we have a very strong cash flow generation looking at our free cash flow on an LTM basis it's 379 million and if you were to divide that by a multiple of six which is basically where we have made acquisitions historically you would arrive at basically 60-65 million in acquired EBDA right so we feel like we can continue to to grow by acquisitions just given our strong cash flow really and but we are balanced between leverage and acquisitions so I think that marks the last question for for today's presentation and with that we wish everyone a great day and thanks for all the good questions bye bye