Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to the Balco Audiocast with Teleconference Q1 2022. [Operator Instructions] And today, I'm pleased to present CEO, Kenneth Lundahl. Please begin your meeting.

Thank you. Good morning. Welcome to the Balco Q1 reporting. It's Michael Grindborn here, CFO; and Kenneth Lundahl. We start on Page 2. These set points in Q1. We expect that much higher order intake in Q1. We expect a higher turnover and we expect a high profit. The reason for this not happening, that in the first 6 weeks, January and February, COVID-19 had a negative impact on net sales, order intake, operating profit during January and February. And it was still restrictions in the Nordics and also many of our employees were sick in COVID. Affected us internally. FX order intake, especially Sweden, Norway and it also has affected the building permission process the first 6 weeks. Mike will take the figures later. If you look at point 3 there, investments in resources. We have increased the staff within our project organization to cope with the large increase in order intake since May last year. And also linked to the investment in Green transformation, we are building up a self-employed flexible assembly and as facade organization. Point 4, Balco Living. The development of Balco Living will be intensified and additional development resources will be invested in this product segment, as well as marketing resources, primarily in Sweden and Norway. Michael, Page 3.

Yes. And I guide you through the financial figures. And we start with the net sales where we saw an increase of 15%, up to SEK 288 million. Our Renovation segment accounted for 85% of the sales and the New Build segment for 15%. Order intake increased by 11% to SEK 292 million. Renovation segment accounted for 82% of order intake and the New Build segment for 18%. Our order backlog has increased by 39% compared to the same period of last year, up to SEK 1.567 billion. Our adjusted profit increased by 19% to SEK 26 million and with an adjusted operating profit margin of 9.1%. The cash flow for the period was been less to the first quarter last year at minus SEK 14 million. Going to Page 4 and have a look at the Renovation segment. Here, the order intake was more or less the same as the year before, SEK 239 million. The order backlog though has increased by 47% compared to first quarter last year, and it's now close to SEK 1.4 billion, in a 88% of our order backlog. Net sales increased by 24%, up to SEK 246 million, and the operating profits increased by 31% to SEK 24 million with an operating margin of 9.6%, which is an improvement compared to 9.1% last year. And turning to Page 5 and have a look at the New Build segment. There is a quite a big increase in our order intake, which was SEK 52 million in this quarter, in 18% of the total order intake. Order backlog, stable at SEK 189 million. Net sales decreased though by 19% to SEK 42 million, and it's mainly a decrease in the Maritime segment, which is right now, we are building the last book we have in our order backlog [ permanently ]. Operating profit was SEK 2 million with an operating margin of 5.7%. And turning to Page 6 and have a look at our balance sheet. We have a very strong balance sheet. So the equity to assets ratio at 56%. Our net debt to EBITDA. If we include leasing debt, it's now at 1.2x. The main reason why the big increase is that we have a new 10-year lease agreement for our head office in Vaxjo, so we have the [indiscernible] expanded by 800 square meters. So we had a new agreement now in March this year. If we exclude leasing debt, the net debt to EBITDA is at just at still 0.6x. Our profit after tax increased by 18% to SEK 19 million, corresponding to an earnings per share of SEK 0.87 and it's an improvement compared to -- it's SEK 0.74 last year. And we are prepared for further acquisitions. We have an acquisition headroom. We extended our bank agreement with Danske Bank last year. So we are having -- it's valid now until October 2024. And we have also possibility to issue shares to finance acquisition, which is a possibility for big ones. And turning to Page 7 and have a look at our financial targets that was updated in January this year. We have a growth target of 10% per year and looking at the last 12 months, we are [ at a revenue ] growth of 3%. We have a profitability target that our earnings per share should grow by 20% per year. In the last 12 months, the growth has been 34%. We have also grow our capital structure that our net debt to EBITDA after the [indiscernible] 2.5x more than temporarily. And in [indiscernible] that's 1.2x and excluding that's 0.6x. And our dividend policy is that we should distribute 30% to 50% of our profit after tax to our shareholders, and the proposed dividend for this year is 49%. And then we have also the sustainability goal. That's more than 30% of the group's sales to be within the EU taxonomy and also provides 30% energy savings to our customers. And looking at the last 12 months, we are at 13%. And we will go to Page 8 and have a look at Sustainability and Green transformation. And sustainability is an important issue for Balco Group. We have a vision to offer energy savings through innovative solutions and high-quality products in form of balconies, facade solutions that should provide better quality of life for the residents and also create a safer and more aesthetically pleasant environment. We should -- achieving this requires sustainable business practices, which are a prerequisite for the Balco Group's operations to develop, be profitable and create value over time. We have also looked at the agenda 2030. The Balco Group takes its responsibility seriously and has selected 4 specific goals that we believe can make the biggest positive difference and which also align with our overall business objectives and strategic sustainability areas, which are sustainable governance, environment and people. And I hand over to Kenneth, and Green transformation.

Excellent, Michael. Green transformation is an important segment for us, and the interest is higher than we expected. We are selling and we are building projects. Our goal is that within 3 years more than 30% of the group's sales should be within the EU taxonomy and provide at least 30% energy savings to our customers. And the renovation of balcony is a trigger to start this process. I mean, the buildings have been dealing with this [indiscernible] or older. And renovation of balconies, so the Balco-method to new glazed balconies gives an energy savings of 15% to 30%. So it's a trigger that enables energy savings of at least 30% and possibility to get financing with green loans/bonds. And when we have a cooperation agreement with a customer. Our energy consultant can help the customers to analyze their energy declaration and give them suggestion on actions that can help them to -- help the customer improve its energy declaration from D or E, F to B or C. And offering we have the, of course, is that the general contractor, they'll -- all the work ourselves, we start with the balcony. But to ensure energy saving of at least stands -- Balco have broadened its offering than being currently contracted with an addition to balconies. And this is, of course, [ consolidation ]. We can do ourselves. Roof insulation, heat recovery and solar panels. Next page, Balco Living. Totally new segment, new product segment, Balco is the first in Europe to offer this. Significant development resources over 1.5 years, have been working with this, and we are intensifying this work even more. This gives new living space at a low construction cost. The cost of square meter is between SEK 25,000 per square meter to SEK 35,000 per square meter. With this high cost we have today and that is with floor heating and live panels inside. Up to 20% increased living space without increasing the energy consumption. With all these buildings, and within this outside 20 square meters, the total energy cost will not go up on the flat. So the new square meters with the energy calculated, it [ still is up ]. And of course, this product gives many, many opportunities in many area, for tenant-owned areas, private-owned areas for, how to say, the public-owned areas, of course, where you have the issue with 2 different living space. So I mean the product should be able to provide major positive social effects. And the market we'd do, it's in Sweden, Norway primarily and also in Sweden, a little bit of the political marketing there. We anticipate that this segment will be a significant part of Balco's sales within a 3-year period. We believe that this -- we sell product this year and build next year. Okay. Questions, please.

[Operator Instructions] Our first question comes from the line of Nick Fharm from SEB.

My first question would be, if you could try to estimate the impact in Q1 from delayed building permit approvals. It would be very helpful to understand the impact on sales and possibly on order intake.

Order intake, I'd say, 15%, 20%, at least.

Yes.

Turnover [indiscernible] we have SEK 5 million to SEK 8 million.

Yes.

Sorry, I didn't catch that. Could you repeat that, please?

In order intake, I would say, 15% to 20% more at least.

Yes.

In EBIT I'd say, SEK 5 million to SEK 8 million, Michael?

Yes. Yes.

I guess. But I think it's better to say like this at the first half year, we have a really good order sales. So we have a really good customer interest and it looks really, really good. But the first half of the year, we didn't start as we expected. If we look at the second quarter, we think it will be okay, that's not [ blended ]. But we actually think that this full year, we will reach all our targets we believe in beginning of…

Yes. Probably the end of…

End of last year.

Yes. Yes.

But the start is this [ point. ]

And can I also ask you, I think producing a 9% EBIT margin under sort of the circumstances, I think, is actually good. But my question is, last year, you had about, well, 11.7%. Sorry, you had a really the wrong line here. We are here -- no, it's actually -- sorry, forget that. Let me withdraw that question. Anyway, in this quarter, you are also guiding for a continuing negative impact from delayed building permits, right? So my question is, do you think you are able to continue to manage costs and protect your margins in Q2 as you did in Q1, I have to say? Or do you expect very negative absorption effects from whatever the outcome is of delayed building permits on sales in the quarter that we're in right now?

Before you answer that, Mike, I would say that now we don't have an issue with building permission. There is -- there are no issues now. The issues is that we believe that we will start and we more than increase in Q1. So what we see now is still we have a little bit to -- we have too much resources in Q2 still, but we need all these resources that we have deployed to cope the need of the [indiscernible] because that authorization will have an issue in some factories to cope the demand. Let me turn on now to…

Yes. No, we think that we will be able to keep more or less the same operating profit margin in the second quarter as we had last. And sooner -- and just for the full year, we think that we will reach the target that we set beginning of the year. So second half year looks promising. It will be little bit lower than we expected in the second quarter, but the margins will be rather stable compared to last year.

We seem to have too much people because we thought we would have full blast out there. But we can't, how to say, get real people that we need because we need them very soon.

Yes.

Yes, makes perfect sense. My final question, and then maybe I'll come back into the call later on. Can I just ask you -- I'm sorry if I missed this, but what's the reason for the significant increase in operating receivables in the working cap in Q1 this year?

Well, it's depending on the different stages in the projects. And right now, it's the main big increase was more trade receivables. And it's due to -- yes, a delayed invoicing, due to that we didn't start up [indiscernible] as it's expected. So we invoiced in March, in fact normally perhaps, it should be invoiced in February and so that's paid in March. So the big increase really in fact [ missing ], but no late payments. It's just delayed invoicing.

Excellent answer. So if I understand you correctly, that means that this should have apples-to-apples reverse in this quarter Q2, right?

Yes, yes. Correct.

[Operator Instructions] Our next question comes from the line of Sofia Sorling from Carnegie.

All right. My first question is also about the solid order intake. And I believe it's solid, but perhaps lower income compared to previous 2 quarters. And you mentioned the delayed in building permits. But would you say that this is the main reason? Or can you give us some color on the dynamics behind this?

Regarding order intake, the main reason is that there was actually lockdown in February, January February in Sweden and Norway. That was the real truth. And I think -- yes, and that affected the order intake because we need to have the [ meetings ] and also it started to move -- I mean, it moved some of the, let's say, [indiscernible] I mean, when people saw that in February, okay, it's opening up, okay. We are waiting to go to the [indiscernible]. So it was, say, the first 2 months are very turbulent. That was a major intake. The interest in orders has not changed at all. There is tremendous possible orders possibilities. And then also regarding building commission. I mean, we have many, many people sick at home, 30% I would say in January February, that affect turnover. And of course, after a while, why didn't we get building permissions as we expected. Then their problem is sick. We have got to get information as we may need now.

All right. Okay. And -- but regarding demand, you don't see any slowdown in demand among tenant associations due to -- that deals with increasing rates going forward?

No. But if you ask us what is bothering us, I mean, it couldn't be -- it looks it didn't catch up. It seems to me like that. But, of course, what shall we look at from the top view. And one of the things worrying me is, of course, is people are worried. That is -- I mean, we probably have 1 month now going forward, but we are still a little bit uncertain that you will adopt, will we have the gas for blah, blah, blah. So I mean, uncertainty is, of course, not good in any area [ like that. ]

All right. Okay. And then regarding Balco Living, have you received any orders as of yet or any fee sign agreements or notification with them?

No. No. Yes. It's too early. I think it will be end of this year, we will probably have some agreement, and then we will build some product next year. But it's the recent in the product. That is also a kind of project because it's totally new, doesn't -- it seems to me it's picking up to what -- they had to explain what it is.

All right. Okay. And the sales growth, you mentioned that organic growth was 2%. And how much of the residual part is due to structural changes and FX changes on a group [ level? ]

Yes. No, the other part is coming from the [ acquisition. I mean, ] that were consolidated from [indiscernible]. So currency changes was yes, less than 1%.

All right. Okay. And my last question is about M&A. Could you give us some color on your M&A outlook 2022?

Yes. We have several discussions ongoing. So we still hope that we expect to make perhaps 2 acquisitions during this year, and we still look at the Nordic market mainly. So it's still in the Nordic markets we are looking.

And we have just one follow-up from Nick Fharm from SEB.

Just one final question, if I may. I was just looking at the balance sheet and more specifically, at the capital employed. And my question is, I mean, you're running a fairly lean balance sheet, of course, strong balance sheet with regards to the previous question. But my question is, do you think there is some scope at the end of the day to drive return on capital employed from also improving capital employed and not only the sort of operating margin that you're targeting?

Yes, when the projects are running even more, and we are getting the building permit, it's often getting better cash flow as well and improving return of capital employed as well. So of course, possibility that it's…

I would say when you have a good margin, that would affects the…

Yes, yes. Normally, it is. Yes.

Yes. Yes, right. Okay. One nitty-gritty question. Sorry if I missed this as well, but what was the sort of acquired component in the order intake growth in the quarter? You reported 11% increase in orders, right? What was the number for the acquired unit there or vice versa?

The acquired unit was 3%.

3% of the 11%?

3% and 8% was organic.

And we just have one question from [ Mattis Thorsten from CMAM ].

So just a quick question on investments you mentioned into marketing, development and organization in order to develop the growing transformation activity and the Balco Living offer. May I ask you to elaborate on this investment? Is it only on formation and people? No CapEx into physical assets? And what do you think could be the impact in terms of margins? And finally, when do you think you will see a significant impact on organic growth for these 2 offers?

A good question. In the Green transformation area, it's -- you would see -- we will see already this year in order intake, turnover and profit. But at the same time, we are building up owned -- we have owned [indiscernible] everything I'd say. All the theaters, [indiscernible] and near. That's flat managers, some people. But we are also now building up a flexible organization that can both deals with Balco and [indiscernible] at the same time. We see so that we don't need to buy an 15 [ assorted ] companies. This is happening today, and we so [indiscernible] executives that we should be at least 30 people in this [ transaction. ] Then we can build products everywhere in the Nordic countries. This is just cost in some education, not big money. This is happening. That is the Green transformation. So Green transformation, that is already given effect in all kind of areas and corners. The Balco Living, I would say that there are some resources more. We developed on, I'd say, 2 full year resources more. So there will be 3 people working with this fully and of course, that can affect some of cost rise -- running costs. And then I would say that the investment wise, investment in balance sheet, I will say that will be about SEK 5 million to make this work being [ due ]. And I believe in the cost [ amount ] this year will give turnover a net profit next year. But I -- what I see today is that the Banco Living segment going forward will also include some other areas for us in our own internal [ glazing ] business. I will not tell you exactly what that is. But I would say that after we have sold 2 of the first Banco Living projects, so that will give also some really good effect in the working area, in the way we are working actually.

That should be some -- yes, good finishing. Yes.

That's connected to the financing.

Yes.

So that segment is also in there. But Green transformation, better than expected. Banco Living is, I'd say, foot work in all kind of areas, development, marketing, dimension. That was the first of the answers.

Yes. Now and [indiscernible] transformation will be even more important now with high energy costs and thus saving energy and therefore environmental part and then, of course, also for the financial part to the high energy costs.

Okay. Okay. Very clear. And last question on inventories. I think we touched on receivable. Just the inventories have doubled compared to last year. Can you just comment on that? Is it in order to front the difficulties in supply? Or yes, do you have any comment on the increase in inventory?

Yes. If you look compared to last year, it's quite a big increase. But it is the year-end, it's not that big increase. And -- but one reason is that [indiscernible] it has more of a production company. So they have quite big inventories. So one part of it different compared to last year is that [indiscernible] was consolidated from April. But then we have also increased inventories in January. Those, of course, due to higher prices of the goods that we buy but also quite some extra -- yes, it could be a…

So we had Ukraine Russia in the beginning, and especially in Poland, we had some inflation.

Yes. If I connect some material in both [indiscernible]. So it will be lower going forward.

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

Excellent. Thank you very much. Good questions.

Yes. Thank you. Thank you.

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