Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello and welcome to the Balco Q2, 2022 earnings conference call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to your host today, Kenneth Lundahl. Mr. Lundahl, please proceed.

Thank you. Welcome from Balco here. It's me Kenneth Lundahl, CEO; Michael Grindborn, CFO; and Camilla Ekdahl, COO. Second page, Michael. Q2 continued net sales but a smaller number of lost projects negatively affected the results. Net sales for the quarter increased by 16%, all organic growth. Net sales year-to-date increased by 15%, of which 9% was organic growth. Order intake in the quarter was not as expected. We had about SEK 40 million of orders that was moved to next quarter. And the reason for this is a discussion about material price level, material index and what interest rate level we shall be on. We see now that the long-term interest rate level seems to be stabilizing, and we also see that material prices are going down. And we see that for the second half year, the interest of our products and the projects we had the level of the personal products is higher than last year. That was a little bit of order intake. Margin duration from some projects. The margin duration in the quarter is due to lost projects in Norway, which together have had a negative effect of SEK 40 million in the quarter. The large deviations in Norway have run that we have implemented necessary changes in the Norwegian organization. And we feel comfortable that this is a onetime effect and the margin level going forward in the whole world would look good. Next Page, Michael. Acting CEO of Balco Group. The Board of Directors of Balco Group has decided to appoint Camilla Ekdahl, currently COO and Managing Director of Balco AB as acting President of Balco Group from 1st of September until the recruitment process is completed. And Camilla, I recruited her 2 years ago, and now she's readied for some new challenging tasks. And of course, I will support Camilla with whatever the needs going forward. Camilla please explain who are you?

Yes. I'm Camilla Ekdahl. I'm 55 years old. And as Kenneth said, I worked as a COO for Balco Group and Managing Director Balco AB since October 2019. I have a background of the metro science in mechanical engineering, and I have worked in several manufacturing companies, which are acting on the international markets for such as Pelly Group, Isaberg Rapid, Thule and I have had different positions within the company as CEO, Site Manager and also Managing Director. So that was a very short introduction of myself, please.

Thank you. Michael?

Yes, Turn to the next page and have a look at the financial figures for the second quarter. Our net sales increased by 16% to SEK 351 million, of which 87% time from the renovation segment and 13% from the New Build segment. Order intake amounted to SEK 364 million. Here, Renovation segment had 96% of order intake, while the New Build statement had only 4% of order intake. Our order backlog has increased by 14% compared to 1 year ago, so it's now close to SEK 1.6 billion, which from Adjusted operating profit as Kenneth has mentioned there was a bit of a disappointment. It amounted to SEK 28 million, and this was negatively affected by these loss projects we have in Norway, which had a negative effect of SEK 14 million, and we also took SEK 1 million as noncomparable costs for the reorganization of a Norwegian organization in the quarter. So operating profit volume amounted to 8.1%. Operating cash flow amounted to SEK 32 million that were last year when it was minus SEK 1 million. Turn to the next page and have a look at the Business segments and start with the Renovation segment. Order intake was 6% lower than we had before, SEK 350 million. And it was, as Kenneth mentioned, due to delayed decision-making from some customers. We had roughly SEK 140 million that was moved to the coming calls. We're expecting more but it's in the Renovation segment and the renovation need will not disappear. So we know that the orders will come [indiscernible]. The order backlog for the Renovation segment has increased by [ 23% ], and it's now more than SEK 1.4 billion. Our revenue increased by 14% to SEK 306 million and the operating profit was SEK 24 million. And all the Norwegian projects were in the Renovation segment. So this negative effect of SEK 14 million was all in the Renovation segment Otherwise, we would have been on the same margin as the year before. And have a look at the New Build segment. Here, the order intake was just SEK 14 million in the quarter. We have no new orders, for example, in the Maritime segment that we still have no new offers out in the Maritime segment, the hope that will become some orders in the second half of the year. Order backlog has gone down 31% down to SEK 161 million. Revenue growth has increased by 25% to SEK 45 million with an operating profit of SEK 3 million and it's 7.3%. Here, we have a negative effect from projects in U.K., where we -- the market doesn't access material pricing safety indexes, and we know that we would have some negative effect and it was just above SEK 1 million that had negative effect in this quarter. So we turn to the next page and have a look at the first half year period and the first half year period, we have a positive effect in our net sales it's increased by 16% to SEK 640 million, 9% of this was organic growth and then adequately what's part of the group since the 1st of April last year. So it comes from the acquisition of them is [indiscernible] other 6%. Renovation segment had 86% of the sales and the New Build segment, 14%. Order intake has been SEK 656 million so far this year, 90% is coming from the Renovation segment and 10% from the New Build segment. Adjusted operating profit SEK 54 million, with an adjusted operating profit margin of 8.5%. Operating cash flow better than we have before is at SEK 18 million. Last year, we had minus SEK 64 million of the same half year period. And turn to the next page and look at the two business segments we have first half year. Order intake for the Renovation segment has been SEK 590 million, revenue SEK 552 million and the operating profit, SEK 48 million, with an operating profit margin of 8.7%. Of course, also affected by the negative effects we had in the second quarter in the Norwegian market. New Build segment, order intake increase of 44%, up to SEK 66 million. Revenue on the same level as last year, SEK 87 million, and operating profit also close to last year's profit of SEK 6 million. We have the negative effect from the U.K. market where we don't have material ready in excess of more than SEK 1 million. And we turn to the next page and have a look at our financial position and our equity-to-asset ratio is still very strong at 55%. It's better than last year, we had 51%. Our net debt to EBITDA is still at the very low level, including leasing debt is at 1.3x And if we exclude leasing this is just 0.7x lower than last year. And the big difference comes from we have a new renting contract for our building in main office in venture. So that's the new 10-year reach contract. And of course, that have an impact of when you include leasing debt. Our profit after tax has been SEK 39 million so far this year corresponding to an earnings per share of SEK 1.91, and we have forecast for acquisitions. We have a banking agreement with Danske Bank which was signed a year ago that is valid until October 2024. And we also have a very low indebtedness. So we really have money to do further acquisition. And we have quite a lot of discussions ongoing. Turning to the next page and have a look at our financial targets. Balco has a target of 10% growth per year. And if we look at the last 12-month period compared to 12-month period before that, the sales growth has been 12%, so we're above that target. We also have a profitability target of earnings per share, but it should grow by 20% per year. And also look at the 12-month period, it's -- the growth have been 54%. So it's much higher. Our capital structure is that our interest earning debt per share shouldn't exceed 2.5x of the adjusted operating EBITDA. And here, we are at 1.3x, including leasing that it's just 0.7x, excluding leasing debt. Our dividend policy [indiscernible] should distribute profit to 50% of the profit after tax to shareholders. And the distribution this year was had a dividend of SEK 2 per share in its 49% of the profit after tax. Then we have a sustainability goal as well, that 30% of our group's sales should be within the new taxonomy and provide at least 30% energy savings for our customers. And for the last 12-month period, we are now at 17% here.

Good, Michael. So if we summarize this, Balco is a growth company with a very low debt?

Yes.

Next page, Camilla.

Yes. We will talk a little bit about our sustainability and green transformation. Our vision is to offer energy savings through innovative solutions and high-quality products in the form of balcony and fasade solutions. And as you all know, the discussions about how we can reduce the total energy consumption is now discussed all over the world, 40% of all energy consumption is used for heating up our buildings. And based on this, we have said that we will focus even more on offering to our cost or this with the green transformation. The glazed balcony can give 15% to 30% reduction of the energy usage. And therefore, glazed balconies is a trigger for doing even more. And this is a base that we have set that we will work on, and this is a base for our goal, as Michael just said, that we will have more than 30% of the group sales to be within the EU taxonomy and give 30% energy savings. And how should we then do this? We reduced our balconies as a starting trigger, as we said. We are also offering now where we have a cooperation agreement with the customers. We are giving them the opportunity to get an energy consultant and help them to suggest different actions, and we have broadened our offer to the customer also. We can do [indiscernible] solutions, we can do roof installations, heat recovery, and we also have solar panels on our product portfolio. So that is the key thing for us now ahead to really help our customers with the energy savings by this Green Transformation.

Excellent. And we are building projects like this. We are selling products like this and the interest going forward looks really, really good regarding Green Transformation. Excellent. I think that was a quick presentation. Now questions, please.

[Operator Instructions] And today's first question comes from Sofia Sorling with Carnegie.

I will start with a couple of questions about the loss-making project in Norway. Would you say that this is related to specific projects or the operation as a whole in Norway? And if you can give us some more details, what is the main reason behind this loss-making? Because if you -- from a material cost perspective, you usually have cost index growth? And is that not the case here? Or what is the main reason for the softening in project? That's my first question.

Good question. It's not overall, it's only specific projects, and it's not due to, how to say, material prices and so on, it's more that they are really badly planned and badly executed cost wise. But the projects are more or less ready. The customers are really, really happy that the customer didn't know that we are losing money on the projects. It's -- I will not go into exactly detail what we have done, but this is -- we can say like this specific projects, loss-making project that are executed. They are built. Customer's very happy that they went really wrong in our, how to say, profitability. And this is -- this has -- I have been in Balco for 9 years. I think the last time we had it like this was in England, we had a project where we made a lot of loss due to some fire issues. So this is badly management -- bad management.

Okay. So you -- my second question then, you said that these projects are finalized now? Or will we see any effect or negative impact in the following quarters as well?

No. I think this is a onetime effect, doesn't happen very seldom and it's handled. And I think that you should see this just as onetime effect. And I think if we take away this single specific projects, I think contribution margin is on the same level as last year, I think, might be low. Yes. If you correct if we...

Shouldn't have this loss-making project in Norway, our operating profits have been between 11.5% and 12%.

Okay. And if it's bad management, what is your plan to have a good management for the upcoming quarters then?

It's already handled. And of course, we -- it's already handling. It's already handled.

All right. Okay. Then I have a couple of questions regarding the market. You mentioned increasing interest rates that customers are reluctant to actually go into a project right now, and I can fully understand that one, and it's a psychological effect that you're to pass larger investments. But what is you plan to convince people that this is still a good customer case even if long-term interest rate increases to perhaps reach 4%? Because I'm seeing if we look historically that you have operated successfully when the interest rates are high as well.

I will give you another glance of it. Don't forget that now we are in July. But in the beginning of the quarter, we didn't even get correct prices of aluminum. I mean we couldn't even get the correct pricing in Q4. I mean we didn't even get the price. So we were guessing. So you can say that I don't know the world of a [indiscernible], it's the world of that. That was the case in the beginning of the quarter with the material project. Today, we feel very comfortable of material prices. We have -- and we see that they are going down. So -- and perhaps, we had a little bit much headwind because we didn't know. So material price has been down, stable. And also in the beginning, it was really difficult -- what should interest rates should we calculate with. But already now, we can see that the long-term interest rates stabilizing. And so we know a little bit what we can -- I mean, Sweden now, 3.5% .

Late yesterday that the long-term interest rate is starting to stabilize and even perhaps.

I think the only -- we have -- the only thing in need is a stable situation. Then the customer will act -- but of course -- so if we look at the next quarter, the interest from the customer is much higher than last year, that's the situation.

Yes. Okay. And given your case to the customer, do you have any like breakeven level on your interest rate that is like a breakeven for your customers that you see as like this is a way too high interest rates or if you can give us some thoughts about that.

No, it's always a [indiscernible] for the customer to, how to say, get the new bigger place to balcony, if you look at the valuation wise. But of course, you don't want to have -- the investment is always, how to say, a good return. But of course, you don't want to get too high monthly cost that is really important. And the way to work with this is, of course, to have the correct interest rate, have the correct amortization and, of course, a stable price, but we feel already now we have a little bit go through this. But we don't have any, I'll say, a breakeven. I don't know I think that the interest rate of 6%, 7%, 8%, perhaps then it will be pretty tough.

All right. I see. And last question is about your M&A agenda. Given the high interest rate have you seen...

Just another question here. For example, everything is about how to say, getting used to the situation. Like you said, couple of years ago, where we had a 3% interest rate and the world didn't stop. We had -- we are building 3 big projects at the moment. One is already being built. And then the prices we have to adjust the prices, prices went up a bit, probably pretty much, then the customer is not to hesitate. So they were -- but 2 months later, they started because they were getting used to that, okay, now we do. So it is a little bit how to say, it takes time to get used to about the new level acquisition, M&A [indiscernible] take that, Michael?

Yes, you can make the question first...

Okay.

Yes. It's about -- if you can give us some update on your M&A agenda. And if it has changed given that the interest rates has increased now and if you can give us some color on your M&A pipeline.

Michael?

Yes. No, as we said, we have a very low indebted or not using very much of our revolving facilities. So we have a lot of possibilities to acquire companies. And -- we have right now ongoing discussions with companies in 4 different countries. So we have a lot of discussions ongoing and we hope to close a couple of them during the year.

And the next question comes from [indiscernible] from SEB.

Well, a lot of my questions have already been answered, but perhaps I can go into the last part of your presentation about the sustainability and Green Transformation. Your goal about having 30% of sales providing at least 30% of energy savings. Is it faster now in this environment to convince the customers to accept what you call our complementary offers to reach those 30%?

It's totally opposite. Mike, Camilla, you can take it. .

It's actually the opposite because what we are offering them, we are offering them even more energy savings and energy savings give them contribution to pay for the balcony. So that is actually helping them in these decisions. So that is also why we are focusing so much on it.

To compensate for high interest, of course, and with higher energy prices, the savings in money is even higher...

Even higher. So it's helping us.

And as there are no more questions, I would like to return the call to management for any closing comments.

Yes. What shall we say, we're a little bit disappointed about, of course, the report, order intake and the loss-making projects, but -- we see that many interesting projects going forward, order wise. And we are not so concerned going forward regarding our margins. Anything to add, Camilla, Michael? And we're also working with some really interesting acquisition projects with -- that fits Balco very well and also with a good valuation for Balco and for the shareholders.

Okay. Thank you from us. Thank you. Have a really good day.

Yes. And as my turn, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.