Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to the Balco Q3 Report 2020. [Operator Instructions] Today, I'm pleased to present CEO, Kenneth Lundahl. Please go ahead with your meeting.

Thank you. Welcome to the Q3 reporting of Balco. We'll start with Page 2. Balco helps customers which have problem with their existing balconies, and our solution is to take away the old balcony, put up a bigger, in most cases, glazed balcony. We are focusing mainly on the renovation segment. We have unique selling process, helping the customer to the whole process. Page 3. Q3, strong financial position, but quarter affected by COVID-19. We have an improved EBIT margin but negative COVID-19 impact. Net sales was SEK 258 million compared to SEK 292 million last year, operating profit SEK 29 million compared to SEK 31 million. Operating margin improved to 11.2% compared to 10.7% last year. COVID-19. The second wave of COVID-19 with increased spread of infection in most countries have postponed Balco's order intake in the third quarter. We have a lot of activities. We're working with the customers, and we can do most of the work, but people are cautious about meeting in groups. And in the last process, we had a meeting physically that people meet and they vote. Here, we are working with other solutions. And we have some digital voting that happens. And we are also now evaluating quick tests, COVID-19 quick tests. And I think we have chosen one supplier now. So we'll actually offer all our customers quick tests. And the people who had corona, they can give power of autonomy in the voting process. So we are working with different solutions so that the customer really can have their vote and because we had a really good, what you say, piling up of possible orders, but we have to solve the last part of the process and help the customer then. Customers have moved the final voting of projects in Q3 for a value of more than SEK 250 million. Possible orders are piling up in Q4 and Q1 2021. But the weak order intake since March will negatively affect sales and earnings in the coming quarters, mainly Q4 and a little bit in Q1. We had a strong financial position. Operating cash flow of SEK 35 million in the quarter, and operating cash conversion of 91% in the quarter. Our equity asset rate is 49%. The bulk -- no dividend in 2020 due to acquisition opportunities. Balco evaluates various acquisition opportunity. And in the light of this, the Board of Directors confirmed its previous decision not to pay out a dividend in 2020. Michael, next page.

Yes. Some more financial highlights from the third quarter. We had strong cash flow and improved our operating margin. Net sales, as Kenneth mentioned, amounted to about SEK 258 million, down from SEK 292 million last year. The renovation segment accounted for 94% of the sales and the new build segment is just 6%. Order intake amounted to SEK 142 million, down from SEK 199 million. The renovation segment accounted for 87% of order intake in the quarter. Our order backlog at the end of September was SEK 1.3 billion, down from SEK 1.56 billion last year. Operating profit amounted to SEK 29 million, down from SEK 31 million last year. But our operating profit margin improved to 11.2% from 10.7% last year. Cash flow was strong and improved to SEK 35 million, minus SEK 1 million last year, mainly due to reduced working capital. And our operating cash flow version was 91% in the quarter and cash and cash equivalents at the quarter end was SEK 181 million. Turning to the next page. Just a summary of the third quarter. Order intake, down 29% to SEK 141 million. Order backlog reduced 17% to SEK 1.3 billion. Revenue down 12% to SEK 258 million, and operating profit down 8% to SEK 29 million, but an improved operating profit margin of 11.2%. Turn to the next page and look at the development of our business segment and start with the renovation segment. Also here, order intake was down 24%, down to SEK 124 million. Order backlog reduced by 23% to SEK 1.1 billion. Revenue reduced 5% to SEK 242 million, and operating profit was reduced by 6% to SEK 29 million, but we have a stable operating profit margin of about to 12% in the quarter. And if you turn to the next page and look at the new build segment. Here, the order intake was very low, just SEK 18 million, and also revenue was reduced quite a lot by 57%, down to SEK 60 million. Revenue was a lot affected of the maritime business, which has slowed down a lot. They try to -- they have not canceled any orders, but they have postponed the fulfillment of our running projects. So we have been postponed in time. So still, the order backlog is bigger than last year, SEK 205 million, 45% more than we had last year. And operating profit was affected by the low sales, just SEK 1 million profit in this quarter, but a stable operating profit margin of about 4%. Turn to the next page and look at the 9-month period. In the net first 9 months, we have had net sales growth and improved profitability and strong cash flow. Net sales has increased by 5% in the 9-month period to SEK 931 million. Renovation segment has accounted for 91% of the sales and new build segment, 9%. Order intake has amounted to SEK 703 million, while the renovation segment has accounted for 86% of the order intake. Our operating profit has improved by 10%, up to SEK 113 million, and operating profit margins have improved to 11 -- 12.1% compared to 11.6% last year. Operating cash flow has improved to SEK 125 million compared to SEK 34 million last year, and it's due to better EBITDA and also better development of our working capital. The operating cash conversion in the 9-month period was 89% and if we look at the last 12 months, we have had 119% operating cash conversion. So really strong cash flow. Turn to the next page and look at a summary of the first 9 months. Order intake has been down by 30%, strongly affected by COVID-19, so it's down to SEK 703 million. Revenue has increased by 5% to SEK 931 million. Operating profit increased by 10% to SEK 113 million with an improved operating profit margin as well. And our earnings per share has increased by 7% and is now SEK 3.82 per share. So if we turn to the next page and look at the development for the 2 business segments in the first 9 months. Our renovation segment, we have seen an improved revenue by 11%, up to SEK 850 million and also an improved operating profit by 10% to SEK 109 million, with an operating profit margin of close to 13%. The New build segment has been affected mostly by the maritime segment slowing down, so we have reduced revenue by 33% to SEK 82 million and also reduced operating profit by 27% down to SEK 6 million. But we have improved our operating profit margin, so it's now above 7% for that segment. Turning to the next page and look at our balance sheet and our strong financial position. The equity-to-asset ratio, it's currently at 49% compared to 45% last year for the same period, and it's driven by increased profits, low investments and, of course, also no dividend this year [indiscernible]. Our net debt-to-EBITDA is down 0.4. And if take away also with leasing debt is just 0.1. So we have really low debt for the moment. Our net profit for the period. Profit after tax has increased by 8% to SEK 83 million, and it corresponds to earnings per share of SEK 3.82 per share. And we are really prepared for acquisitions. We have an acquisition headroom. We had a banking agreement until September 2022. We had an acquisition credit of SEK 100 million, and we had cash and cash equivalent at quarter end of SEK 181 million. And then we have also authorization to issue shares to finance acquisitions. Turning to the next page and look at our financial goals. We have a growth target of 10% a year. Currently, the last 12 months, we are down now at 6%, affected by the COVID-19 in the third quarter. Profitability, we have goal to reach 13% of profit margin. And looking for the last 12 months, we are now up to 11.9%. When it comes to debt, our net debt-to-EBITDA should not exceed 2.5x and currently at just 0.4, as I mentioned before, without the leasing debt just 0.1. And our dividend policy is that we should distribute 50% of the profit after tax to our shareholders, but -- due to some uncertainty of the COVID-19, but mostly affected by all the possibilities we see with some acquisition targets, we have decided not to have any dividend for this year. We turn to next page and summarize by Kenneth.

Thank you, Michael. Page 13, our sustainability initiatives. We know that our lifetime is -- of our glazed balcony solution is more than 90 years. We know that the lifetime of our Balco city balconies are -- last for more than 70 years. I know that our energy savings of our glazed balconies solution is between 15% to 30% depending on products and conditions. We know that our solutions -- balcony glazed solutions are climate positive between 30 to 50 years depending on solution. Here, revenue goes to reduce this within another 5 to 10 years, and this is already in action, and I will say that we will reach this goal in the beginning of 2021. We are increasing our sustainability focuses. We know that we have climate-positive solutions, but we're also working with the sustainability focus in the whole group. And our goal here is to be green-rated in sustainalytics in the beginning of next year. And this is one of our top priority projects we are working at Balco Group. Okay. That was the end of the presentation. Please, questions, and we will try to answer.

[Operator Instructions] Our first question comes from the line of Kenneth Toll from Carnegie.

So I'm a little bit worried about the order intake. And you say that, well, there are postponements due to COVID and so on. But now the COVID is spreading faster or quite fast at least and this situation might last until the summer or something like this. So are you preparing yourself for a period now or maybe a year ahead of lower sales volumes and so on? Are you trimming your costs or how are you meeting this period?

We're still optimistic about the possible orders coming in. So we don't -- because it's piling up, and we are -- we have an order intake, and it looks not as bad yet. And we have more and more solution of digital voting solutions. Now we will offer all our customers which want a quick test, COVID-19, takes 15 minutes to get an answer.

And at low cost.

At a very low cost. And after that, the people who have the corona, they can make, let's call it...

Power of attorney.

Power of attorney and those things because the customers really want. They want to have a solution. They want to solve that. And they are obviously concerned. We are not in that stage. But of course, as you say, Kenneth, you never know if the corona would be really increasing and gets even more dangerous, we never know what kind of decision government takes. But we don't feel that -- now, I would say we are still pretty optimistic. The orders are piling up. So even if half of the orders were postponed, there are still orders coming in. So it's not like end.

And we have more client find solutions by our customers so they can have many meetings. Yes, of course, we are prepared. Even if it not happen, we are prepared.

And the answer to your question, we are not yet in any position that we cut costs in a -- no, we don't see that need yet. And so if it would be needed, we can do that.

Yes, I guess. And the beautiful thing just with balcony --

Kenneth, a question to you. If you look at the increased sale cost this year, the sales cost is still increasing. So it's not that we are not yet changing anything in our strategy. I would think opposite, and our strategy will be even more aggressive. So we have no plans to reduce our sales force. We have increased sales cost this year with, I don't know how much is it?

SEK 50 million, roughly.

SEK 50 million. So that's not -- we increased our sales probably SEK 50 million in a corona crisis. So we're -- Kenneth, we're not there yet. Still optimistic.

That's good. And the beautiful thing with balcony is also that if you don't renovate them today, they will need a renovation. So it could just be a soft spot, and then the demand is still out there once we are through it.

Yes. We are working -- our sales force are working and there is a mutual need both from Balco and both from the customer to solve this. But of course, in the process, you have 3 meetings where you meet a lot of people. You have a lot of meetings. You have meeting the [indiscernible]. You have a meeting with Tim Show, and you have a meeting in the voting process. And there are different solutions. But of course, when a government in Germany says that you're not allowed to meet more than 7 people, then it affects -- it gets more difficult. So it has -- it's most difficult in Germany and Denmark. Kenneth, no cost cuts yet.

And the next question comes from the line of Julius Rapeli from SEB.

Maybe one question relating to order intake and the outlook for Q4. Now we are quite far already in the last quarter of the year and the impact in Q3 was quite hard from the pandemic. So you briefly talked about it already. But what's your outlook for Q4 and what should we expect regarding orders here?

Regarding orders, it's piling up in Q4 and Q1. So we are optimistic. But you never know what decision will be taken tomorrow with different government. That is the case. And what will affect us in Q4 and Q1, that's the turnover. The cost of the low order intake the last 6 months. But there are a lot of products we are working with. And if you ask me today, we are optimistic to grow the order intake in through Q4 and Q1, because it's also piling up a lot in Q1. But what will happen tomorrow? And yesterday, Julius, we were not allowed to go and drink alcohol after 10:00 in Sweden. So what will happen tomorrow?