Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to the Balco Q2 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Kenneth Lundahl. Please go ahead with your meeting.

Welcome to this Q2 reporting of Balco. It's me, Kenneth Lundahl, here; and the CFO, Michael Grindborn. We'll start with Page 2, a short snapshot of Balco. Balco helps customers, which have problem with existing balconies. Our solution is to cut down the old balconies, put up a new bigger balcony, glazed or open. We focus on the renovation segment. We have a unique selling process, helping the customer through the whole process, and we have a well-established logistics and delivery function. If you look at Page 3. Best quarter in net sales, operating profit and operating margins so far. Sounds like an easy quarter, it was not. It was an intense quarter to keep all production units and all building sites in operation. But here, the management and our workers have done a really good job, and we have been able to keep everything running. And we have also been able to keep our own people safe and also our customers safe. So we have done a lot of actions to run all sites and also to see that people really are safe. If you look at the net sales increased 8%, operating profit 12%. Operating margin improved to 14.1%, best quarter so far. And then we have -- in the quarter, we have taken cost -- net cost about SEK 3 million due to the changes we have done in operations to run them safe. One example is that we don't go into the customer and do the measuring. We take extra cost to do all measuring outside. If you look at the effect of COVID-19, we have some costs, as I mentioned in the quarter, at the beginning. We have been able to work, all people -- so all people have been working. The people that -- of course, affected most, is the sales side. The sales side has been able to meet customers. And to -- I mean, to meet the board, people in the board to do the ordinary work. We have been offering more than ever the first half year. But of course, it has been a problem to have the meetings, camp meetings and have the [ votely ] meetings. And that -- those restrictions have been different in different countries and also it has been changing in different areas. Like, in Germany, during some period, I'd be not allowed to meet more than 2 people. Then it's really difficult to have a camp show or silent voting. So we haven't had any lost sale. We have been offering more than ever. Our circulation department has had a really lot to do, and all salespeople have been working, but we expect that we have moved orders in March to May of about SEK 200 million. This has started now in a good way from June, and we believe that we can catch up most of this during the rest of the year. Our operations and production has functioned, yes, normally, except some extra costs on construction sites and freight, and the net cost of this is SEK 3 million effect in the quarter. A strong financial position. Operating cash flow of SEK 86 million. Operating cash conversion of 145% in the quarter. Equity/assets ratio 48%. We have a breakthrough in U.K. and Netherlands. The U.K. project is an interesting project. It's in an area where we've been building before. Customers happy. Here -- the change here is that it's a combination of some part is glazed product and other part are open product, open balconies. In U.K. now, we have developed a new product, open balcony patent solution that we think would be really interesting for that market and also to other markets. And already now, in very short time, taken 3 orders. In Netherlands, we have a breakthrough. We have -- we're also in Netherlands -- we're already in Netherlands. But this project is interesting because it's a building where one part is owned by the community and one part is owned by the VVE, like in, a BRFs in tenant-owner associations in Sweden. And this solution is good because, of course, this will be a very beautiful -- short project, but it will also be a project that will be sold by itself because now the community sees that all solutions for them, for the buildings that they have a problem and we see that there is a solution for them when they have a need. So that's really an interesting product with the sales, really will sell other products for us. Michael, Page 4.

Yes. And looking at the financial highlights for the second quarter. We have really strong cash flow and our debt, net sales, operating profit and operating margin, so far. Our net sales increased by 8% to SEK 352 million. The Renovation segment accounted for 93% of the sales and the New Build segment just 7%. We have a slight slowdown in the Maritime segment, that's why the New Build has gone down a little bit. Order intake was SEK 278 million. Here the Renovation segment accounted for 98% of order intake. And our order backlog at quarter end was SEK 1.47 billion compared to SEK 1.64 billion last year same period. Our operating profit increased by 12%, up to SEK 49 million, and the operating profit margin was our best ever, so far, 14.1% compared to 13.6% last year. Operating cash flow, really strong SEK 86 million in the quarter due to improved EBITDA and reduced working capital. And the operating cash conversion in the quarter was 145%. And at quarter end, our cash and cash equivalent was SEK 162 million and in fact this -- compared to last year, we had just SEK 37 million in cash and cash equivalents. So turning to Page 5 and look at the summary of our second quarter. Order intake of SEK 278 million. Revenue increased 8% to SEK 352 million, gives an order backlog of slightly below SEK 1.5 billion and improved operating profit of 12% to SEK 49 million and an operating margin, best ever, so far, by 14.1%. Turning to Page 6 and look at our development of the 2 business segments we have and start with the Renovation segment. The Renovation segment had strong net sales and improved profitability. Order intake for Renovation segment was SEK 273 million. Revenue increased by 14% to SEK 325 million. Order backlog this quarter end just below SEK 1.3 billion compared to SEK 1.5 billion last year. Operating profit increased by 19% to SEK 50 million for the Renovation segment, given an operating margin in the second quarter for Renovation segment of 15.5% compared to 14.9% last year. If we look at the New Build segment, there is low order intake, just SEK 5 million in the quarter and also slightly reduced sales down to SEK 26 million. But order backlog is stronger than compared to last year, SEK 60 million more. So we have 2 -- just above SEK 200 million in order backlog for New Build segment. Operating profit of SEK 3 million and the best operating margin, so far, for the New Build segment, it was 10% in the quarter compared to 8.8% last year. So improved profit margin, but slightly lower sales due to the slowdown in the maritime segment in the quarter. If we turn to next page, Page 8, and look at the financial highlights for the first half year. In the first half year, we have had sales growth and improved profitability and also very strong cash flows. Our net sales has increased by 13% to SEK 673 million. Renovation segment has accounted for 90% of the sales. Order intake has been SEK 618 million. The Renovation segment has accounted for 87% of order intake. Our order profit -- operating profit has improved by 17% in first 6 months, up to SEK 84 million. And our operating margin has improved from 12% up to 12.4% first half year. Operating cash flow has improved to SEK 90 million compared to SEK 35 million last year due to better EBITDA and also better development of the working capital. And our operating cash conversion has been 88% year-to-date. And looking at the last 12 months, we have had an operating cash conversion of 99%. Going to Page 9, a quick summary of the first 6 months. Net sales growth and improved profitability, order intake of SEK 618 million. Revenue of SEK 673 million, 13% better than last year. Operating profit up 17%, up to SEK 84 million, with an operating margin of 12.4%. And our earnings per share has increased by 9% to SEK 2.85. Turning to Page 10, and look at the revenue and earnings per business segment for the first half year. The Renovation segment has had net sales and profit growth. The revenue has increased by 19% to SEK 607 million, and our operating profit in the Renovation segment has improved by 23% up to SEK 82 million, given an operating margin of 13.5% compared to 13.1% last year, so an improvement. Also the New Build business segment has had an improved operating margin, which has increased to 8.5% compared to 8.1%. But the sales has slightly going down to SEK 66 million and with an operating profit of SEK 6 million. Turning to Page 11, and looking at our financial position, it's a strong financial position. We have equity-to-asset ratio at quarter end of 48% compared to 42% last year, and it's driven by the increased profit and also quite low investments. Our net debt to EBITDA is down 0.5 compared to 1.5 last year, and the reduction in debt is due to a strong cash flow. And if we look at net debt to EBITDA, and exclude the leasing debt, it's just 0.3. Our profit after tax has improved by 16% for the first half year, up to SEK 62 million, and it corresponds to an earnings per share of SEK 2.85. And we have prepared for acquisitions. We have acquisition headroom. We have a banking agreement until September 2022. We have an acquisition credit of SEK 100 million. We had cash at quarter end of SEK 152 million, and we have also authorization to issue shares to finance acquisitions. And turning to Page 12, and look at our financial targets for the group. We had a growth target of 10% for year, and last 12 months we are at 14%, so above the goal. We also have an operating profit margin goal of 13%, and the last 12 months, we are now at 11.8%. So we are improving it a little bit. We shouldn't have any debt compared to EBITDA more than 2.5x temporarily, and we are now down at 0.5x. And our dividend policy is that we should distribute half of our profit after tax to our shareholders. But due to the uncertainty of COVID-19, the Board and also the Annual Meeting took the decision not to give any dividend this year. So turning to Page 13, and back to Kenneth.

Our sustainability initiatives. We know that our lifetime of our glazed balcony solution is more than 90 years and are fully recyclable. We also now know that our city balconies last for over 70 years. So there we're doing actions now to offer the customer also there financing, so it can help them to run more of these projects. Energy savings of solutions between 15% to 30%. And everything we are covering with our glazed solution reduces the maintenance of facade and windows. Our balcony -- glazed balcony solutions are climate positive after 35 to 50 years with our glazed balcony solutions. And we have new initiatives and actions to reduce with another 5- to 10-year, very short. And we have an increased sustainability focus, not for the products, also for the full company, as a whole. So you have -- we are running projects here to take a grip to improve our sustainability initiatives even more. If you look at the short-term effect of COVID-19, we have explained for you, they've coped up pretty well. It affected order intake in the first half year. And we believe that we will be in a good shape going forward. But the long-term effect, what will happen there? The COVID-19 will keep the interest rates low for a long time, and that helps us some, of course. We had no lost sales, missing order intake in March and May, the demand remains. The need is there. The offering is high, and we believe that most of this lost order intake, we can capture in the rest of the year. Our solutions are environmental friendly, and this is even more important now and also going forward, and investment in the balcony renovation with the Balco-method is climate positive. And we see that in many areas that this is really giving an advantage, both in the calculations, market cost calculations and also, of course, that is a good solution for the environment. And due to this COVID-19, where people have been home more, and of course, won't be outside the balcony -- to have a flat without the balcony, and I don't think that's a good idea. So this will also help us. I think that was the end of the presentation. Questions, please?

[Operator Instructions] Our first question comes from the line of Julius Rapeli from SEB.

First question regarding the Renovation segment and the strong margins there. Despite the higher costs during the quarter, you reached quite nice margins in the Renovation segment. Is there something project-specific during Q2? Or are you now reaching the benefits from your work with production and other operating costs, et cetera? And is this the level you expect the Renovation to remain going forward?

Nothing special more than we have been able to keep people busy. Yes, I will say that there's nothing project-wise. But I think the last year, the project you have is more and more secure, I would say, regarding the calculations. Also, there is very seldom any deviations and big deviations.

And also, when we have a lot to do, both in production and operation, we will have a very efficient organization. So having a lot to do improves the margin as such.

You have double effects. But I will say that when we're running in a good way, this is the margin you will have or better.

Yes.

And then you should know that we are not using our capacity to the -- or we can increase the capacity there, more than 30%, 40%, then we will have a stretch situation.

All right. Maybe a more general question on the competitive landscape, and now especially, when we're seeing the impact from the COVID-19 crisis. So has this affected your competition at all? I mean have you seen any smaller competitors struggling financially and maybe taking advantage of this one? Or what is your view on the competition?

We know all our colleagues in the business. Some of them are interesting colleagues, which we would like to work with. And of course, some is struggling, so I will say that especially some of them working in the new building area with low financial possibilities. If they will have one hit, they will go bankrupt. But we had a smart [ format ] actually.

Yes. And knowing -- we know all the colleagues, and we know what would be interesting for us, perhaps the buyer as well. So we have some products...

Yes. That -- it is that is we are working the acquisition. And the decision from our Board is that we will not give out any dividend because we see so many opportunities for acquisitions. So we want to be in a strong position due to everything that is happening.

Yes.

All right. Maybe last one from my side. You mentioned the orders in U.K. and Netherlands. Anything you can elaborate on these orders, maybe regarding size, and how significant are these orders for you? And then maybe some comments on the outlook on these markets? Are you expecting to win new orders in the coming quarters as well, or anything you can comment on this one?

Yes. In a Balco perspective, these are not big orders. Big orders from Balco perspective is more than EUR 10 million. But for these countries, these are really big orders. One of the orders in U.K., that's, of course, we have been building projects that before, it looks beautiful. But what is fun here is the combination that one part is the glazed side and the other one is the [ levitate ] product. So going forward, the [ levitate ] product will be very interesting, in the start for the U.K., but also for other markets. That is an open balcony solution, actually. It's an open balcony solution patent. And it is -- say, it's a little bit more expensive when we look at it. But if you look at how it assembles the building, it's really -- actually you can do that, Julius. So if you have a building like somewhere, many floors, levels and you want to assemble like very quick. You can assemble like 40 balconies in 1 day, closed in some areas, short time, as such. So it's a really intelligent solution and it's patent solution. So that is what's triggering us in U.K., that product. They will have a good progress in U.K. So U.K. will have an interesting future. Poland, this is a, what you say, prestige project. That's like a show-off project that will be a marketing tool many, many years. But what is done here, we will not need to do the marketing. Of course, here, it's both the community like [indiscernible] Thule Sweden and VVE, like a tenant-owner associations, in the same building. So here, they will have a tool to find solutions for other buildings. So this is not like, "Oh, Balco has done a terrific job." This is a job between Balco, the net fund regarding the financing, the community and the VVE. So that's really, I would say, the Dutch product that is most fun if you look -- if you're going forward because the need is tremendous there. And step-by-step, the financing is improving in Poland. I mean this year, it improved 15 to 20 years. This product is a big product. Then, you have 30 years. But I think that year-by-year, the financing will improve more or more. So it's 2 interesting projects for the future, I would say. But if you look financially on Balco, this is not big projects.

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

So to continue a bit on the U.K. and Netherlands orders, are there difference in technologies and sort of building standards and so on that makes it, maybe, a bit more risky to deliver those products? And also, do you need to make a lot of changes on your, sort of, Nordic offering when you report -- or so when you deliver those projects, please?

No. Technology-wise, no higher risk. It's not on any other projects. Product-wise, technology-wise, one of them is new, and in the U.K., and it's patent solution, very interesting. Regarding sales process, the sales process in U.K. is not like the Nordic sale process. So here, you have more competition, a little bit lower volumes. But with this new open balcony here, where we are alone, there we will actually be able to have higher margins on this solution even in the new building area. In Poland, you have the seamless sales process as in the Nordic countries. Though the difference here that the financing is shorter than in the Nordic countries. If you would have the same financing as in Sweden, the Dutch market would have been exploding because they are 10 years behind in the actions they've done with their balconies. That -- yes, I think that's anything more?

I've had a tremendous meeting with [indiscernible], so we renovate the balconies. So -- but when we get good financing solution there.

But that we have the financing solution, and it's improving step-by-step.

Yes.

So it's moving forward.

Okay. And then I was also thinking with all this coronavirus and lockdowns and things, how have you been affected in your business to cruise ships? Have you been able to work as usual? Or have there been delays? Or yes, can you talk a little bit about that?

We have been able to work -- yes, absolutely, we have been able to work. But I would say, that in that segment, there is no, say -- they don't lose any orders and so on. But there is -- they have a tough situation, the cruising area. We have -- I was on a meeting with them. And the total cruising area lose SEK 100 million a day. So I would say that we should not expect any tremendous orders in new ships really short. That we should not do. So here, they say that they did start with the cruiser ships in October, and I'm really interested to see how shall that work because I've booked the cruising myself in December. But if we have a good control of the progress we have, and we have a very -- we have utilized the strengthening of the euro for the next coming project. So we see the margin of the projects we have in the order sector look pretty good. I hope no one was recording this because then maybe that can sue me.

Okay. Sounds good. And also, you commented in the report that you hope to, sort of, retake a lot of orders in the second half that you have had lower order intake in the first half. And I guess you base that statement on a little bit the development in July and August and also by the number of tenders for orders that you have out there. Is that correct?

Yes. It changed toward June. I would say, March to May was really boring. I mean if our main market would have been in Germany because they were really so restrictive that 2 people to meet. So in June, you had relaxed, it was, what's called, our turnaround; and July, August looks okay; September, really promising. So we can say that is -- that we have a lot to do. Of course, there will be an effect of a hole in the period, in some effect, in turnover over perhaps a little bit in Q4, Q1. But what we look at is, of course, what will be the order stock when we go into 2021? That is what we base our, say, budget 3-year plan in this kind of thing. So that's the -- that -- where we are. That's what we are working. What kind of order book shall we have in 2021? And I would say that we will know that pretty well of September. Yes.

Yes. Because then you look at what tenders are out there, and you have a good feeling...

For what to work, yes.

Yes.

[Operator Instructions] And as there are no further questions, I'll hand it back to the speakers.

Excellent. Thank you very, very much, and we wish you all a sunny day. Thank you.

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