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Edited Transcript of BALCO.ST earnings conference call or presentation 14-Nov-19 8:00am GMT

Nine Months 2019 Balco Group AB Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Balco Group AB earnings conference call or presentation Thursday, November 14, 2019 at 8:00:00am 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, Head of IR & IT

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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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Thank you. Welcome to the future reporting.

We start at Page 2. Balco is a product company, helping customers which have problem with their existing open balconies, and we cut down the old balconies and put up new [PK] glazed balconies. And we are focusing mainly the Renovation segment. We have a unique selling process, helping customers through the whole process. And our production operation and our logistics setup is really strong. There is no one in the market that is even close to us.

Our key markets are Sweden, Denmark and Norway. We change to Page 3. We're happy with the quarter and the result of it and also the -- our -- the activities on the market and so on, so we're really, really happy. If we look at the order intake, the growth was 57%. Organic growth in order intake was 32%; net sales increased 23%; operating profit, 25%. And we had some delays in our -- some of -- with some of the bigger projects and that has hurt our turnover a little bit in the quarter. And so our organic growth was negative by 9.8%. Some of these projects here were in waiting pretty long time for -- to get the building permission. So now when they started, they got the building permission, there were some changes. And of course, we wanted to increase the prices. So in some of these cases, they actually had to go up and take a new Board meeting, and that is actually one of the reasons why it is a little bit delayed. But we don't see it as a problem. It's more that organic order stock is increasing even more.

And also now when we are in the budgeting process, looking forward, we can see that the order stock that their operations can work with at the [modern] Balco AB has increased 60% during the year. And this gives a really strong momentum going into next year. So next year, Balco AB will be the growth engine turnover. So our plan is working very well. We can also see another something that -- we look at, of course, at organic sales order intake growth and that's -- that looks good for the whole year and in the quarter, but our operation and productional organization, they don't think about which kind of order stock do we have, is it organic or is it both? They work with a total order stock and a healthy (inaudible).

We've come to the organization, we have now changed our group management, made it different and have also employed Camilla Ekdahl as CEO of Balco AB and CEO of the Group.

And there are 2 reasons for this. One is to really get good synergies and control of operation and production in the whole group, get the synergies between all the company and also that operation and production, they should see the order stock as one part helping each other with the flexibility in the whole group. This organization is also done so that it will be easy -- we have -- a part of our organization is working with -- looking at acquisitions that this organization also done so that we can easily acquire and integrate new companies in the group. That's one of the reasons that we have changes in organization. If you look at financing, we showed last quarter that we had a breakthrough in the -- in what we explained monthly cost, we are climate positive. Our lifetime is -- probably, it's more than 90-year that we have worked with our financing. And the breakthrough we've had in Sweden going from 50 years amortization to 70 years is where -- the customers are really happy with that, our sales organization, of course, but the effect of this is really positive, and we will not see it in the order take -- intake more perhaps end of next year. But this is actually a decrease of the monthly cost to 25%. There is a -- cases where the customer didn't have the possibility to actually financially do the product and now they have it. So this is really, as we thought and that means really good.

We, of course, working -- trying to do the same thing now in our other key markets. And Michael, Page 4.

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Michael Grindborn, Balco Group AB - CFO, Head of IR & IT [2]

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Yes. Some financial highlights in third -- the third quarter, as we said, consistently good quarter overall. We had an increase in net sales of 23%, up to SEK 292 million.

As Kenneth mentioned, organic growth was negative 10%, and acquired was positive 33%. The Renovation segment accounted for 87% of the total

Sales and the New Build segment, 13%. It's a higher share in the New Build segment than we had last year where we had just 10% in the New Build segment. Order intake was increasing by 57%, up to SEK 199 million, of which organic growth was 35%. The growth in the Renovation segment was 40% and accounted for 81% of the total order intake in the quarter. Our order backlog has increased by 29% compared to the same period last year, up to SEK 1.66 billion and of the increase SEK 155 million is organic growth.

Our operating profit has increased by 25% in the quarter, up to SEK 31 million, and the profit margin improved to 10.7% compared to 10.6% last year.

The rather small increase is due to the higher cost of sales in the New Build segment. We have seen good improvements in the profitability in the New Build segment, but it's still much lower profitability in that segment in -- than in the Renovation segment.

So that's one major reason why the profit margin hadn't increased more. Our cash flow was slightly negative in the quarter, SEK 2 million, compared to a positive operating cash related last year of

SEK 33 million. It's also mainly due to delays in -- of these major -- big projects that we mentioned before, because when we get a light delays in the projects, we also tie up more capital on ongoing projects. We have certain payment plans, and we have to reach certain costs in the projects for the customer to pay.

If we go to Page 5, just a summary in diagrams, growth in top line, earnings, order intake and order backlog. Order intake plus 57%. As I mentioned, 35% organic growth. Net sales increased 23%; order backlog, 29%, increased compared to last year, of which 13% is organic growth; and operating profit increased 25%; and operating margin improved to 10.7% in the quarter.

So if we go to Page 6, we will then start to look at the 2 segments we have and stuff for the Renovation segment, our big segment, where we focus mainly. We had a strong order intake and a solid profitability. Order intake increased 40%, up to SEK 162 million. Of this 40%, 17% was organic growth. And it was in total 81% of the total order intake in the third quarter. It was coming from the Renovation segment.

Order backlog has increased 36% compared to last year and is SEK 1.4 billion now, the Renovation segment, and it's 91% of our total order backlog.

The net sales for the Renovation segment increased 16%, up to SEK 255 million. It's 87% of our total sales in the third quarter. And net operating profit for the Renovation segment improved 24%, up to SEK 31.5 million. And the operating margin improved to 12.3% (sic) [12.9%] compared to 11.6% last year. So good split quarter and solid profitability in the Renovation segment.

So if we go to Page 7, the New Build segment, where we have a new strategy, much less focus, and we just take certain kind of projects where -- and the biggest part in the New Build segment is our second project in the maritime business that is so far -- is following time line very well and also profitability. Order intake improved more than 200% in the New Build segment, up to SEK 37 million in the quarter, and it was 19% of the total order intake. We also had a good increase in net sales, and it was 13% of our total sales compared to 10% last year. The order backlog, though, in -- for the New Build segment has decreased compared to last year by 14%, down to SEK 142 million and is just 9% of our total order backlog for the moment.

Good improvement so in operating profit, going from SEK 0.2 million up to SEK 1.6 million. And operating margin in the quarter improved from 1.1% up to 4.3%. So we see that this new strategy is delivering in the improvements to New Build segment as well.

Heading forward to Page 8 and our 9-month financial highlights. So far in here, we had good growth in sales and order intake, and we have also improved our profitability. Our net sales has increased by 18%, up to SEK 887 million. Here, the acquired growth is 24% and the organic growth is negative by 6%. The Renovation segment, that's been 86% of our total sales and New Build 14% so far this year.

The order intake has increased by SEK 300 million, up to SEK 997 million, an increase of 43%, of which organic growth has been 20%. The growth in Renovation segment has been 38% and has accounted for 89% of the total order intake in the 9-month period.

Our operating profit has increased by 31%, up to SEK 103 million, and operating margin has improved from 8.4% up to 11.6%. Also the operating cash flow has improved slightly during the year, up to SEK 31.7 million compared to SEK 22.9 million and is due to better operating profit and also some increased depreciation due to the IFRS 16 implementation.

So in summary of the 9 months in diagram form, our order intake has exceeded revenue by 12% so far. So an order intake increase of 43% and a net sales increase of just 18%. But also a good improvement in profitability, 31% improvement and operating margin going from 10.4% up to 11.6%. So the 2 segments in the 9-month period. If we look at the Renovation segment, the net sales has increased by 13%, up to 764% (sic) [SEK 764 million]. It's 86% of our total sales. And here, the acquired growth has been 27%, while organic has been negative 14%.

But if we look at order intake, we have an increase of 8% -- 38%, up to SEK 888 million. And here, the organic growth has been 14%, and it's 89% of our total order intake. Operating profit has improved 22%, up to SEK 98 million, with an operating margin now of 12.9% compared to 11.9% last year, so 1 percentage improvement in operating margin.

The New Build segment, as I mentioned, the biggest project so far is our second maritime project, and we are seeing a good increase in revenue, 62%, up to SEK 123 million, it's 14% of our total sales. Also order intake has grown, almost doubled, up to SEK 110 million, and operating profit has improved from just SEK 1 million up to SEK 9 million and then operating margin is now 6.9% in the New Build segment compared to just 1.6% last year, so a big improvement in profitability.

And if we look at our financial position on Page 11, we have still a very solid balance sheet, and we are prepared for more acquisitions.

Our equity-to-asset ratio is at 45%, slightly down compared to last year when it was 46.4%, and it's driven by the increase of the balance sheet total assets from the acquisitions of TBO-Haglinds and also the implementation of IFRS 16. Our net debt to EBITDA is up to 1.5x at the end of September compared to 0.9x last year, and the increasing debt is also coming from the acquisition of TBO-Haglinds and also the implementation of IFRS 16. If we take away the leasing debt, our net debt to EBITDA is just at 1.1x by the end of September. Our profit after tax improved -- has improved by 33%, up to SEK 77 million, and it's corresponding to an earnings per share of SEK 3.87 compared to SEK 2.81 last year, so more than SEK 1 better earnings per share. And there we are prepared for more acquisitions, as we mentioned last report. We have prolonged our banking agreement until end of September 2022, and also our acquisition credit is restored at SEK 100 million. And we have also strengthened our group management -- our new group management that is also prepared for acquisitions.

So our financial targets, finally at Page 12. We have a growth target of 10% per year. And looking at the last 12 months, we have a growth rate of 13%. We're exceeding that. We have a profitability goal of reaching 13% profit margin. Our adjusted profit margin in the last 12 months is currently at 12.1%. Our net debt to EBITDA should not exceed 2.5x more than temporarily, and we are currently at 1.5x, and we have also a dividend policy that we should distribute of our profit after tax, of course, taking in consideration of the Balco's long-term growth and prevailing market conditions. And this last year, we were at 54%. And giving off now to Kenneth, again, Page 13.

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

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Yes, regarding our sustainable initiatives. We have done our lifetime analysis of our products, and we know that they last more than 90 years, and we thought that we had to change more of the things than we did during the 90 years but it's enough for 2 services for SEK 2,000 last year during this period and then products will really last a lot. But during this analysis, it was so obvious to see that it's our integrated glazings that is the key also to protect the concrete that we are using. So solutions, which other colleagues have, where the glazes are not integrated is not working with a lifetime. We can also see that now in Finland, half of our products -- projects we are selling in Finland, starts with taking away old glazings and then to go in cut down the old balconies.

So lifetime, really good and the service we need to do during this period better than expected. We all climate positive. It's a difference depending on which kind of product decision, of course, is it south or north, but it's between 20 and 40 years, and we have learned so much now so that we know how we can develop the product further and even improve this more, and we also know which kind of cost that is affecting the 0 emission most. So here, we can also do changes. And I think also in future to be impossible to tell the customer. This solution will give you a 30-year's climate positive. If we increase the price a little bit, it should start -- materially can go down in the time you get climate positive. So this is really a eye opening, and we have learned a lot.

Energy saving with our solution is between 10% and

30%, depending on product and condition. And we know also that our solution gives a reduced maintenance of façade windows. And here, we are also -- this is not yet taken into account when we are -- have done, I'll say, analysis and I'll see when we are climate positive. So this is the next work we're doing. And I guarantee that this will show that the climate wall of our product is really the key, both to solve the, of course, the problem with the balcony, but also to solve the maintenance during a long period for the buildings. That was the presentation of the Q3 reporting of Balco. Questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from the line of Julius Rapeli from SEB.

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

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First question relating to the postponement in the projects. You mentioned that some of these projects needs new approvals for the Board meeting. So do you see any risk that these clients could decline these projects? And I assume that these projects are already in the order book, right?

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

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Yes. No, we see no risk there.

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Julius Rapeli, SEB, Research Division - Analyst [4]

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All right, all right. Even if you have raised the prices, so no risk in your side?

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

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Yes, yes, yes. It's -- it depends -- these are the kind of projects, but I can't mention the names of them, but in some cases, there have been building commission discussion. We have to change the product a little bit and combine with the product. Of course, if you have wait a long time, you have this index increase the prices, and then they need to take a new Board decision. But we haven't seen that, that is a problem.

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Julius Rapeli, SEB, Research Division - Analyst [6]

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All right. And if I can continue on this one. Is there some sanctions if clients would, for some reason, cancel a project?

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Kenneth Lundahl, Balco Group AB - President & CEO [7]

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In this late stage, yes, but we have actually done like this that -- if you look at the order stock in your question, I will say that every year, we take out 1 to 2 projects in the order stock where we see that this will not happen -- or not happening in a couple of years, so that can happen. And then we have taken in costs like white-collar work and so on. And the -- if we want, with the agreement we have, we can go after the customer and tell them to pay some of this, but we are very, how to say, humble here because we see this as a marketing activity. So if you want, we can go after them and tell you have to pay this and this and this. But we actually don't do that. So for the small products we take out of -- from the orders of every year, 1 to 2 products, we don't go after the customer because we don't have -- want to have this bad wind, but we could do it technical, but we don't.

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

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All right. And then the last one from my side regarding TBO. Again, the revenue growth and revenues were really strong in TBO and after 3 quarters, you already exceed the 2018 figures. So question relating to TBO's order backlog, how does that look like? And should we expect similar figures in Q4 regarding revenue growth and -- on revenues?

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

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Regarding order backlog, as I said, now the order backlog, which you can work really, looks tremendously good in Balco AB, I mean the mother. That has increased to 60% during the year.

So during 2020, Balco AB will be the growth engine turnover-wise.

If you look at TBO, they have a good growth in turnover, but you should also know that one of the reason is that we are helping them. When we write the reporting here, we talk about organic growth and so on. But our production and operation organization, they don't care about what parts in the order stock that are organic or not. So I would say that TBO now is already so well integrated, so the production and operation organization see the company as one unit. So they have got a lot of help from Balco regarding project leadership, production and all thing to really educate the orders so quickly. And I think that was also one of the reasons why they did sell that they felt that they couldn't -- they didn't employ more sales people because they didn't feel that they could handle order stock that they have. So what we have done this year is that we have helped them, so they have a good growth in revenue, but they have also employed more sales persons because they have confidence. So they have actually -- they have, I will say, flat order stock, good order intake growth compared to last year, good revenue growth that their order stock is flat. But their order stock in the rest of the group is -- has grown a lot.

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Operator [10]

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

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [11]

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So continue on TBO, do you see that they also have a strong order intake, so that they can continue to grow into next year?

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Kenneth Lundahl, Balco Group AB - President & CEO [12]

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Yes. That's -- I would say that, yes, yes, yes. And yes, again. One thing Kenneth, what we've seen -- I mean now its Q4, we're looking at next year, so

The activity in all markets looks really good. And TBO is a great success, both integration-wise, sales-wise and how they like it. We have learned a lot of this. And of course, this will give [him] other areas, too. But they have a really good order intake growth.

They -- I think they wouldn't have dared to do what they're doing without us in the sales organization and the order intake.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [13]

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So you think that went -- with TBO well integrated, it might be next -- it might be time for taking the next step in terms of acquisitions, I guess?

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Kenneth Lundahl, Balco Group AB - President & CEO [14]

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Yes, yes. I think one of the reason why we are doing this organization change with the group management and also with Camilla. Camilla is really a competent person. I worked with her in Thule. I worked with her in Isaberg Rapid and now she's a strong -- Camilla has a strong position in Balco. And the reason for that is really to have the group as a group unit for production and operation, so that feed order stock (inaudible). It doesn't matter where it is. That -- it's also so that we can -- when we make an acquisition, it's easy because the -- when we acquire a company, the MD will report to me regarding sales, operation and production will be integrated in the Balco Group.

So this new organization is actually to get synergies where we have, but also to make it easier to acquire and integrate new companies, like TBO.

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

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And then on building permits, do you -- you had some hopes that the process of getting building permits might ease or speed up a little bit when the residential construction starts and so on in Sweden were slowing. Have you seen any positive effects for -- in -- yes, in the building permit processes?

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

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No. And actually, when we talk about this issue in Stockholm, Stockholm is still an issue.

And Stockholm, it's a -- no -- I would say that when we look at this, I'll say, how we turned order stock into growth. I would say it's 1.2, but it's not 1.1. It's from 1.2 towards 1.1.

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

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Okay. And then finally, on the maritime side, you're running a project now, and it's in line with plans and so on. So first question is then you're not nervous for Q4 when it comes to earnings and then final deliveries and so on? And secondly, do you think you will do more such projects? Do you have any such projects in the order book? Or should we expect orders?

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

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The project is running and working well, and the customer's extremely happy. I was actually there last week, Monday, Tuesday and have a discussion with them.

And they are really happy. And they have one more project in the order book, and they are -- they have -- they really want us to deliver more boats, and we will be in this segment continuing. And you see also now that our profitability is okay in this area. And if you take new boats, the profitability will not go down, it will go up even more from the base we have today.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [19]

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But when will this -- the current project run out? And will you be able to replace that business with new business? Or do you think there will be a gap?

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

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There will be no gaps. I can't tell everything about the future, but there is a need there and they have sold a lot of boats, which we haven't got us order yet.

So the customer -- our customer have a lots of boats sold, where we not have the orders yet of doing the balconies. So we will not have any gap, we will deliver balconies to the cruising segment in the next coming 4 years.

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Operator [21]

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As there are no further questions, I'll hand it back to the speakers.

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

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Michael, anything else?

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Michael Grindborn, Balco Group AB - CFO, Head of IR & IT [23]

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No.

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

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Then we wish you all a really good day.

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Operator [25]

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This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.