Balco Group AB (BALCO) Earnings Call Transcript & Summary

Welcome to the Balco Audiocast Teleconference Q3 2022. [Operator Instructions] Today, I am pleased to present acting CEO, Camilla Ekdahl; and CFO, Michael Grindborn. Please begin your meeting.

Thank you.

Thank you. Welcome. Yes, we start with some highlights. The net sales for the quarter increased by 28%, all organic growth, and for the 9-month period the increase was 19% of which 15% was coming from organic growth. We have a very strong operating cash flow also during the period and also for the start of the year. However, the result is lower than we have expected, and it's mainly the gross margin which is deviated. We have continued project deviations in Norway, rising material prices per class as well as increased energy costs and transport costs also weigh on the result. We also had some orders which have been taken out of the order stock due to that they are -- the promised [ financiation ] to the customers have been taken away. But the main disappointment is the lower order intake in general. And here, we can see that the order intake in general is mainly coming from that the customers are postponing their decisions. They still want to have the balconies, but they are postponing their decision. Due to the lower results during the last 2 quarters and tougher market conditions with expected lower order intake the coming months, we have decided to implement the cost-saving project. This cost-saving program is estimated to save above SEK 20 million. But I also want to underline here that we are in the renovation market. This means that the demand for our products and for our services are not going away. We have 90% of the Balco space is coming from renovation and the renovation demand is still there but the customers are postponing the projects. But as soon as we can see that the market is going to be more stabilized with the materials, with interest rate and inflation, we are very sure that the order intake will come back again. As you have seen also, we have still -- we have a very good cash flow, and we have a very low debt also in the group, and we have headroom for acquisition. As we said -- and therefore, we made an acquisition here in the starting of quarter 4 of Söderåsens Mur och Kakel, and I will come back to that in a little bit later about that company. So I hand over to Michael with the financial figures.

Yes. And I go to Page 3 in the presentation about the Q3 financial highlights. And net sales, as Camilla mentioned, was very strong, this increased by 28% to SEK 311 million. Our renovation segment accounted for 91% of sales and new build segment was 9%. Our order intake amounted to SEK 265 million. Here, 97% came from the renovation segment and just 3% from the new build segment. Our order backlog is SEK 1.46 billion from the same level as 1 year before. Our adjusting operating profit amounts to SEK 17 million, with an adjusted profit margin of 5.4%, down from 10.4% last year. But our operating cash flow was very strong and it improved to SEK 104 million in the quarter. Turning to Page 4 and have a look at the 2 business segments, and we start with the renovation segment. For the renovation segment, order intake was down 13% to SEK 256 million. The order backlog is 6% higher than 1 year before, so it's just above SEK 1.3 billion. Revenue increased strongly by 34%, up to SEK 284 million. The operating profit was SEK 15 million with an operating profit margin of 5.1%. And here, the main reason for the decrease in operating margin and profit is the Norwegian project and also the canceled orders, both of them effect of roughly SEK 4 million each. In the new build segment, our order intake was lower, down to SEK 9 million in the quarter, and the order backlog is also 35% lower than 1 year before at SEK 136 million. Revenue was also down by 12% to SEK 27 million in the quarter, and the profit was just about SEK 1 million in the quarter with a profit margin of 5.4%. Here, it's mostly the U.K. projects where we don't have material index that affects the result by roughly SEK 1 million. If we go over to the 9-month period, Page 6 in the presentation, and have a look at the net sales. It has increased by 19%, up to SEK 950 million, of which 15% is organic growth. Renovation segment has accounted for 88% of the sales and new build, 12%. Our order intake amounted to SEK 921 million. Here, renovation segment is 92% of the order intake and new build, 8%. Our operating profit so far is SEK 71 million, with an operating profit margin of 7.5%. And also 9-month period, the cash flow has been really strong and it improved to SEK 122 million. And turning to Page 7 and have a look at the 2 segment in the 9-month period. Here, we see that the order intake for renovation has been down 9% -- 11% to SEK 846 million. Revenue will have increased by 23% to SEK 837 million. The operating profit has decreased to SEK 63 million with an operating profit margin of 7.5%. New build segment. Here, the order intake is higher by 30% compared to 1 year ago, SEK 75 million. Revenue more or less the same as in '21 to SEK 114 million, but the operating profit has decreased by 25% to SEK 7 million with an operating margin of 6.2%. Have a look at the balance sheet. We still have a very strong financial position. Our equity to asset ratio is stable at 51%. Our net debt to EBITDA, including leasing is down to 0.7, and if we exclude leasing, that is just 0.2. Our profit after tax has been SEK 50 million so far in the year with an earnings per share of SEK 2.39. And we have prepared for more acquisitions. We have an acquisition head-room. We have a banking agreement with Danske Bank until October '24 with a sustainability-linked RFC of SEK 510 million and also overdraft facility of SEK 75 million, and our indebtedness is very low in the moment. Our financial targets is that we should have a growth of 10% per year. And if we look at the last 12 months and compare it to 12 months before that, we have a growth of 20%. Our earnings per share, we have a goal that we seek to grow by 20% per year. And then looking at the last 12 months and compare it to the 12 months before, we are at 47%. Our capital structure, our interest-bearing debt compared to EBITDA should not exceed 2.5. And here, we are just 0.7, including leasing debt and 0.2 excluding leasing debt. And we also shall distribute 30% to 50% of profit after tax to our shareholders. And last year it was 49% that we gave in dividends to our shareholders. We also have the sustainability goal at 30% of our sales should provide 30% of energy savings for our customers. And looking at the last 12-month period, we are at 15% here. Now we go to Page 10 and have a look at Sustainability and Green Transformation. Sustainability is very important for the Balco Group, and it's in our vision to offer energy savings through innovative solutions and high-quality products to our customers. And we also have set goals towards the UN Agenda 2030, and we have 4 goals that we have -- that we think has the most important for our business and its gender equality, decent work and economic growth. Its industry, innovation and infrastructure and also responsible consumption and production. And with you, Camilla, with the Green Transformation.

Yes. Thank you, Michael. Yes, in the Green Transformation, as Michael said here, we have the goal that more than 30% of our group sales should come -- that we have 30% energy savings. And here, we see the balcony is a trigger for getting these kind of projects. The renovation of a balcony with the Balco method can give us between 15% and 30% energy savings. And this is a good base for getting up to the 30% needed for getting the green loans. What we do then is that we meet the customers, they have a demand of a balcony renovation and then we have a look at their energy costs, and we can offer them making energy declaration. And we then can give them proposal of how we can transfer them from energy declaration D or E, up to B or C. And that we can do by taking the glazed balcony, but also making a complementary offer. We can do the facade renovation, we have the roof insulation, heat recovery and solar panels. And all these, we call that we can give them a Green transformation and then they can get the green loan. And this is, of course, one of the most important offers we now have to the market considering the market conditions ahead with higher energy costs and all other higher costs that is coming up. And if we take to the next page. This is also why we have decided that we continue our acquisitions. We have then bought a new facade company, which is called Söderåsen Mur och Kakel. Söderåsen was founded in year 2000, and they offered facade works. The customers consist of housing associations, public utilities, private property owners and construction companies. They are located in Kågeröd and they have about 21 full-time employees employed. We will continue to work with Söderåsen as we do with all other companies. They are an independent company within the Balco Group. And the current management, Ola Gustafsson and Emil Johansson will continue to be the management of the company. We have that we will consolidate the results for Söderåsen come 1st of November. We can see that the acquisition is expected to contribute positively to earnings per share already in 2023. And we are financing the acquisition with our own cash. And this is in line with Balco's growth strategy, both regarding acquisition, but also more on the focus on sustainability and helping customers to the energy savings through Green Transformation. And if you see where this is located, it's located in the south of Sweden. And then we have Stora Fasad, which is located in the mid of Sweden. So this is also good from geographic point of view. So that was all from us. So we come to the questions.

[Operator Instructions] Our first question comes from the line of Nick Fhärm at SEB Equities.

My first question would be on the cost-savings program, could you give us an idea of the costs to be taken out to achieve the SEK 20 million in savings? And could you also give us an idea of what type of costs you aim to reduce if you just follow the P&L disclosure line, please?

Yes. We will just start up discussions now with the union. So we have meetings tomorrow. But we expect that roughly 25 people will be involved about 25 both in Sweden and in other countries around. So in total roughly 25 people. And it will be in all lines book in the production and project line cost and it will also be an administration in place, the same with marketing. And we expect -- we don't know exactly how many. What the cost will be right now based on [ what we get ] starting up in discussions but it will be when we say more between SEK 10 million and SEK 20 million. That will be a onetime cost in [ '24 ].

Right. Got you. Makes sense. Very clear. Second question. So it's a bit unclear to me when I read the report, but SEK 4 million of the gross margin bridge this quarter is because of accrued expenses, but it's a little bit unclear whether those SEK 4 million also include the project costs running higher than expected in Norway or not? But anyway, could you give us a slightly more detailed description of sort of the negative 7.6 percentage point gross margin? Where does that come from in addition to what you write in the report, please?

Yes. Main cost is that we have continued project deviations in Norway. We expect it roughly SEK 4 million, that is negative deviations in Norway. SEK 1 million negative project deviation due that we don't have material index in the U.K. We also see increased energy costs, but we can't forward to our customers now, especially in August and September. It was really high entry cost in Sweden. So it's roughly SEK 1 million extra energy cost we had in the quarter. Then the canceled orders. Then we had accrued costs in the balance sheet that was roughly SEK 4 million that we have started to work on these projects. But then [ made what's ] canceled from the customer because the -- yes, they have financing with the bank, either to increase the financing cost so much that the customer couldn't continue. Or in some reason also that they completely canceled both the finance agreement. So that was SEK 4 million. And then due to that we didn't have same occupancy in the project organization, especially Balco AB, where we had a cost of roughly SEK 3 million. And then especially the increased cost in GAAP because GAAP is linked to -- in glass because glass is linked to the [indiscernible]. So here we got the material increase is very high in August, September. So it's roughly SEK 2 million that comes from that. And they are not part of our material index. But then we get compensation for aluminum steel labor but we have in our material index, but we get compensation pound per pound. So we don't get the margin. So I would say that, that makes roughly 2% of the -- from -- down to [ 25 ]. With this other SEK 15 million, we should have been on this 25% profit.

[Operator Instructions] And our next questions from the line of Sofia Sörling of Carnegie.

I have a couple of questions about the order intake during this quarter. So my first question is, could you say something about the order intake and if any of the order intake during this quarter is any of the orders that were deferred during Q2? And also if you can say something about the trend in this order intake, is it different compared to regions, such as Sweden, Norway, Denmark and the rest of the market? And also if you see a trend in the initial part of the quarter compared to the end of the quarter?

I think we take them one by one. The first question was, is the order intake that -- is the orders that was canceled, you said, if they were taken in, in quarter 2. Was that correctly understood?

Yes, the ones that you said were deferred during Q2, if they were now announced in Q3 or if the tenant association is still passing the orders?

[indiscernible].

Yes. Okay. The [ for sold ], sorry, I didn't see -- it's a little bit on the line here. Sorry, Sofia. Yes. The [ for sold ] we had in quarter 2, some of them came in, in quarter 3, yes, but we have seen also from planned quarter 3 that has gone to quarter 4 and even actually one which is -- some of them are being postponed to next year. So this postponement of decision, that is what we still see on the order intake. And as you said, if it's different from different markets that I could also say, yes, we have seen it first from the Swedish market. But we recently also now see from the Norwegian market that they are also starting to postpone. And it's a very big interest but they want to wait to quarter 2 next year, some of them.

All right. Okay. And you don't see a declining trend during the quarter -- this quarter, I mean, with higher interest in the beginning of the quarter and lower interest at the end or something?

No, I would say that if we look from a market perspective, so the main markets, which is Sweden and Norway, Sweden was already from the start of quarter 3, a little bit, so to say, hesitated to take the decisions. Norway has more started up actually now. So they are a little bit delayed in the performance of Swedish markets.

All right. And then a couple of questions about profitability. There are really good questions from the previous speaker, but I have a follow-up here. So you mentioned in your report that you see a cost due to canceled orders. And when you mentioned canceled orders, do you refer to orders already recognizing your order backlog? Or is it presigned agreements that have been canceled? Or is it already orders already taking the order backlog at this day?