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Edited Transcript of BALCO.ST earnings conference call or presentation 21-May-19 7:00am GMT

Q1 2019 Balco Group AB Earnings Call

May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Balco Group AB earnings conference call or presentation Tuesday, May 21, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth Lundahl

Balco Group AB - President & CEO

* Michael Grindborn

Balco Group AB - CFO

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Conference Call Participants

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* Julius Rapeli

SEB, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Kenneth Lundahl, Balco Group AB - President & CEO [1]

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Welcome to the Balco Q1 reporting. It's me, Kenneth Lundahl, CEO, here; and then our new CFO, Michael Grindborn.

We'll start with Page 2. Quarter 1, strong quarter throughout.

Our order intake is up 33% in the quarter to SEK 362 million...

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Unidentified Participant, [2]

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(inaudible)

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Kenneth Lundahl, Balco Group AB - President & CEO [3]

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[Of which] renovations accounted for 91%. We expect an increased order intake of 25% the coming quarters. And our order intake in Q1 was 35 -- 34% higher than our turnover.

Our revenue growth is plus 11% in the quarter to SEK 270 million, and our acquired growth from TBO-Haglinds is 18%. Our organic growth is negative with 7%, and I will come back to that. We expect the full year organic growth to be 10%.

Our operating profit is up 23% in the quarter to SEK 27 million. Our operating profit is up from 9% -- 9.1% to 10% in the quarter. Our order book backlog is now SEK 1,529 million, a growth of SEK 100 million in the quarter. And SEK 225 million of this comes from the acquisition of TBO-Haglinds. This is the strongest order backlog ever, 19% higher than last year.

We'll turn to Page 3, where -- we had strong demand results in order intake growth of 33%. Our net sales increased 11.3% to SEK 270 million, an increase of SEK 27 million. Acquired growth was 18%, while organic growth was negative by 7%. Renovation accounted for 83.3% of the sales, and New Build for 16.7%. We expect the full year organic growth to be 10%. And the reason for that is that we have a good order stock in Kontech and we had a good order stock in TBO, and the last quarters, we have moved resources to these 2 areas from Balco AB. And we have also had a good order intake in Balco -- we had a good order intake and we have had a good order intake in Balco AB the last quarters, so building all the stock in Balco AB. The -- in Q1, in Balco AB Växjö and in Poland we have had too little to do, but we've seen successive increase in both Denmark at TBO and Balco AB Växjö and also in Poland.

Our order intake increased by SEK 90.6 million or 33% to SEK 361 million in the quarter. The growth for the Renovation segment was 27% and accounted for 91% of order intake in the quarter. We still have high activity in the market. And that, together with the acquisition of TBO-Haglinds, will support continued growth. We expect an increase of the order intake in the Renovation segment to be 25% the coming quarters.

Our order backlog increased to SEK 1,529 million. It's is a new all-time high. Organic increase was SEK 100 million. And acquired order backlog in TBO was SEK 225 million.

Our operating profit increased with 23.1% to SEK 27 million, and our operating profit margin improved from 9.1% to 10%. Operating cash flow improved to minus SEK 7 million due to better EBITDA and less increase of working capital than last year.

If we summarize, point with Page 3 is that we expect the full year organic growth to be 10% and we expect an increase of our order intake of 25% in the Renovation segment coming quarters.

We change to Page 4, Q1 growth of top line, earnings, order intake and order backlog. Order intake improved with 33%, order backlog 19%, revenue 11%, operating profit 23%. A good quarter.

Michael Grindborn, Page 5. Stage is yours.

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Michael Grindborn, Balco Group AB - CFO [4]

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Yes.

And as you know, the main focus of Balco is the Renovation segment. And it grew by 27% in the quarter in order intake, up to SEK 328 million. The Renovation segment accounted for 91% of our total order intake in the quarter, and order backlog at the end of March is 90% coming from Renovation segment. The New Build segment also had good order intake in the quarter and grew from SEK 12 million last year up to SEK 34 million this year.

Turning to Page 6 and looking at the revenue and profit per segment.

We see that the Renovation segment had small growth by 2.7% up to SEK 225 million. And the reason behind the slow order -- revenue increase this quarter was the slow -- low order intake we had in the middle of last year. Operating margins improved slightly in the quarter up to 10.9%, and the operating profit increased by SEK 1 million just to SEK 24.5 million.

The -- a new strategy we have in the New Build segment to be more selective when quoting projects has delivered. We see that the revenue has grown from SEK 24 million up to SEK 45 million. And the biggest project here is the second maritime project. And that project is following its time plans, project plans so far, both in time and also the profit. The operating profit within the New Build segment improved quite a bit from SEK 0.6 million last year up to SEK 3.4 million, and the margin improved from 2.7% up to 7.5%.

Turning to Page 7.

We still have a strong financial position. Our equity-to-asset ratio has been down slightly to 43.4%. It's driven by the increased balance sheet from both the acquisition of TBO-Haglinds by the end of last year and also the implementation of IFRS 16 that has increased the balance sheet by roughly SEK 13 million.

The net debt-to-EBITDA is at 1.6x. It's also affected by the acquisition of TBO-Haglinds and the implementation of IFRS 16, but if we exclude the leasing debt, it's -- the ratio is just at 1.2x.

Our net profit for period, before tax, has increased by 27.5% up to close to SEK 20 million. And we are also prepared for further acquisitions. We have acquisition headroom through our committed facility plans, and we also have authorization to issue shares to finance further acquisitions. And we have also strengthened our organization for acquisitions.

Turning to Page 8.

The financial target of Balco is that we shall achieve growth of 10% per year. And looking at the last 12 months, we are currently at 8.5%. We're getting closer. Our profitability, we should achieve a profit margin of 13%. And last 12 months, we are 11.5% adjusted operating margins. Our capital structure is that we should have interest-bearing debt-to-EBITDA not exceeding 2.5x, more than temporary. And currently, we're just at 1.6x. Excluding, as I mentioned before, leasing debt, we are just at 1.2x.

And we also have a dividend policy that we should distribute half of our profits after tax to our shareholders. The suggested dividend ratio for this year is back with -- for 2018 is 54%.

Turning to Page 9.

We have, Balco has an attractive financial profile. We have high revenue increase. And it's been increasing by, on average, 14% the last 4 years. Our order intake has also good growth by 16% on average the last 4 years. We are improving our profitability. And the profitability has increased by, on average, 33% last 4 years. And we also have a stable cash conversion on a pretty good level.

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Kenneth Lundahl, Balco Group AB - President & CEO [5]

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Thank you. Thanks, Michael.

Any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Julius Rapeli of SEB.

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Julius Rapeli, SEB, Research Division - Analyst [2]

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It's Julius from SEB. Can you hear me?

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Kenneth Lundahl, Balco Group AB - President & CEO [3]

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Absolutely.

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Michael Grindborn, Balco Group AB - CFO [4]

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Yes, we hear you.

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Julius Rapeli, SEB, Research Division - Analyst [5]

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Yes. Perfect. My first question is regarding the order intake growth, especially on the Renovation side. So I'm interested on the impact of TBO here. So basically, what was the organic growth in the order intake on the Renovation side? Or how much did TBO contribute there?

And then if I can follow up on just the pricing situation in the market. You previous talked about price increases. So are you still able to increase the prices? And have you seen any changes in the competitive environment lately?

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Kenneth Lundahl, Balco Group AB - President & CEO [6]

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If you look at -- I will say that TBO -- of the 33% order intake, I think that TBO is worth for about 40% of that, and then the rest from the rest of our companies. And...

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Michael Grindborn, Balco Group AB - CFO [7]

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Yes.

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Julius Rapeli, SEB, Research Division - Analyst [8]

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Excuse me. Can you repeat that number? I didn't get the -- how much did TBO...

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Kenneth Lundahl, Balco Group AB - President & CEO [9]

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I should think that the order intakes coming from TBO is about 40%, and the rest of -- from the rest of the companies in Balco Group.

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Michael Grindborn, Balco Group AB - CFO [10]

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[Okay, but that's] organic.

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Kenneth Lundahl, Balco Group AB - President & CEO [11]

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Yes, but that's -- it's dependent upon -- in this quarter, yes, because some of the products is between [10 and 40 million], so it will be partly dependent to the quarter. It'd be easier to discuss after the first half year actually.

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Michael Grindborn, Balco Group AB - CFO [12]

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Yes.

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Kenneth Lundahl, Balco Group AB - President & CEO [13]

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Regarding price increases, yes, it is possible to increase the prices. And we did that the last year. So the only thing I can say, that if we look at the order stock we have today, with a high rate of renovations and with the price increases we have done the last 2 years, we have a good kind of margin in the existing orders.

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Operator [14]

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Our next question comes from the line of Kenneth Toll of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [15]

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Yes. So on the New Build side, you also had a very large increase in orders there. So what that -- was that related to the marine segment, or was it more [what now in] New Build? And what drove those -- that order increase?

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Kenneth Lundahl, Balco Group AB - President & CEO [16]

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It was not in the marine side. And in the New Build area we don't have [unsafe] resources. We are very selective when we are choosing them. And there we can see that, from what you see us taking in, the margin is actually really good in the new -- in the ones we are taking in. So the risk is that you cannot in a couple of quarters say that why don't you go in harder for the New Build area and build that more, but it's actually due to that we are very selective. And in this case it was some [I think, there was through the process] a little bit of build here. But this side is so small today. If you get to orders of SEK 5 million, you will notice that.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [17]

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And also I saw that your sales costs were actually down year-over-year in the quarter. Was this something you did deliberately to cut costs? Did you reduce [NPL] in some markets also? What's...

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Kenneth Lundahl, Balco Group AB - President & CEO [18]

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This is Kenneth, this is a good question. And it's the actual increase that due to the IFRS 16 we have. You can explain that, Michael.

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Michael Grindborn, Balco Group AB - CFO [19]

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Yes. We have this -- some effect from IFRS 16. One part of the costs that before was leasing costs is now interest cost. We have depreciation and interest costs. So we have some effect from IFRS 16.

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Kenneth Lundahl, Balco Group AB - President & CEO [20]

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We'll look into this and show better what our real sales costs are. Because now they look at -- that they are decreasing on that, and they are not. But you can see that in the depression it's -- goes up pretty much.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [21]

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Good. And also, last year, you moved production from Denmark down to Poland. And in the beginning of last year, there were some negative effects about -- around building permits in Poland and so on that slowed your development there. But could you talk a little bit about the Danish operations, if the production in Poland is delivering in a good way to the Danish market and if -- yes.

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Kenneth Lundahl, Balco Group AB - President & CEO [22]

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Yes. Like I mentioned before, I said that our organic growth full year will be 10%. And of course, that's due to the building of stock in Balco AB, TBO's delivering. And also Kontech is delivering because they have a tremendous order stock.

So Kontech now in Denmark, their only focus is sales and operations. All the production is done in our facility in Poland, and the Dutch one [in Slagelse, as well.] And what's also happened now the last quarter is that we have got really a lot of building permissions approved. It seems that [some have been standing then] systematically in Copenhagen. So they have a real -- they have a lot to do. So we have moved resources to them, but we have capacities. We have capacity, absolutely. And Balco as a whole in the production and operation quarter 1 has too little to do.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [23]

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Okay. Good. So it's not production that's the limiting factor. It's more the project -- yes, the management of projects...

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Kenneth Lundahl, Balco Group AB - President & CEO [24]

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No small are delivering the bigger because it has moved a lot from being commissioned, into the wholesale side. So they then -- they increased their turnover step by step.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [25]

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Okay. Great, yes. That's all for me -- I'm sorry. One more if, I can pitch in. I mean now you have been working together with TBO. Or you owned it for a couple of months now, so what are your first impressions after sort of being very close to them?

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Kenneth Lundahl, Balco Group AB - President & CEO [26]

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They are really good as an organization and as person. And they really like to work with us, and we like to work with them. And we have -- it's running better than our plan. So our plan works well, but what is new is what we have learned in the market, how we see at the market. I mean how the customers are working.

As I said, these are [3] different kind of products and sales service to the customers. That is we are learning a lot from that, but actually, Kenneth, the last 6 months, what we have learned most about is actually due to these large-cycle analyses, launch time of our products, that we have seen emission positive, our energy calculations. This kind of knowledge that we have now will actually change both the way we are marking it -- we are marketing ourselves and also the way we are helping the customer to get the products approved.

Because all over -- in all countries where we are, the customer has a tremendous need. And -- but in some cases they have the problem with, how to say, the monthly costs is getting too high and so on. So the lifetime connected zero emission and also to look at the projects in a longer perspective will help the customer to build even more products. So I think that the last 6 months we have learned more about the market. And also I think now -- you know yourself. You have followed Balco pretty long time. Now we have also understood why the glazing penetration is so high at 60% in Finland. And now we understand that we can actually work differently with the market and, yes, grow it even quicker. That was a very short comment to your question.

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Operator [27]

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(Operator Instructions) And we have a follow-up question from Julius Rapeli at SEB.

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Julius Rapeli, SEB, Research Division - Analyst [28]

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Just a quick follow-up question. I mean you -- so the 7% negative organic growth, you mentioned lower orders in mid-2018. Just trying to understand here. Usually, you're talking about that the order book turnover is around a bit more than a year. And I think the lower orders that you are referring here are the Q3 orders. So can you elaborate a bit on this one just to get it clear?

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Kenneth Lundahl, Balco Group AB - President & CEO [29]

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Our -- I will say that our order ratio is about 1.2 years that we have a -- it takes 1.2 years to sort of take care of the ordered stock. And that is the situation, but we have had high -- really high order stock in Denmark and also in TBO. So there we have moved resources. They are stepping up now turnover-wise. And they -- like in Denmark we'll probably increase the turnover there 40% from Q1 to second half. So those 2 areas is really increasing turnover now quarter by quarter.

But it's also like the -- Balco AB had a bad order intake Q3 last year. That has affected the turnover this quarter, and it will also affect the quarter a little bit in quarter 2 too. So Balco AB Växjö and Polish factory have had too little to do in quarter 1, but now the order intake in Q4 looks good. Order intake in quarter 1 is good. And then we believe that order intake coming quarters will be good.

So the order stock is being built up at Balco AB pretty quick from quarter 4, quarter 1. And that will affect the turnover. So I will say that the factory in Poland and in Växjö has had little to do, but they really, I mean, had to show their ability going forward to deliver. And of course, the order stock is there and we have the order intake.

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Operator [30]

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(Operator Instructions) No further questions at this time. I'll hand back to our speakers for the closing comments.

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Kenneth Lundahl, Balco Group AB - President & CEO [31]

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Okay. Thank you from Balco.

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Michael Grindborn, Balco Group AB - CFO [32]

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Yes. Thank you.

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Kenneth Lundahl, Balco Group AB - President & CEO [33]

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Take care.