Sdiptech AB (publ)

Hi, everybody, and welcome to our Q3 presentation and Q&A. I am Anders Mattson, CEO of Sdiptech, and I will be presenting the results together with CFO, Bengt Lejdstrom, here today.

I will start with the highlights of the quarter before we go into the more general content with the financial results. So in the quarter, we have implemented and streamlined our portfolio and Sdiptech will become a more coherent and better aligned group going forward.

Until today, we have consisted of 41 companies in our 4 business areas. We have historically been growing our adjusted EBITA at a good level, but we have, at the same time, been quite volatile.

Our portfolio has partially been based on installation companies, companies with exposure to cyclical end markets like construction and quite a few companies with a margin around 10% in the group. And these companies were usually or most of them required before our strategic shift into.

So if we look at the financials here for this total portfolio in Q3, we had approximately 19% in adjusted EBITA margin and 12% return on capital employed. If we look in the middle, so what have we done?

We have assessed on our key strategic priorities. We prefer product-based companies.

We like markets with strong underlying growth drivers. And we would like to see a clear niche, which is usually protected a good way and that's also the reason why we [Technical Difficulty] in many of our business units.

So based on this assessment, we have made a decision to divest 11 companies from the group. We have already started the process of finding new homes to these companies, and we have good progress with several of divestments so far.

As these 11 companies only stand for roughly 3% of the year-to-date adjusted EBITA, their P&L effect is minor. On the balance sheet, the result will be a write-down of SEK 500 million in goodwill and other intangible assets.

And Bengt will come back to this later in the presentation. So if we look to the right here, from today and going forward, we will consist of 30 companies and a better aligned portfolio.

We believe we will be able to more proactively drive organic growth with this portfolio. And from our point of view, it's also a better allocation of capital towards our strategic priorities going forward.

Financially in the quarter, as I said, is a minor effect. Adjusted EBITA will be reduced by SEK 7 million from SEK 242 million to SEK 235 million.

but our adjusted EBITA margin will go up from 19.4% to 21.3%. And return on capital employed will increase from 12% to roughly 13%.

So in the presentation going forward now, I will present numbers according to the core portfolio. So summary of the quarter from a financial perspective, net sales increased with 9%.

That was 4.5% organic growth and roughly 9% due to acquisition. We were glad to see solid demand from all our business areas.

It was positive to see a slow recovery from some larger business units where orders have been pushed forward in the year from Q1 to Q2 and now in Q3, we finally got some sales realized. Adjusted EBITA increased with 9% at 2.4% organic and rough from acquisitions.

The increase in sales made EBITA grow as well. So it's not only because of cost adjustment.

And year-to-date, we are still behind last year's numbers, but positive with the organic growth in the quarter. We have also been able to maintain the margin of 21.3% in the quarter, which has been quite challenging due to tough market conditions, both on price and also actually to getting the customer to commit to the orders.

We had a strong cash flow generation in the quarter as well of 94%, which resulted in SEK 255 million in cash. And that was primarily a result of improved inventory levels from a high level in the last quarter.

If we're going into the net sales, the net sales increased with 9% to SEK 1,102 million. And as I said, there was a good demand, solid demand from all our business areas.

And the 4.5% organic growth is something we are, of course, satisfied with in the quarter. As I also talked about previous quarters, we have experienced a slow first half of the year, especially from some larger business units in the group.

So it's a positive sign that I mentioned as well that we have been able to deliver and recognize sales in the quarter. We have also had a strong contribution from acquisitions.

And some of the acquisitions is influenced by strong growth drivers linked to security around data center as one example, and that is in our smallest business area, Safety & Security. In the graph to the right, we have separated the core portfolio since 2023.

And from this date, you can see we have achieved a CAGR of 13% in sales growth. If we're looking at the sales split, the sales split of the portfolio looks now a little bit different.

After the separation of the core, Sweden has decreased in size and now it's only between 5% and 6% in total sales from the portfolio. U.K.

is still our biggest market. We believe we are successful in the U.K.

We like the trend with the long-term investments in infrastructure assets. Other Europe is now roughly at 20%.

This is a geographic area we foresee to continue to grow in. If you look to the right, turnover by type, proprietary products is the dominant type of revenue for us as a group.

Installation has been reduced as a result of the core portfolio. The installation and service that you still hear -- you still see now is primarily on our own products.

And we have several companies with a strong service offering that enables stability in the earnings. And that's usually both service on hardware, software and manual labor hours as well.

But again, on our -- primarily on our own products then. Coming into the adjusted EBITA.

Adjusted EBITA increased by 9% to SEK 235 million. That is, for us, a stable profit growth with 2.4% organic growth.

We also had a strong contribution from acquisitions with 10%, and it's coming primarily from companies within Safety & Security and also from companies within Energy & Electrification. And again, that's the trend around security for data center that has been driven this acquisition quite good in the quarter.

The margin at 21.3%, we have been able to maintain from last year. As I mentioned before, it's been a price pressure in the market.

So being able to maintain this margin is a result of a good cost control, both from activities within purchasing, but also from overall overhead cost development. If we look at the diagram to the right, we see a stable and high level in adjusted EBITA in percentage since 2023.

If you also then look at the CAGR, the CAGR of the EBITA is at 11%, and we know we can do better than this. But in this graph, it's affected by a slower pace of acquisitions since last 1.5 year and it's also a weaker, as we know, organic growth since the beginning of 2024.

So looking at the development in our 4 business areas, I think it's important to mention that we believe our 4 business areas serves us well as a group. They are broad enough to enable good M&A opportunities within each and every business area.

And they also align our focus to the markets with strong underlying growth drivers, which is very important for the long-term development for us as a group. In Q3, all 4 business areas had solid demand.

It's also positive to see that our smallest business area, Safety & Security, had a strong development in the quarter. If you look at Supply Chain & Transportation, we have begun to recover in this one after a weaker first half of the year.

Several customers in this business area postponed their orders, actually from Q2 during the summer into Q3 and some into Q4. But in Q3, we released some sales, and it was also a good scalability, which led to margin improvements in the business area.

Safety & Security, as I already mentioned, had a strong quarter, and there was several smaller units benefiting from favorable market trends, the one I already mentioned around data center, but also around emission control, pollution control, which is a strong area for us. And the new acquired companies in this business area also affected positively.

Within Energy & Electrification, performance was mixed. A few units were driven by continued strong demand from energy efficiency, while some units were still affected from some very tough comparison from last year.

That was from Q1, Q2 and also now in Q3. In Water & Bioocconomy, several units performed well, although margins were impacted in this business area by some cost pressure.

And we are working to -- but we also need to be balanced to foresee future opportunities and future growth in regards to our cost base. And with that said, I hand over to you, Bengt.

Thank you, Anders. Yes.

And let's have a little bit deeper look into the cash flow and cash conversion for the whole group. As Anders was mentioning, we had a very good cash conversion of 94%, much of that coming from the inventories that were built up during the summer for seasonal sales that have started now and will continue into Q4.

Improved the whole situation with inventory levels. We also saw some lower tax payments compared to last year.

So all in all, a good quarter. And as you can see there on the chart that typically, we are between 70% to 90% in cash conversion.

That's from operations and from working capital ups and downs. And we're now on a last 12-month basis, right in the middle at 81%, comparable with last year's 83%.

We also start to show in our reports now the free cash flow per share. We haven't reported that for a very long time, but we report it now.

And we had a very good free cash flow. That means all cash coming in from the business and also after the working capital adjustments, but then deducting the amortization of different leasing contracts as well as deducting the capital expenditures for different type of investments in the companies.

So really, the only thing not included is when we acquire companies or pay earn-out debts to already acquired companies. So that cash flow was very good.

And apart from the good cash flow from the operations, we saw a lower CapEx level in this quarter as we have done also for the full year. We work very closely with the companies, of course, to decide what type of the investments they should do.

And we do that by looking at a classical DuPont chart, you could say that we -- where we look at both their EBIT margins and their capital turnover and see what kind of return on capital employed they have and from that decide what's most prioritized. So yes.

And also the free cash flow for the last 12 months, as you see here at the last bullet is also very strong coming then both from the operations and from lower capital expenditures. Looking then at some additional metrics.

We have the profit after tax, of course, an important measure. And -- but this quarter, it's a bit affected quite heavily actually by this write-down of goodwill when -- and it's all of SEK 500 million, this write-down of goodwill and other immaterial assets.

When we moved these companies that will be divested out of the business areas, we could then make a full impairment test of their values. As you know, we do our impairment tests on goodwill, et cetera, based on our business areas because they are our cash-generating units.

And all our 4 business areas have been able to defend very well the values that are in there. There is no risk for write-downs of the business areas.

But when we then subtract out these specific companies, we have enabled them to look at them individually and in fact did total write-down of SEK 0.5 million. But if we exclude that more bookkeeping exercise, it's not cash generating anything, not affecting the cash flow, then we see that the profit after tax was a little bit lower.

The difference is mainly because of the currency effects. We had SEK 14 million of currency loss in the quarter.

And as you could see and hear from Anders previously that it affects both top line and profit, of course, this 4%, 5% all in all FX effect. But in our finance net, it affects us with SEK 14 million in the quarter.

And that also affects us on the last 12 months. Then total, the finance net is affected with SEK 50 million, most of that coming from currency effects.

And as you saw on the chart on our distribution of sales that currency effect could, of course, be quite substantial as the Swedish currency becomes stronger as we have more than 90% of our revenues kicking in from other currencies. Then another measure then taking that profit after tax and take it per ordinary share after dilution, you see then a very hefty minus in the quarter, minus SEK 11.14 per share.

But if we then exclude this write-down, it's 2 -- a little bit more than SEK 2 per share, and it's of the same reasons as I just explained. And that also goes for the last 12 months compared with last year.

Then taking a look on the leverage. We saw a quite big increase in the financial debt leverage compared with last year and also compared with the year-end last year.

And that's because we have paid out earn-out debts. These earn-outs have been provided for in the balance sheet ever since we acquired the companies.

So the payout of earn-outs do not affect the net debt in total, the bottom line, but it affects the financial net debt. So that has -- we have paid out about SEK 150 million in the quarter and almost SEK 400 million in the year, year-to-date.

So that's, of course, a lot of money going out, but it's going up and it's having performed very well since we acquired them. So it's a good thing to pay earn-outs.

The total net debt compared with the adjusted EBITA has decreased since new year since we haven't made so much acquisitions, but it increased from last year September because we have acquired SEK 85 million of profit in the last 12 months. And of course, that affects the balance sheet and since the organic growth hasn't been top notch during that period.

That affects the profit and results in an increased -- slightly increase in the net debt leverage. Then as the last financial metric here presented, we look at the return on capital employed, the ROCE.

And as Anders mentioned, it was 12% now. It's counted as, of course, on the average capital employed for the last 4 months and then compared with the EBITA profit we have had.

And that decreased because we have increased the capital employed from the acquisitions and the organic growth, as I said, has been -- last 12 months have been slightly negative. If we just look at the outgoing balance of capital employed after the write-downs of goodwills, we are at almost 13%.

And if we only look at the core businesses, taking their capital employed and their profits, then we're at 13.5% now. So as we divest these companies one by one, then, of course, then the capital employed is reduced and this ROCE will increase slowly, but steadily.

If we look upon the operational return on capital employed, that is the average from our operating units, we're at 51%, which is, of course, very good, we believe. Okay, with that, back to Anders.

Okay. Thank you, Bengt.

So coming into acquisitions, which is a very important aspect of our business model. Year-to-date, we have acquired SEK 40 million in EBITA, and we hope to close one small deal before year-end.

We have some ongoing discussions that is quite far in the process. So that's the aim for the year.

I think it's important to mention our guiding principles here in regards to M&A. Regarding the pipeline, we continue to build the pipeline to meet the customers and customers -- sorry, companies to come to the discussion about the final acquisitions, and we do that, and we have a strong, solid pipeline in place continuously building that one.

In regard to valuation, we're disciplined here. We know that it's easy to go away in valuation.

And we have -- during this quarter, we have stepped away from 2 deals that I was part of as well due to the valuation was going too high for us. And on the leverage side, as we have said, our aim is to reduce the leverage in the future.

So of course, that together with our disciplined evaluation is affecting as well the numbers of acquisition and the number of EBIT we have done so far in the year. I can also add here that we have started to look into Germany.

We did it already last quarter, but it's a good progress and a lot of exciting companies in that region for us now and also for the future, we believe. Okay.

So last slide before we go into the Q&A, a little bit of the takeaways from the quarter from us. I think the solid underlying demand is positive.

A majority of our companies had a stable demand in Q3. It is still uncertainty out there in the market.

And the condition for many of the businesses in Q4 is unstable. We see that 2026 is a positive sign for us, but it's still uncertain.

And that's what we see right now. And we don't want to say anything more about 2026 than that here today.

On the second bullet here, on our strategic actions for the long-term value creation, we have taken some very important steps in the [ quarter line ], our portfolio. We have been talking about that for quite some time, and it's -- I think it's good for us for Sdiptech to finally have done this decision now going forward.

Many of the companies, we will divest. We have ongoing discussions with and progress in a good way.

We have not set any strict deadline when it needs to happen, the divestment. But both from our perspective, from the company's perspective, we would like to be efficient and fast in the process.

So that's what we are driving at. We have -- during the autumn as well, we have looked into our strategy, and we have made some adjustments, and we will present that on a Capital Market Day in end of November.

And on the last note then, the acquisition pipeline. It is a solid pipeline that we have.

Discussions ongoing, but we keep a strong discipline in our valuation and also around our investment criteria, especially with our aim to decreasing the leverage over time in the future. So that was, I think, everything from us as a presenter, and I think we can open up for our Q&A session as well now.

Well done in the quarter. Three questions from my side, 3, 4 questions.

Perhaps starting with the cash flow. As you said, very strong here in the quarter, partly due to lower tax, but also lower CapEx and then quite neutral impact from net working capital.

So the first question on cash flow, I think you mentioned this, Bengt. But here in the end of 2025 in Q4, do you see potential for further support from net working capital in terms of the cash flow?

Or yes, what's your thought on that, if you start with that one?

Exactly. Now typically, Q4 could be quite good from a working capital perspective since we have some seasonal oriented comp.

There's no moving equipment and heat work and so on. And they have been building stocks during the summer and starting now then to sell it and turn it into accounts receivables, of course, but then also get the cash in from those invoices.

So -- last year, it was actually above 100%, the cash generation. So it's not that high this year, but still Q4 is typically good for net working capital.

Okay. Sounds promising.

And then you actually touched upon this also during the presentation that in the quarter, CapEx was a bit lower and that you have a very strict process with the subsidiaries when deciding how to allocate capital. And perhaps thinking a bit more long term than just next quarter, but historically, Sdiptech has been at some 4% of sales in terms of CapEx.

Do you see a potential to reduce that number going ahead and perhaps allocate more into acquisitions instead and deleveraging? What's your thought thoughts on that going forward?

Yes. I mean it's typically perhaps difficult to say the exact number for the future.

But I think if we have been sometimes around 4 and even above, I think we're more around of sales now in CapEx spending. So -- but as I said, it's always depending on the actual situation and what's most profitable for that company, for example.

But yes -- but we have tightened up the process quite a bit.

I can add to that as well, then. Yes, I think what Bengt said there, it's important for us to see the CapEx and the need for the total portfolio and to prioritize in the coming years in a better way.

And that's something we have looked into ourselves in our strategic work as well.

Okay. Sounds good.

And then changing topic. I mean as you have explained yourself, quite a lot of things going on right now in Sdiptech, I mean, everything from improvement measures in several core subsidiaries.

You still have an active M&A pipeline, you have ambitions to divest several companies. And I guess you're preparing as well for Capital Markets Day here in the end of November.

Just curious how you allocate responsibilities internally? And do you consider yourself to be able to execute on all parts without, I guess, losing momentum and/or sacrificing quality?

What's your thoughts on that?

Yes, I think from -- I agree, it's a lot of -- on the agenda, but I think we have structured it quite good. The M&A team is not responsible for the divestment.

So they are focusing on building the pipeline and meeting and executing on the M&A side. We have other internal individuals responsible for the divestment.

And it's going quite good actually with -- we are not going on big broad processes. We are identifying smart, we think, key potential buyers to the businesses, and we drive that process quite efficiently.

And from the other perspective is that we are still working on establishing the new business area organization. In August, Daniel started as the new Head of Supply Chain & Transportation.

And we are quite far in the process to recruit somebody in the U.K. as well for Energy & Electrification.

And I think that will, of course, be very important going forward to have that stable organization in the business area side as well. But so far, it looks -- feels good on that side.

Okay. Perfect.

And then one final question, turning a bit more short term again, Just if it's possible, if you could help us how we should think about Q4 here in the next quarter in terms of comparable numbers, both for core and noncore? I mean at first glance, it looks like that noncore or other operations seem to have a quite weak Q4 last year.

I guess it's some seasonality into it as well, whereas core had a more -- it looks like more decent quarter Q4 last year. Did you share that view on things?

Yes. Yes, I can -- definitely, it's correct.

In our situation, we look at the divestment process. So it might be that some of the companies might be divested now during Q4.

And then, of course, it's going to affect that comparable numbers then. From the core, I think Bengt was touching upon that as well, that it's important that our companies with a bigger seasonal effect deliver now.

And it's a little bit -- as we said, it's a little bit unsecured at the moment. We have some more slight negative, so to say.

But overall, it's a positive sign for the future. But it's -- right now for Q4, we have said not to guide anything more than this at the moment.

First, just I want to say, it's a nice addition with the free cash flow per share KPI. Things like that are appreciated.

And then I also have a question, like Max, on the acquisition pace. You -- it sounds like you expect maybe one more smaller acquisition this year.

And it sounds like you remain quite active in new deals. So I just wonder how you think about new acquisitions versus your preferred gearing levels sort of what you're comfortable with and where you think your limits might be in terms of gearing and how much you can do on the acquisition side in near term.

So I guess that's maybe not Q4, but in coming quarters or so. Anything on that would be helpful how you're thinking?

Yes. So I think on the first perspective of this, it's important to be active.

We prefer to say no to deals than not having the deals to not sit at the table. So we are, yes, definitely building the pipeline and meeting the customer and trying to get to the deal, so to say.

But regarding the exact numbers, we will touch upon that, and we have discussed that internally in regards to our Capital Markets Day that we will come up with targets, I think, around some potentially new financial targets there. But right now, we are at 3.2%, as Bengt showed you, but I think we would like to go down from there and not to go up.

So that's the balance. We still would like to acquire those value companies that are out there when we can get them at a good valuation, but still ambition is to drive down leverage.

But we don't want to make it too fast and not make any stupid decisions when we have the good targets out there.

All right. Good answer.

Then I just have a follow-up on the margins on the segments, specifically on Water & Bio. You commented briefly on the margins in that segment were impacted by cost pressures.

Could you maybe elaborate a bit more specifically due to the margin decline year-over-year and how we should expect that those pressures going forward?

Yes, we have a company, which is having a lot of big workforce. So from a salary perspective, salary increased quite significantly in the beginning of the year in -- especially in the U.K.

And we are having some longer contracts with insurance customers, which is very hard to adjust for those kind of compensation or salary conversations. So there's a tough year for that company specifically in the U.K.

And then -- but that's really the majority. And then we have also in other companies, we have been taking some decision to build up a little bit more because it's -- we need that for -- to be able to deliver for a possible upside in the coming quarters.

It looks good from a revenue side in projects and orders.

The first one is related to the dynamic you say, where you postpone orders from H1 to H2. Could you give any more color on the split between kind of what lands in Q3 and what lands in Q4?

I think we have a good -- let's say, part of that was actually now coming into Q3. But yes, it's still -- some of those orders, it's -- I'm thinking specifically of the 3 companies in the group.

They have been promised orders. It didn't come in Q3.

So yes, potentially, it will come in Q4. The good thing when we have the U.K.

companies that they have the budget year in actually end of March 2026. So it's still on the right side in the budget, so to say, for some other companies.

But no, it's difficult to say that, specifically how much of it came in Q3 and how much is going to be realized in Q4. Q4 is more about what I think we answered before as well, the seasonality in some of the winter needs to come, and we need to be able to deliver for the season or in season as well.

I see, I see. And then one final question is related to if you could give some more color on the distribution in your acquisition pipeline when it comes to kind of the split between business areas and geographies going forward?

So from business area perspective, it's, let's say, it's equally among the 4 business areas. We have had some good discussions within supply chain, but also in Safety & Security in the recent quarter.

So I think that's good. It's important that we work with all 4 business areas in acquisitions.

From geography, it's actually nothing special there. It's our main geographies.

It's U.K., it's the Nordics, it's Italy as well. And then as I said as well, we are going into Germany, and we have some good discussions with German or Dutch as well companies.

So the DACH countries. It's -- so that's new and fresh into the pipeline, but nothing more or more significant than other geographies at the moment.

Just a quick couple of questions here from me. Starting off in Water & Bio, what would you say is a normalized margin here once we see a rebound?

Well, I could perhaps step in there.

Yes.

Yes, we have seen -- typically, they have been around 24%, 25%. And then as the companies we now count as the core companies in that business area.

Now it was 21% in this quarter for the reasons that Anders mentioned. So we're working to get it up there again.

So whether it will be 23% or 24%, 25%, that's, of course, still to be seen because there are many different unique situations to take care of. But at least we're working to improve from the current 21%, that much we can say.

Okay. And on '26 here, you mentioned in the report that, that is when you see a broader recovery.

What makes you confident in that? Is there anything -- any indicator you've seen turning more positive or...

No, I think it's the discussion with the companies. We are in a budget process as well, and we've been asking -- or in our discussions with the companies, it is positive momentum for business areas or business units and orders and they are looking into projects for next year and new potential customers.

So no, it's from that perspective, talking to the companies and seeing there what they see for the orders and for the potential in the coming year.

Okay. Super.

That's super clear. And just one last question here.

If I remember correctly, you had some swaps here that are contributing negatively in the net financials. What's the time line?

When will they stop affecting here?

Yes, we have 2 types of hedging arrangements. One is for interest and those interest swaps are right now negative.

They were positive before when the interest rates were higher. Right now, we pay an extra 0.2 or so percent on the debt.

But they will be closed from end of next year. And so 1, 2 years, you could say.

So it's not a very big downside, but still, we pay about 20 basis points more than we should because of those hedging. But they have been giving a good return because they were better before.

The other side, we have hedging arrangements on currencies. And there, we tried to hedge our currency exposure in the balance sheet to some extent.

And not -- we're still net asset positive, which means that when, for example, British pound sterling is weakening towards the SEK, all in all, we get then a cost in the P&L, but not as much as we would if we hadn't those FX swaps and hedges.

Okay. Super.

So 20 bps there.

Yes. And I could kick off then with the questions.

We have received 3 questions in the chat here. I think one we have already answered that was regarding the EBITA margin in the Water & Bioeconomy business area.

And the second question was that some of the companies we are now intending to divest among the other companies. They have quite well-performing companies with good margins and product based to some extent.

Why divesting such companies?

Yes. I think I can add to that question is that -- so what I said, what we look for in the companies we would like to buy in our strategic priorities is around 3 things.

We would like to have a strong promise that actually have their own products. They sell and they make service to them.

We also want to have not cyclical end markets. It has been a challenge with some of the companies, which is very cyclical and working, trying to proactively work with organic growth is quite difficult if you don't have the mindset, that's what it is with those companies.

And the third thing around the niche. If you have niche, you can protect it and you can drive growth from that niche.

And all of these companies that we're giving examples of here, they have some aspect or they are not meeting that criteria. So it's been -- for us, been challenging, and we would like to allocate that money into more our prioritized businesses and future businesses.

And we believe many of these businesses, as we said, it's not because they are performing financially bad, it's more that -- to allocate that capital to something that we believe in the future is better according to us.

Thank you, Anders. And then the last written question, as I see, it's regarding the write-down if -- was that a one-off?

Or could that potentially continue to be more write-downs Q4 and also next year? But what we have done now is to the best of our knowledge, as it's typically called and also to write down the value.

So we don't foresee that we need to do any more write-downs. And of course, it's depending on how much money, high considerations we will get for the companies once we divest.

But we believe at least that the value of these companies represent their market value and potential than consideration that we will get. So it shouldn't be any major at least.

It could be -- go both ways. We could both have some profits or we could have some smaller losses when we divest, but it shouldn't really be any big numbers.

But no write-down of goodwill as such because of any impairment. I think that was all of the written questions.

So back to you, Anders.

Yes. I think then thank you for the written question and asked question.

And yes, thank you all for listening in, and we are looking forward. And hopefully, we will meet some of you at the Capital Markets Day in November, which will be held here in Stockholm, and we are looking forward to that.

So with that, thank you, everybody, for today.