Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to the Balco Audiocast Teleconference Q2 2021. [Operator Instructions] Today, I'm pleased to present CEO, Kenneth Lundahl. Please begin your meeting.

Thank you. Welcome to the Q2 reporting of Balco. It's me, Kenneth Lundahl, CEO here; and the CFO, Michael Grindborn. We will start with some introduction music. Please listen to the text. [Presentation]

The translation of that song is, it's over now, [Foreign Language], and what we mean with that, that the boring period is over. Balco's sales model is unique. No one else is working like us, but we are dependent on physical meetings with the Board and with all the end customers. So even though we have developed digital tools that improves, the physical meeting is important for us. But you can see really that this boring period is over. Before the restriction period, we had a 17% growth 7 years in a row before the restriction period. We believe that from Q4 this year, we will get into good growth path turnover-wise and EBIT-wise. During this restriction year, there are some things that we have developed and that we will bring with us. The [ tent ] shows they are physically and they shall be that in the future also. But we will still continue with digital [ tent ] shows meeting showing our products because in some cases, people are sick or can't attend physically. And also, the cultural change that has happened during the restriction period where the customers have allowed us to start early with the building permission process that we will really continue to even after this period. Also, the different kind of voting processes we have developed during the boring period, that, too, will keep -- we will continue to give the customers. Because in some cases, they are actually better with the mail routing. During this boring period, Balco has not been lazy. We have done a lot of big movements in the sustainability work that will step-by-step be informed to the market. During this period, everyone knows that material prices have increased heavily. So we have increased our prices this year with 3x. But during the boring period, we have improved the financing in all Nordic countries. And this has given the effect that today, after the boring period, even though that the cost increase is perhaps 7%, 8% of our product…

From material cost.

From material cost increases, the monthly cost that the customer gets on the monthly invoice is today lower for our products than it was before the boring period. And that's due to that we have improved the financing in all countries -- all Nordic countries during the boring period. If you look at the existing situation, Q2 order intake was good. We believe that with the visibility we see today, Q3, Q4, Q1 next year, the order intake will be really good. And we believe that from Q4 this year, turnover and profit will be nice and good. And we also believe that from Q1 2022, we will be back on the original business plan that we had before the boring period. That was a little bit the introduction. We start with the Page 3. Q2, best order intake so far in the quarter. The relief in COVID-19 restriction during the latter part of the second quarter has started the order intake. Order intake, 66% higher than sales and 82% higher than Q2 last year. Order backlog increased SEK 267 million in the quarter. Net sales and EBIT still affected by COVID-19. Net sales, SEK 304 million; and operating profit, SEK 34 million. And this low turnover and low profit explained by the weak order intake that we had during the boring period. We had a strong financial position. Equity-to-assets ratio, 51%; net debt-to-EBITDA, 1.3. We've done 2 acquisitions this year, Stora Fasad and RK Teknik. And these 2 companies, really good competence, strong organization, good product. So actually, it seems -- it looks more positive than we believed, yes, before we bought the companies. And we can say that when we see the effect we get of 2 companies like these organizations in the Balco Group, it gives us even more taste to do more acquisitions. Michael, Page 4.

Yes, Page 4 and look a little bit about our financial highlights in the second quarter. As Kenneth mentioned, the net sales was SEK 304 million compared to last year's SEK 352 million. But then we should know that the second quarter last year was so far our best quarter ever in both sales and profits, so it's a tough, biggest comparable compared to. Renovation segment accounted for 88% of our sales; and the new build segment, 12%. Our order intake was very strong, 66% higher than the net sales, and it was an increase of 82% compared to last year, up to SEK 505 million. The order intake is the best ever in the quarter so far. The renovation segment accounted for 94% of the order intake in the quarter. Our order backlog is almost back on the same level as we had last year, SEK 1.4 billion, with an increase of SEK 267 million in the quarter. Operating profit of SEK 32 million (sic) [ SEK 34 million ] or 11.3% in profit margin. And our operating cash flow was negative in the quarter of SEK 41 million. Going to Page 5, a little bit summary of the financial figures. Order intake increased 82% up to SEK 505 million. Order backlog, almost back on track, SEK 1.4 billion. Revenue, down 14% to SEK 304 million. And operating profit, SEK 34 million or 11.3% in profit margins. And now we'll have a look at the 2 business segments going to Page 6 and start with the renovation segment. Here, we had a really strong order intake in the quarter. It increased by 75%, up to SEK 476 million. The order backlog also here is almost back on the same level as last year, SEK 1.2 billion. Revenue for the renovation segment was SEK 267 million in the quarter, with a margin of 11.5%. And the profit was SEK 31 million. Look at the new build segment, that's Page 7. Also here, the order intake increase was high but from a very low level. So we had SEK 29 million in order intake. Order backlog is a little bit higher than compared to last year, SEK 233 million. The revenue had an increase of 38%, up to SEK 36 million, and it's coming mainly from maritime segment and also the acquisition of Stora Fasad. Operating profit was SEK 4 million, with a stable operating margin of 10%. And now look at the 6-month period with first half year at Page 8. And our net sales in the first half year have been SEK 554 million. Renovation segment has accounted for 84% of the sales; and renewable segment, 16%. Order intake has been 39% higher than net sales and has increased by 24% compared to last year, up to SEK 768 million. The renovation segment has accounted for 94% of this order intake. Our operating profit first 6 months has been SEK 56 million, with a profit margin of 10.2%. And the cash flow has been negative so far by SEK 54 million, and it's coming from the lower profit and also increase the working capital. And turning to Page 9, a quick summary of the 6-month figures. Order intake increased 24% or 39% higher than the revenue, up to SEK 768 million. Revenue down 18% to SEK 554 million. Operating profit also down to SEK 56 million or 10.2%. And earnings per share, also down the same level to SEK 1.93 per share. And now going back to the Page 10 and the 2 segments in the first half year, renovation segment has been affected mostly and has gone down in sales by 23% to SEK 466 million. But the order intake for the renovation segment has increased 34%, up to SEK 722 million. Our operating profit for the renovation segment has been SEK 49 million or 10.5% in the profit margin. New build segment has had a strong revenue increase at SEK 34 million plus, up to SEK 88 million in net sales. Order intake for the new build segment has been SEK 46 million so far, 6% of the total order intake. And the operating profit has been -- with a stable margin of 8.5% has been SEK 7 million so far. Now going to Page 11 and have a look at our balance sheet and financial position. And we have still a very strong balance sheet with an equity-to-asset ratio of 51%. And net debt-to-EBITDA has increased due to the 2 acquisitions of RK Teknik and Stora Fasad, and it's now at 1.3 compared to 0.5 last year. But if we exclude leasing debt, it's about just 1.0. Our profit after tax first 6 months, SEK 42 million, corresponding to an earnings per share of SEK 1.93. And we are prepared for further acquisitions. We still have an unused acquisition credit of SEK 100 million. And we are also authorized to issue shares for financial -- finance acquisitions. So -- and we also -- we have a current banking agreement that will ease to September 2022, but we are right now looking to prolong the banking agreement. And so we would have quite shortly a new agreement ready in September this year. Turning to Page 12 and have a look at our financial targets of the Balco Group, and we have a group target of 10% per year. And as Kenneth mentioned, normally, we have very strong growth. But now over the last 12 months, due to COVID-19 and the restrictions from that, we have had negative growth of 17%. We have a profit target of 13% in operating profit margin. And for the last 12 months, we have had 9.9%. Our capital structure, we should have a net debt-to-EBITDA not exceeding 2.5 more than occasionally, and we are right now at 1.3; and excluding leasing debt, just 1.0. And we also have a dividend policy that we should distribute half of our profit after tax to our shareholders. But due to what we have had furlough during the first half year, we are not able, due to the rules in Sweden, to have the dividend. So therefore, the Annual General Meeting decided not to give any dividend for the year 2020. So it will be no dividend this year. Now turning to Page 13 and a little bit have a look at sustainability initiatives we have in the group. And firstly, we have a product with our glazed balcony with material and construction that last for at least 90 years and are fully recyclable after this period. And during these 90 years, it also just needs 2 minor services. And this has been checked and documented by external parties. Our open city balconies also have a long lifetime of 70 years. And our glazed balconies gives energy savings of 15% to 30%, depending on the product you choose and also the conditions where the house is situated. It also gave a reduced maintenance of the facade and windows. And this combined gives that we are climate positive of the 30 to 50 years with our glazed balconies. And we have set a new goal that will be reached during this year to reduce this period of 5 to 10 years. So at the end of this year, we'll be climate positive after 25 to 40 years instead. We have also, during this, as Kenneth mentioned, boring period really focused and increased our sustainability work and focus. And one thing is that we decided to -- all purchases should be made from suppliers in Europe. We have also improved our information to the market and our customers on our website about our sustainability initiatives and our goals and also from this year a stand-alone sustainability report. And we have seen that we have also from this get better sustainability ratings from the current institutes. I'll hand it back to you, Kenneth.

Excellent, Michael. Any questions?

[Operator Instructions] We have a question from the line of Julius Rapeli from SEB.

Congrats on a good Q2 report. And I would like to start off with a question regarding the order -- strong order intake figure you had in the quarter and then quite a beat compared to at least our estimates. So maybe to understand better the figures, so could you maybe describe a bit of what is the impact of pent-up demand from previous quarters? Or did you have some extraordinary large orders during the quarter that contributed to the figure?

No extraordinary large orders. During the boring period, we have offered more than ever, that we have had problems in the last meetings and voting process and so on. So I would say that this is not an extraordinary order intake. We believe that the order intake in Q3, Q4, Q1 will be really good. So this was not just -- this was not just, I would say, a catch-up thing one blip. The need and demand during the next 3 quarters looks really promising, order intake-wise.

The order just came in May, June, more or less. And we saw the -- as soon as COVID restrictions was a little bit less. It started in May in Sweden and June in Norway. And now it looks very promising.

All right. That's very helpful. Maybe to follow up on -- you mentioned that you have been working on getting building permits before the actual orders closes, and you aim to continue this work also going forward. So what is your estimate of how will this impact your lead times that have historically been north of 1 year or so?

I will say that order stock, I think it was 1.2 now. It will go down perhaps 1.1. So it will shorten the lead time with, say, 1 month average. It's the country change that was good. So there were actually some good things happening during the boring period that went quicker than it should have done usually.

And we have one more question from Kenneth Toll from Carnegie.

Yes. Just to discuss the order intake a little bit more. In terms of segments, was it mainly housing cooperatives? Or was it more broad-based, the customer segments?

I would say broad-based.

They're quite broad-based, but still, of course, tenant-owned [indiscernible] our main business.

Yes, because it [indiscernible]. Yes.