Vestum AB (publ)

Hello everyone and welcome to our presentation of Vestum's year end report for 2024. My name is Simon Gothberg, CEO of Vestum and together with me I also have Olaf Andersson, CFO of the company. Now I'd like to start today's presentation on giving a short summary of the full year 2024. We have accomplished so much and delivered on almost everything we set out to do at the beginning of the year. We went into the year with a strategic review with the ambition to increase our focus on core business consisting of leading suppliers in growing market niches and technologies in infrastructure while also deleveraging. And we have done just that, divested non-core companies and increased the level of specialization in Vestum. Product companies now make up 63% of our profits and our financial net debt including earnouts were reduced by 38% to 1.4 billion SEK down from 2.3 billion. This takes us to a leverage of 2.2 times reported EBDA which is well in line with our financial targets. For many of our businesses the market has been quite challenging throughout 2024 and this can be seen in the decline in sales growth of minus .8% of which minus 6% organically. Sales reached 4.2 billion with an EBITDA margin of 10.5%. Operational cash flows remained stable and increased to 665 million while free cash flow decreased to 204 million. In 2025 free cash flow will be positively impacted by our improved capital structure That will be in place from March and onward meaning full bank financing as our last outstanding bond of 600 million will be redeemed saving approximately 70 million in interest costs per year. Acquisition wise we made our first acquisition in two years in Q3 and given our strong balance sheet we are now in a good position to make acquisitions again. Main focus for platform acquisitions will be on the two segments flow technology and niche products. Let's have a look at some highlights from Q4. As mentioned the challenging market conditions have remained for certain parts of our business but it's good to see that organic growth is going in the right direction. As there's been a sequential improvement compared to Q2 and Q3 we generated organic growth profit in two out of three segments water and infrastructure while the services segment continued to face a rather tough market. And in order to streamline vestum, strengthen our balance sheet and position us for growth as previously mentioned we've divested a number of contracting companies in the infrastructure segment at an attractive valuation and thanks to solid cash flows coupled with the divestitures we have successfully leveraged to 2.2 times report at EBDA. As we have strategically repositioned vestum a new group structure was announced to clarify our strategic focus on growing niches and technologies in infrastructure. And going forward capital allocation will shift from deleveraging to growth. Let's have a look at the segments starting with the water segment. Demand has continued to be strong with sales growth of 31% 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. The margin was as expected lower than last year driven by the acquisition of PDES. That company though continues to perform in line with expectation and continues to improve its EBDA margin. We have after year end secured two significant distribution agreements with Siloam, a global market leader in water solutions which will positively impact our UK operations in the years to come. For the full year this segment generates 20% growth and an EBDA margin of 19% which is in line with last year. Moving on to the infrastructure segment sales growth was consequentially in the quarter compared to Q2 and Q3 but remained negative at minus 8%. Profitability improved for the second quarter in a row with an EBDA margin of 11% mainly driven by our product companies. Products represented 50% of the segments EBDA. For the services part of the segment focus remains on improving profitability. Lastly, let's move on to the services segment. As with the infrastructure segment growth continued to improve sequentially compared to all three previous quarters in 2024 but remained negative at minus 8% as we're still facing a challenging property market. Although it's good to see that sales growth improved profitability was negatively impacted by mainly three factors, less working days in December, lower volumes and some credit losses. Overall the margin came down to 5% which of course is too low for the segment but as the market now picks up with higher volumes which we really have experienced since end of summer and with an increased focus on higher margin projects the profitability will improve for these companies. Now as we have spent the last two years on strategically repositioned Vestum and to clarify our strategic focus on growing market niches and technologies we have implemented a new group structure from January 1st 2025. The group will be divided into the three segments flow technology, niche products and solutions. Starting from the far left here, flow technology. We're focused on market leading products that improve water infrastructure. The segment offers pumps, filters, measurement technology, pipe systems and other flow technology products. The segment generated strong sales growth of 15% in 2024 with a margin of 18.4%. And going forward we will invest in both organic and acquisitive growth to the segment. Moving on to the middle part, niche products. We have leading product companies in selected technology niches. The segment offers mainly safety systems, containers and fasteners. Sales dropped for the segment in 2024 driven by the companies with exposure to construction and markets. The full year beta margin of .3% is quite low. It should be above 15% for the segment and we will continue to focus on improving margins for certain parts of the segment while we'll invest in growth in others both organically and in new platform acquisitions. Moving on to the far right here, solutions. Here we offer specialized solutions for maintaining, developing and streamlining properties and transport networks. Segment offers renovation of concrete structure solutions regarding ceiling layer and technical installation as well as other installation services. The segment has overall faced challenging market conditions in 2024 with sales dropping some 7% while the beta margin came down to 7.1%. The margin here should be above 10% and we're continuously working to improve the profitability. Now over to Olof.

Thank

you

Simon. Let's have a look at our net sales and EBITDA development over the past couple of quarters. 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. If we move on to the chart in the middle showing adjusted EBITDA development, we see the same pattern with a decrease which in turn was driven primarily by the services segment. And finally in the chart to the right, the EBITDA margin also decreased compared to the same period last year again mainly driven by the services segment. And that brings us to the next slide which is net sales growth. And we saw negative organic growth of .7% in the quarter. At the same time the acquisition of PDAS contributed positively to net sales growth and in total net sales in Q4 decreased by .5% compared to the same period last year. We'll proceed to have a look at operating cash flow during the last 12 months. And the operating cash flow increased versus last quarter mainly driven by change in networking capital. And cash conversion also increased somewhat compared to previous quarter to a quite solid 105%. 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 change in networking 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, acquisitions and repayment of debt. And for the last 12 months the free cash flow amounted to 204 million SEK. And that corresponds to 49% of EBITDA. It's worth noting that the free cash flow presented here is negatively impacted by the divestments we've made in the sense that all operating cash flow generated by the companies that are being divested has been excluded in accordance with IFRS 5. But the positive effect on financials that we get from these divestments is obviously not reflected here. So that's important to note. On to the net debt and leverage development. So the net debt is represented by the pink bars in the chart and amounted to 1.4 billion SEK, down from 2.1 billion SEK same period last year. Leverage also decreased from 2.1 times to 2.2 times sequentially from last quarter driven by the divestments that we have mentioned previously. Also, earn-out debt was reduced to 19 million SEK in Q4. And when taking into account earn-out debt, the leverage multiple was 2.3 times. And by that I leave it back to you Sami.

Alright, thank you. So in summary, we have sequentially improved organic growth and continue to deliver strong results in the water and infrastructure segment, as also seen in Q3. In the services segment however, profitability continues to be impacted by challenging market. And we are seeing signs of recovery in 2025, as seen by the sales volume development throughout 2024. Our capital structure will be heavily improved in Q1 2025, as we are redeeming our last outstanding bond and transitioning to full bank financing, leading to substantial annual interest cost savings. The level of product companies continues to increase and reach 63% of Group EBITDA in 2024. And we have established a new group structure for growth and expect to make new platform acquisitions in the next couple of months. Our capital allocation focus will shift from deleveraging to growth, as we are currently evaluating several acquisition candidates and organic growth initiatives. And as with previous quarters in 2024, market uncertainties remain in the short term, but the positive shift in market outlook has continued in Q4 and we expect to return to growth in 2025. And with that we open up

for

questions.

Hello guys and thank you for taking my question. So it's mainly regarding the service companies for you and how you view the development for the coming quarters. I mean you talked about signs of recovery in the market for 2025, but you also say that the near term outlook remains a bit challenging still, I believe. So maybe talk a bit more about how we see the development for the service related companies here in the coming one or two quarters. Should we expect more similar performance in Q1 as Q4 or can we expect gradual improvement or how should we view that, both in terms of order and sales and also for margin development? Thank you.

Yeah, sure. Hi, good morning Simon. It's Simon here. Yeah, so I mean in the services segment we've seen a improvement on sales really quarter by quarter throughout 2024, right? That's Q2 was a little bit better than Q1 and then Q3 a bit better than Q2 and Q4 a bit better than Q3 in terms of volumes. Now the margin was obviously too weak in Q4 here with a little bit over 5% and that was driven by those things that we mentioned both in the report and the CEO comments in the actual report, right? So basically what we're doing now is that we're increasing our selection on high margin projects. We've seen throughout the weaker economy that it's been some price pressure both from sort of the larger construction companies coming into the installation space and also from other smaller players doing really what they shouldn't be doing. And that has created a price pressure and typically, you know, our mantra to our businesses is to not chase utilization, but to rather be selective. But naturally in a weaker economy what happens is that some projects are taken with a lower margin really. And that happened in the first part of 2024 and we're now seeing a part of that in Q4. And we're also consolidating some of the installation companies now. We have some terrific businesses and for example technical installation and we're not creating a

group where they're coming together. They can have a strength and offering to

customers and also some of our installation companies. And then we also have made some efficiency measures and also with the weaker economy, there has been some credit losses. They weren't really material and we have reserved all of it for Q4 here. So that did have an impact on Q4. We're not expecting that to impact really the numbers in 2025 unless things happen to our customer base, right? And now going into 2025, we're basically seeing the same pattern as in 2024 with a volume pickup. But the margins in some of the projects that we took in the first half of 2024 will most likely impact even the first quarter, but not so much later on during the year. So yeah, I guess with everything we're now doing combined with an upbeat in the market compared to a year ago, our view is that we will return to both organic growth and a margin expansion for 2025.

All right, thank you for that. And also now with the new group and all that and about the cash conversion, I think you showed a slide there on the LTM cash conversion around 50% if I'm correct. How should we think about the cash conversion now for this year, you think, with the new group?

Yeah, so the operational cash conversion is 105% on LTM basis. You're obviously referring to the free cash flow in relation to adjusted EBITDA, which is where I mean that number is crucial to us. And we're following that religiously in Western. And it's also it's basically the reason for that being is that in order for us to be self-financed and acquisitive growth and to reach our growth target of 15%, we like to see that number coming up. And it should increase in 2025 driven by many different factors. One is obviously the new capital structure, which will be in place from March 3rd and onward. And it's expected to save us 70 million in interest costs on an annual basis. Right. Then we had free cash flow, 204 million in the full year of 2024. And then on an annual basis, expecting to save 70 million in interest with the new capital structure. And on top of this, we're now investing more so in organic initiatives to speed up the organic growth. And as you can recall, organic growth was negative in Q4, but it was sequentially better than both Q2 and Q3. So we're expecting organic growth to improve. And we're working a lot, as you know, with our margin. And we like to see margin expansion, you know, year on year. And our financial target is 12%, but the ambition doesn't definitely not stop at 12%. So with all these things combined, we're expecting to see an uptick in both free cash flow in absolute numbers, but also in the relation to adjusted EBITDA.

All right. Thank you so much. That's all for me.

Thank you.

The next question comes from Johan Lundqvist Sunden from Carnegie. Please go ahead.

Hello, Simon and Ulof. Thank you for taking my questions. Two from my side. First, just on something about the service business, in ballpark guidance on how big the credit losses were in Q4.

Yeah, sure. So it was roughly a little bit less than five million. So if you look at the EBITDA drop, I guess roughly 15% was due to credit losses.

And if you summarize the full year 24, what was the total amount of credit losses that you had towards various kinds of clients within the construction industry?

Yeah, I mean, it wasn't very material. We haven't really mentioned the credit losses as any material impact on any of the quarters in 2024. I mean, if you look at Q3, Q4, 23, there were some credit losses. And then we obviously make provisions. We make reservations on an ongoing basis for things that could be expected to be bad debt. It hasn't been material. The big part was in Q4, 24.

Okay, very clear. And then just another question on the water segment. You mentioned during the presentation, an agreement with the asylum. Is it possible to use some color what that can mean for the water business in potential revenues per year going forward?

Yeah, sure. So it's basically two agreements, one for the acquisition that was made in August for PEDAS, which is now a subsidiary to the platform company Palm Supplies and one for Palm Supplies. The one for Palm Supplies is roughly two million and it's actually a little bit less than two million. And this is in pounds in PEDAS. So just short of four million pounds in terms of revenue. And the margin for the Palm Supplies part of it is really solid. And it's a little bit lower on the PEDAS part, but it will improve after very clear synergies on that agreement with the existing business. And there's also now there's a lot of things happening now to the water infrastructure space in the UK. The new investment cycle begins in April this year and goes on for five years with a huge record of 104 million pounds being invested. And a big part of that is water transfer. And all we do is water transfer, moving water from one place to another, which basically means that we're becoming less dependent on extreme weather flooding and droughts. We're doing lots of things where they basically need to move water from reservoirs, from dams, what have you, in different parts of the infrastructure. So quite excited about the full technology part of it in the UK going forward.

And when does the Syla and McGree-Mell kicks in? Is it from 1st January or is it later in the spring?

Yeah, no, it kicked in in mid-January.

Excellent. Yeah, I think that was my only two questions actually. So I get back in line. Thanks a

lot. Thanks.

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

Hi guys and thank you for taking my question. So some of them have already been answered, but I can maybe add a question to the infrastructure segment. You know, a good margin quarter this time around as well. And I'm just wondering your thoughts on, you know, if we see a market pick up here, how would that affect margin? You know, I guess, probably companies performing well. And if you have more blue-collar workers, so to say, in work in infra, would that impact margins negatively or do you think you can hold them on this level?

Yeah, hi, Jacob. And good morning. Well, yeah, so the product companies of the infrastructure segment, they're now part of either Flow Technology or Niche Products and they continue to perform strongly. And we're expecting those both volumes and margins to perform quite well in 2025. And the services part of the segment is now a part of solutions, obviously, right? And here we're facing quite high volumes in the first part of 2024 in comparison to 2023, i.e. there was a high volumes in the services part of infrastructure in the first part of 2023, but margin wise, it was quite weak. And with everything we've done now and with our focus being on margin expansion and cash flow for those businesses, we are expecting a margin uptick for the services part of infrastructure going forward. But volume wise, it could be a little bit challenging. And obviously, that would play another part of the margin expansion going forward. So, yeah, definitely doing lots to improve the profitability for those companies.

Perfect. Thank you. And then I had a question on Flow Technology. Just wondering which or if it's several companies that you have moved, I guess, Flow Technology is mostly water segment, but it seems like it's a little more top line than only water. So I'm just curious on what kind of companies you have moved to that segment.

Yeah, sure. So we moved two companies from infrastructure. Basically, the product companies that are working with water and Flow Technology things. So Podrian and Mark, who's working with pipe systems and moisture protection, protecting from water flowing into different parts of our infrastructure. So those two companies were moved into the water segment, now creating Flow Technology.

Perfect. Thank you. And then I just had a question. If you are planning on releasing full quarterly numbers in conjunction with CMD, or how should we think about that, especially cash flow profile on the different quarters?

Yeah, no. So basically what we're releasing before the first quarterly report of 2025, which I believe is in late April, perhaps April 29, is the appendix that we attach to the Q4 figure. So in the CMD, it won't be as financial heavy. It will be more focused on our strategic focus going forward and basically what we're expecting, basically how we think about capital allocation and where we're expecting to invest in new acquisitions and new platform acquisitions, etc.

Okay, perfect. Thank you. That was all for me.

Okay, thanks, Jacob.

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

Okay, yes, we do have two questions here. I think one of them was already answered, but I'll read it anyways and we'll see if there's any more color to be added. So here it goes. In the services segment, you have credit losses, bankruptcies. What was the magnitude of these in Q4? As already mentioned, a little bit less than 5 million. And will they continue in Q1 in 2025 or will reservations mean that it won't be an issue any longer? Yes, we basically took 100% of the exposure we had in Q4. That was taken in Q4. But then again, things can happen going forward in 2025 that we're not currently aware of in our customer base. So that will naturally have an impact if that occurs. Next question is, you also have some margin pressure in the projects taken on during the spring. Will these continue to impact Q1 slash H1 as well and at what magnitude? Yeah, so here goes the answer. So these margin pressure projects were, as mentioned, taken in the services segment in the first half of 2024. And we would expect that some of those are ongoing in the first quarter of 2025 as well. Not a lot of them will have an impact on Q2 and basically the major part of 2025. Full stop. OK, next question. Very specific question. What has been the driver behind the small increase in repayment of these liabilities in cash flow statements? Is this level what we should expect going forward? So

this is all of I will be answering this question. So when it comes to the separate quarters, this number may vary a bit from quarter to quarter because of timing differences basically. But there is also an increase if you look at the full year figure. And I think it's reasonable to the driver behind that increase is spread over higher leasing costs from machinery, but also due to premises. And I think that full year figure when it comes to leasing payments is quite representative for the group's leasing payments.

OK, very good, Olof. So that was the last written question. Yeah, as mentioned, I think both Olof and myself and the entire team are very excited about again investing in growth, investing for 2025 both organically and M&A wise. So we are expecting to make acquisitions here and hopefully even the first half of 2025, which we definitely look much forward to. So we thank everyone for dialing in and asking questions. See you again next time. Bye bye.