Prevas AB (PREVB) Earnings Call Transcript & Summary

Good morning and welcome to today's webcast presentation where we have Prevas will be presenting the Q1 report for 2024. With us presenting we have the CEO, Magnus Welen; and CFO, Helena Burstrom. [Operator Instructions] With that said, please go ahead with your presentation.

Hello, everybody and welcome to this presentation for the Q1 results for Prevas. My name as announced is Magnus Welen, and together -- I'm the CEO of the Prevas, and together with me I have...

Helena Burstrom.

Helena Burstrom, who is the CFO of the Prevas. And again, therefore today is brief me thing is that we will start with this brief introduction and then we will review our financing performance for the quarter. Look a little bit into the market, and then we will spend some more time on the exciting acquisition we have made in Enmac. And then we will finalize this meeting with the Q&A session as we know well we do. So, how did we perform during Q1? Looking to the revenues, we actually managed to grow during the quarter. So despite the calendar affect that was negative during this quarter and rather dynamic where in some parts also quite challenging market. We managed to grow our top line. And then the question is, of course, how do we perform in terms of EBITA. We actually delivered a strong result in the quarter, our EBITA margin of 13.2%, which we believe is the strong, given that we actually have the negative calendar effect, one day is Sweden, three days in Norway. So, it's a quite substantial effect on the result due to negative calendar effect. And also due to this rather dynamic market, we are quite proud actually that we managed to deliver such a strong result in the first quarter. We have also managed to increase our prices in order to maintain our margins. One of the key aspects of that is, of course, the pricing. And we continuously work to increase our prices. And we can see that in the first quarter that the prices has been increasing in all our countries, which is really good, of course. What we also see in the first quarter is that the cash flow for Prevas continues to be very, very strong. And for this quarter, it was substantially above last year as well as the last quarter or the last year. And also exciting for this first quarter is that we announced the acquisition of Enmac, where Prevas established a strong foothold, a strong strategic platform in Finland. So Prevas is moving ahead in many different ways. Looking into more detail of the quarter. As I was mentioning, we managed to deliver a strong EBITA margin given the calendar effect. And we also delivered an EBIT of SEK 44.2 million. That is a little bit lower than the last year. And one effect that we see here is due to the acquisition-related items of totaling SEK 9.2 million that affects the EBIT and also the EPS for the quarter. Out of those SEK 9.2 million, SEK 7 million were transaction costs related to the acquisition of Enmac. All-in-all, we believe that we start the year in a quite good way. You can see also the cash flow here, where we increased it from SEK 22.8 million, up to SEK 27.1 million. So that was one quarter, once again one quarter. But what is happening? We zoom out a little bit. You can see in these two graphs, the exciting development that Prevas has had since 2017, where the company has continuously increased our EBITA. And we -- last year, we also increased our target for the EBITA. So actually, our target now is 12% over time. And this quarter, we are very glad to present that we actually overachieved compared to our financial target in terms of EBITA. So you can see that we have a continuous growth in the EBITA. Last year has been a rather flat development around our target of 12% EBITA. And in the other graph, you can see that we have continued to grow. The rolling 12 revenue growth figure is in that graph. And you can see that we have a continuous growth in Prevas, even in the first quarter, we actually managed to grow despite this calendar effect and also the rather challenging market that we see today. So this is one thing that we managed to grow the EBITA, we managed to grow the revenue, but most important, of course, from a shareholder perspective is that we managed to turn this into earnings per share. And here, you can see the development of earnings per share the last years and also that we have increased the dividend per share over time. So for us, it's very important that we continuously work and focus on earnings per share. So with that, we grow over time in that very, very important metric for Prevas. So this is a little bit about the quarter, a little bit zoom out regarding earnings per share and dividend. And now I would ask Helena to look into our financial position.

Thank you, Magnus. As Magnus said, we have increased cash flow from operating activities with SEK 4 million compared to Q1 last year amounting to SEK 27 million compared to SEK 23 million in Q1 2023. And this is mainly driven by a reduction of our operating receivables. Since the final day of Q1 was during the weekend, amortization was deducted beginning April and that's affecting financing activities positively with approximately SEK 6 million. Cash amounted to SEK 130 million at the end of Q1 2024 compared to SEK 83 million in Q1 2023. Prevas's financial position remains strong. We can see here that Prevas is well below the financial target of maximum 2x EBITDA. Net debt in relation to EBITDA is still negative. Our equity ratio remains as well strong and amounts to 60.9% in Q1. Q1 2023 equity ratio amounted to 59.3%. And then Magnus, can you please give some market updates.

Yes, of course. Thank you, Helena. Very good to see that we have a strong financial position in Prevas. Looking into the market, what we have seen in the first quarter is a similar market as we have seen in Q3 and Q4 2023, where we have some areas with really high demands. The green transition is driving a lot of demands in different parts of the industry, which Prevas is very well represented. We have a growing business within cybersecurity, headed by our Danish unit and also sold throughout of -- in Sweden and also other countries, of course. And also, we continue to see a high demand in the defense industry. There are also sectors where we see continuously a rather high competition, especially in terms of time and material consultant assignments. And I would classify that more of general IT consultants, that where we see, that there is a rather high competition, which affect Prevas. The good news is that, that is a very, very small part of Prevas actually. So in all, we believe that the market is very similar to Q3, Q4, but stable and rather actually starting to look a little bit better compared to how it have been in the past. We have received some signals from some customers that the positive thing that started to -- seems to turn into more requests, more tenders, more bids in order to find new business. But still, we haven't seen that it's materialized into a booming business climate. But we see some small signs here and there that we see that is starting to move in the right direction in the marketplace. And globally speaking, Prevas is very well positioned because we are in very many -- in many different industries, as you can see in the graph, which means we have a low risk and also a good opportunity in that sense, because we can balance our resources and focus on the areas where we see demands. That is a very positive thing. And that we do continuously within Prevas. We also have a very fantastic nice customer list. And our five largest customers, SaaB, Ericsson, ABB, Atlas Copco, and Sandvik. They are less than 25% of our turnover. So we have a very, very good position in the marketplace. And so we are very, very prepared to turn from this more or less flat development we see now and to meet a more increased demand moving forward, which we hope, of course, will materialize as well. So that's a little bit about the market. And then, we move into our exciting progress in Finland. Because during this quarter, we announced that we will acquire Enmac. Enmac is a premium company in Finland with around 200 employees. They have 8 locations across the country. Total turnover of around EUR 23 million with a healthy EBITDA margin of around 14%. And Enmac has been growing over time. So it's a growing company coming into Prevas. Together, if we merge then Enmac and Prevas, we will establish a pan-Nordic industry group operating across Sweden, Norway, Denmark, and now Finland, with around 1,100 employees and a total turnover of SEK 1.75 billion of annual turnover. So it's a very big step we do for Prevas from a strategic point of view moving into Finland. So a little bit about Enmac. Enmac is a premium company. Their core is production and process development. They have an edge in industrial automation, technical design, advanced calculations, FEM calculations, CFD calculations, product development, process and piping design. And they are also very strong in system deliveries where they deliver more advanced and complex solutions to customers. What is common between Enmac and Prevas is that we come to our best when it's very advanced solutions and when it's a little bit more tricky. And that -- when I met the team in Enmac, it was very nice to meet the people and see that it felt like coming home actually, because they are engineers. They are working with the more complex solutions, and they have the customer first and driving a lot of interesting business and assignments for the team. And Enmac has been around since 1985. So they've been in the market for a long time, building long-term relationship with very, very interesting companies, mainly based in Finland, but they have also some businesses in Sweden as well and also some other markets, but to a very small extent. Some of the customers that Enmac has been working with is Valmet, Andritz, Kemira, Metsa Group and Fortum. So they are very, very big companies that they have been working with for a long, long, long time. Another positive thing about the team in Finland now coming into Prevas is that 70% of what they do comes delivered from their own offices, so to say, in-house work and project business and assignments and the part of time and material consultants out in the customer place is around 30%. And that means that it's high-end deliveries that Enmac is delivering. So I'm very positive, as you imagine, to move forward together with Enmac. And then a little bit for U.S. investors to understand the rationale, why is this good for Prevas and for Enmac. At first, it's very important for us that moving into a new market that we get a strong foothold, a strong platform, and Enmac with these 8 offices and 200 employees, they have a critical mass in order to be a foundation for continued growth into Finland. They also bring additional expertise into Prevas. For example, one niche area with, where Enmac is really, really good is in piping design. It's a niche, but they are absolutely one of the top suppliers in Finland, and I would actually say in the Nordic market in this niche. So there are some niches where Enmac is very strong where Prevas is not so strong. But there are also niches in Prevas, for example, within industrial IoT embedded systems and software where Enmac is not so strong. So we foresee that we can, so to say, take the expertise from Prevas and also create new business in Finland through the Enmac channels, which, of course, is a good thing. As I mentioned, Enmac has a very large customer base and very high potential. Okay, it's a big company, but still, there is a lot of market shares to take in the present customer base as well, which, of course, is also a rationale between this -- for this acquisition. But as you all know, acquiring companies in the consultancy business, it's, of course, related to risk. But one thing to mitigate the risk is that we have a strong culture fit between the two companies. Both of Enmac and Prevas, it's our premium companies, they work with high-level engineering, high-level solutions. They go for things that are a little bit more complex. And then as well as Prevas is very decentralized, agile organization, which, of course, makes us a very, very good fit to bring Enmac into the Prevas family. We also foresee strong future market synergies. Enmac is strong also in the Nordic part of Finland. And Prevas has offices in the northern parts of Sweden. As you all know, it's a heavy investments going on up in the northern parts of Sweden, but also in the northern parts of Finland. And together, we can utilize that market and those investments in a good way. So we see strong future market synergies between Enmac and Prevas as well. Another positive thing about this acquisition is that the very successful management team, they remain as owners in Prevas after the transition, proving that they are here to stay for building a new future together. And last but not least, Enmac has the capability to do M&As. They have acquired companies in the past. They have a strong pipeline today. So with the foundation of Enmac, we will continue also to look into further M&As in Finland to build a stronger position on top of the organic growth that we see. So this is the, sort to say, rationale from a business point of view. Looking into the acquisition from a financial point of view, Helena, could you give some comments?

Yes, of course. The purchase price for the acquired shares amounts to EUR 90 million, approximately SEK 220 million, which corresponds to a valuation of EUR 25 million, approximately SEK 280 million or 100% of the company on a cash and debt-fee basis. In addition, a possible contingent consideration amounting to a maximum of EUR 2 million may be paid depending on Enmac's profitability development during 2024 financial year. Upfront enterprise value divided with EBITDA, local GAAP is 7.6x. The acquisition will be financed through existing cash and a new credit facility amounting to SEK 200 million. And Prevas balance sheet will remain strong. Net debt through EBITDA post the deal is approximately 1.0x the target compared to our financial goal of maximum 2.0x EBITDA. And we will, with Enmac, continue our positive EPS development, as shown in previous slides. This acquisition is subject to regulatory approval, and it will take up to 4 months. And the acquisition is expected to be completed during the third quarter of 2024. Magnus, I hand over to you again. Could you please sum up?

Thank you. Thank you. Very nice to see that we still have a strong balance sheet to lean on, so that we actually can continue to build Prevas into the future. So a summary of this presentation. A strong Q1, we delivered 13.2% EBITA despite this rather dynamic market and also the calendar effect. So that is a good thing. We also managed to grow both organically and through the acquisitions during Q1. We acquired Enmac and established a strong platform in Finland, which is very exciting for the future, a strategic step for Prevas moving into the future. We had a strong cash flow for Q1. And as Helena was mentioning, a solid financial platform, even after the acquisition. So we look forward to continue to build Prevas growing organically, but also continuing looking into further M&A activities. But of course, we will be picky as we always are, in order to find the right gems, so to say, to fit into the Prevas family. And Prevas, we are well positioned in the growing sectors, and we have a fantastic range of customers. And we look forward also to over time, a more booming business climate so that we can also show that we are able to grow both through these acquisitions and organically moving forward. So with this, I would like to conclude our presentation today. And now we move into the Q&A session. So I hope we get a lot of interesting questions. Thank you.

And like you said, I'll now jump into the Q&A part. [Operator Instructions] And we've got a person calling in with a phone number ending of 8637. Please go ahead, you have the word.

Good morning, Magnus and Helena. This is Stefan from ABG. A couple of questions from my side. You mentioned the continued weak demand in certain areas. I was just thinking which type of customers that are most hesitant and if you have seen any different behavior from them of late?

I would put it like this, the demand in some areas went down last summer, more or less and has been in a rather flat development since then. And it's -- for example, consumer industry, it's not a big thing for Prevas, but we had some regions where we're working, for example, with UX and for services for consumer industry, and there has been quite low for quite some quarters now. Although we believe that we will see an upturn, because based on experience, these kind of companies, they reduce their spendings, but eventually, it will come back, because they need to develop as well as everybody does. So the consumer industry is one area. And also, we have seen in the public sector. It's very small for Prevas, but we have seen that in those areas has been quite low demands as well.

Okay. Perfect. And then, then on Finland and Enmac, I know you talked a lot about Enmac here and it seems really exciting. They will constitute around 15% of the group once consolidated. But how do you view the Finnish market long term for you as a group?

I believe it's a very, very interesting market for Prevas and I was trying to explain Enmac has a very strong position in a number of customers in Finland. But there are many other customers where we see that we together can grow outside of the present market, present customer base of Enmac. We also foresee that we can add additional offerings to Enmac, to the Finnish market with the expertise we have in mainly, I would say, in Sweden, in Denmark, but also from Norway. One example could be in enterprise asset management is an area where we have a strong position in the other countries, so to say. And the customer base at Enmac has a very nice potential for EAM business. Another area where we can grow is within, for example, embedded system and more general software because Enmac is strong in industrial automation and plc, but we see that there are opportunities in the customer base for more of IoT services and also more software-related services. So in that sense, we believe that the old cliche of 1 plus 1 should be 3. So we strongly believe in the future potential for the Finnish market as well.

Very good. And then lastly, from my side, you had strong profitability here in Q1 despite the calendar effects that were in play. Will it continue to be a focus for the remainder of 2024? And how do you view the price salary equation now when we approach Q2 where the salaries for 2024 usually are adjusted?

I believe that we will continue to focus on the margins for this year. But over time, it is a priority for Prevas to maintain a good margin. And the way we do it is, we work a lot with business development in order to deliver a stronger customer value, thus driving up the pricing in average, thus, so to say, taking out the effect of the salary increases. So we work quite a lot in order to balance, so to say, the cost and the revenues. So in order to we maintain the market -- the margins in a good way.

Perfect. That was all for me.