Balco Group AB (BALCO) Earnings Call Transcript & Summary

Welcome to the Balco Q4 Report 2020. [Operator Instructions] Today, I'm pleased to present the CEO, Kenneth Lundahl. Please begin your meeting.

Thank you. Welcome to the Q4 Balco reporting. It's me, Kenneth Lundahl here, and Michael Grindborn, the CFO. And we'll change to Page 2. I would start with a little bit of summary. If we look at the corona pandemic situation from March last year until now, that affects Balco due to the restrictions in meeting people. We can do all other kind of work, meeting customers, certainly we're doing a lot of work, but the restriction is affecting our possibility to really close the orders. Now we know that this is the situation, and we have created a lot of tools so that we can in different countries use different kind of tools to really close orders. In Sweden it's one away, Norway one way, Denmark another way. We also have sales to do [indiscernible] before the meeting, so We have launched our digital meetings. But to understand the strategy during this pandemic from March until now, is that we know that potential Balco have in the market, the organic growth potential. So June, whole this process, we have taken a decision not to affect any of Balco's potentials going forward. We want to run through this process without hurting anything of the decisions we took towards that corona situation. So you should understand that what we are doing is that last year, we did increase our sales cost in 18%. And we are not making any changes to reduce any sales cost. At the moment, we have more product development resources than ever working for us. So through this process, we are not, how to say, cost-cutting any areas that we see that is crucial for us going forward in our -- with our organic growth possibilities. We know there is a lot of projects we're working with. We know that the market is tremendous. We know that we are unique. And we -- our strategy is to go through this process, coming out in a very good shape. But this, of course, strategy affects turnover and profit. We could have delivered more profit if we may cost cut in some areas, but we are not doing that. That was a bit short introduction. If you look at Q4, strong cash flow and financial position despite COVID-19. Sales and profit negatively affected by COVID-19. Net sales SEK 269 million compared to SEK 333 million last year. Operating profit, SEK 3 million compared to SEK 38 million. Adjusted EBIT SEK 22 million compared to SEK 38 million last year. Operating margin in Q4, 1.1% compared to 11.3%. Adjusted EBIT margin, 8.3% compared to 11.2%. COVID-19. Cost effecting comparability of SEK 19 million were taken in the quarter in connection with increased risk exposure to COVID-19. Michael will explain more about that later. No grants or other support linked to COVID-19 were received in 2020. Strong financial position. Operating cash flow of SEK 71 million and operating cash conversion of 225% in the quarter. Equity/assets ratio 49%. We made an acquisition of Stora Fasad on February 10. Balco acquired Stora Fasad AB, with net sales in 2020 and SEK 30 million and an operating profit of SEK 5 million. The acquisition adds expertise in the facade area and will strengthen Balco Group's offer for turnkey contracts for both balcony and facade renovation. I will go through this later in more -- in detail in the presentation. Michael?

Yes. We are now on Page 4. And as Kenneth said, the net sales in the quarter landed on SEK 269 million. Of this, the Renovation segment accounted for 92% of the sales and the New Build segment of 8%. Our order intake was SEK 230 million compared to SEK 352 million last year. The Renovation segment accounted for 89% of order intake and New Build 11%. Overall, backlog end of 2020 was SEK 1.1 billion compared to SEK 1.5 billion last -- year before. And the reason -- one reason behind this is that at the end of the year orders to an amount of roughly SEK 150 million was removed from the order backlog. And these are orders that we estimate will not be able to start-up within a 12-month period. So due to COVID-19 and a higher risk expectations and risk exposure, we decided to take these orders out, but we see that a lot of them will probably come back later on, but not within 12 months as we expect. Operating profit amounted to SEK 3 million and adjusted EBIT was SEK 22 million compared to SEK 38 million last year. We took in the quarter a cost affecting comparability of SEK 19 million. It was no cash costs, and they are also due to the higher risk exposure linked to COVID-19, in projects, in our order backlog, in accounts receivables and in inventories. These costs are mostly also as we see it nontax deductible. So that's also one reason that we show quite high tax rate, both in the quarter and in the year, because of these SEK 19 million, most of them we have taken as non-tax deductible costs. Our operating profit amounted to 1.1%, and adjusted EBIT was 8.3% in the quarter compared to 11.3% last year. The cash flow was strong, SEK 71 million. Operating cash flow in the quarter with an operating cash conversion of 225%. And cash and cash equivalent at the year-end was SEK 214 million, almost SEK 100 million more than the year before. So if we turn to Page 5, a quick summary, once again, of these financial figures. Order intake SEK 230 million, down 35% from year before. Revenues, SEK 269 million, down 19%. Order backlog, SEK 1.1 billion compared to SEK 1.5 billion the year before. And our adjusted operating profit, SEK 22 million, down 41%, with an adjusted operating margin of 8.3% compared to 11.3% year before. So we turn to Page 6 and look at our 2 business segments and start with the Renovation segment. The Renovation segment had order intake of SEK 204 million in the quarter and revenue of SEK 246 million. Order backlog at year-end was SEK 882 million. And our adjusted operating profit for the Renovation segment was SEK 24 million, down from EUR 36 million a year before, with an adjusted operating margin of 9.9%. If we turn to Page 7 and look at the new Build segment. The order intake was SEK 26 million, down quite a lot from year before. But in December 2019, we got an order in the Maritime segment of SEK 70 million, so that explains more or less the total difference between the 2 years. Revenue was SEK 22 million in the quarter. And for the backlog at year-end is SEK 204 million, so it's up 12% from end of 2019. Operating profit in the quarter of SEK 1 million with an operating margin of 2.5%. Turning to Page 8 and look at the full year figures for the company. We had in 2020 net sales of exactly SEK 1.2 billion, and it's a decrease of SEK 21 million from 2019. And of these SEK 21 million, SEK 17 million comes from the currency effect, affecting negatively. The Renovation segment accounted for 91% of the sales and New Build of 9%. The order intake for the whole year was SEK 933 million, down from SEK 1.35 billion last year before. And the Renovation segment accounted for 87% of order intake, New Build for 13%. Operating profit amounted to SEK 115 million, and adjusted EBIT was SEK 135 million compared to SEK 140 million year before. Our operating margin, 9.6% and adjusted EBIT of 11.2% compared to 11.5% year before. Operating cash flow has been strong the whole year and improved to SEK 196 million for the year compared to SEK 134 million year before, mostly due to better development of our working capital. And our operating cash conversion for the whole year was 114%. Turning to Page 9 and look at summary, once again, of these figures. Order intake, down 31% to SEK 933 million. Revenue, down 2% up to SEK 1.2 billion of this 1.4% of a decrease comes from currency. Adjusted operating profit, down SEK 5 million to SEK 135 million, with an adjusted operating margin of $11.2 million compared to 11.5% year before. And earnings per share decreased quite a lot. As we said, most of these costs, non-affecting comparability was taken as non-tax deductible. So the earnings per share was $3.58 for the year. A look at the 2 business segments for the full year on Page 10. Renovation segment had revenue of SEK 1.1 billion, up 5% in the year and an adjusted operating profit of SEK 133 million, almost on par of the year before, with an adjusted operating margin of 12.1%. New Build segment revenue decreased quite a lot to SEK 104 million, and it's mostly due to a slowdown in the Maritime segment. Our customer has put orders forward. We have not lost any orders, but there's been a slowdown in converting of these maritime orders. Operating profit, down to SEK 7 million, but the operating margin is still the same as the year before, at 6.5%. Turning to Page 11 and our financial position that is still very strong. We had equity/asset ratio at 49% at year-end, 47% year before. Our net debt-to-EBITDA was 0.3x compared to 0.9x we had before. And the reduction is due to the strong cash flow we have had for the year. And if we look at net debt to EBITDA, excluding leasing debt, it's even slightly negative. So we have no debt at all, if we exclude the leasing debt. Profit for the year -- profit after tax amounted to SEK 78 million, with an earnings per share of $3.58 and we are prepared for more acquisitions. As Kenneth mentioned, we acquired Stora Fasad at February 10, with a net sales of SEK 30 million in the year of 2020, but we have still acquisition headroom. We have cash and cash equivalents at year-end of SEK 214 million. We have a bank agreement until September 2022, and we have also an acquisition credit of SEK 100 million. And we are also authorized to issue shares to finance acquisitions. So we are really prepared for doing more acquisitions. Turning to Page 12, and look at our financial targets. And Balco have a growth goal of achieving 10% growth a year, and we still have this goal even if we were strongly affected by the COVID, so we had a negative growth of 2% in 2020. Profitability, our long-term goal is to reach 13%. Adjusted EBIT was 11.2% in the year, also strongly affected by the pandemic of corona. Capital structure, we should not have net debt to EBITDA, more than 2.5x, more than temporarily, and we had right now 0.3x, including leasing debt. And our dividend policy is that we should distribute half of our profit after tax to our shareholders. But the Board will not propose any dividend to the annual general meeting as the company have reduced occupancy during the first half of this year. And starting in January we had employees on furlough. So -- but at the same time, the Board is open for an extra general meeting later in 2021 for a new dividend decision. And turning to Page 13, and we look at our sustainability initiatives. We have material and constructions in our balconies that lasts for 90 years, and are fully recyclable and only need 2 services during these 90 years, and it's our glazed balconies we are talking about here. Our open city balconies have a lifetime of 7 years and all of it has been checked and -- from our 5 companies and are really -- we have all this on documentation. Energy savings from our glazed products is between 15% and 30% depending on product and conditions. And it also gives reduced maintenance of facade windows. We are climate positive after 30 to 50 years with our glazed balconies in Sweden. And we have set a new goal to reduce this by 5 to 10 years during the first half of 2021. Now we have also an increased sustainability focus. All our purchases will be made from suppliers in Europe. And we also -- from this year, we'll have a standalone sustainability report that will come out at the same time as an annual report. Turning over to Page 14, and back to you, Kenneth.

Well done, Michael. Acquisition of Stora Fasad AB strengthens Banco Group's customer offering. Background. Stora Fasad is a company that offers facade work as well as window replacement, balcony and roof, for renovations and for new production and also related services such as scaffolding work. The acquisition strengthens and complements Balco's product and customer offering. With complete facade renovation, Balco can take responsibility for the turnkey contract in larger projects with both balcony and facade renovation. Initially, the focus is on the Swedish market, but soon we will look at an expansion to other countries where Balco is active. Financials. Revenue 2020 of approximately SEK 30 million, EBIT of SEK 5 million, order backlog of approximately SEK 30 million. Purchase price of SEK 20 million cash upfront and a possible additional purchase price depending on development between 2020 sic [ 2021 ] -2023, estimated to approximately SEK 10 million. Financed through existing cash and cash equivalents. Future outlook. The acquisition will be consolidated from 1st January this year. The acquisition is expected to make a positive contribution to earnings per share as early as 2021. We have talked about this before to broaden our customer offering, and we started this already last year. And this is -- so we have built an already an organization working with the general contracts, both with balconies and facade, but this acquisition will strengthen this even more. We believe that the facade part will be EUR 10 million in short in only 3 years that would be about EUR 30 million. Questions?

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

Firstly, relating to the growth outlook. I mean, the long-term growth outlook seems good, as you also mentioned. But just to understand the near-term development a bit better. So the question is, in what magnitude are you expecting the short layers to impact the operations?

One more, the last sentence.

So in what magnitude are you expecting these short-term layers to impact the operations?

I will take it from a more broader perspective. We think that order intake this year will be really good. Now we have gone through a whole year in this pandemic situation. So we have tools today to actually succeed with closing orders. In Sweden, we feel confident about. Even if today the restrictions regarding meeting people are the highest ever in all Nordic countries, they have tools today to really close orders. So we believe that order intake is really good this year and the safety has a lot to do. But during the first -- say, first quarter and second quarter, we have less to do, mainly in Balco AB. So in the TBO operation, they have a lot to do. Danish operations have a lot to do. But in Balco AB, there we have no layoffs, but we have working less hours in the production, in Sweden, not in Poland. They are working and also in some parts in the nearing area and all same product leaders. But we see that we need all kind of these resources going forward. So we don't do any layoffs. It's more like reducing the capacity during quarter 1 and quarter 2. And after that, we see that we need all the people that we have.

So just that I understood you right. So you are expecting the cost to be at that slightly elevated levels during the H1, although the sales are not maybe coming in before H2? Is that correct?

Yes. It will be an effect of EBIT in the first half year. As we see, long term, it will be better for us to be able to have -- reach our strategic long term goals we have decided to keep people because we need them long term, and it will have, of course, a slight negative effect in the first half year.

Internal…

Maybe if I can just add one quick one here. Regarding input costs, are you seeing any impact on your raw material costs, transportation costs and so on?

No.

No, no big effect.

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