Balco Group AB (BALCO) Earnings Call Transcript & Summary

[Foreign Language]

Welcome to our presentation. We will start with some highlights. We had all-time high net sales, and we have also very strong cash flow. And the net sales for the quarter increased by 18% to SEK 383 million. And for the full year, the increase was 19%. The operating cash flow was SEK 78 million in the quarter and SEK 200 million for the full year. We have made 2 acquisitions during the quarter. The first one was Söderåsen Mur & Kakel, which was consolidated from 1st of November 2022 and then Arutex AB, which will be consolidated from 1st of January 2023. Söderåsen is a facade company in Southern of Sweden, while Arutex will be a subsidiary to TBO Haglinds and are carrying out the installation of the balconies and glazings. As we already announced in quarter 3, we needed to plan for a cost-saving program due to the lower result and order intake and the tougher market solution we have seen. These have now been affected. We have seen savings of SEK 20 million annually, and about 30 people have left Balco Group. However, as you see also in our report, the order intake is still an issue for us, but we see a big interest in the market for our products. There is still a great interest and need for the balcony renovation and the energy efficiency improvements that we can offer. Almost 90% of our turnover is coming from the renovation segment, and the need to renovate balconies is not going away. We are confident that the order intake will pick up again when there is a stabilization of the interest rates and inflation. However, and our estimation is that, that will take until the end of second quarter this year. Please Michael?

Yes. And I'll go for a little bit financial highlights for the quarter and the full year and start with quarter 4 financial highlights. Our net sales, as Camilla mentioned, increased by 18%, up to an all-time high, SEK 383 million. Our acquired growth was 3%. We had a positive currency effect of 2%, and then our organic growth was 13%. All our organic growth came from price increases. Renovation segment accounted for 85% of the net sales and the New Build segment, 15%. Our order intake was just SEK 188 million down from SEK 484 million the year before, which was an all-time high order intake. The Renovation segment accounted for 73% and the New Build segment 27%. The order backlog at year-end was SEK 1.275 billion. Our adjusted operating profit for the quarter amounted to SEK 33 million with an operating profit margin of 8.7%. Our operating cash flow in the quarter was again a strong one, SEK 78 million in the quarter. And our Board of Directors has proposed a dividend of SEK 1.50 per share, and it will be divided into 2 payments of SEK 0.75 per share in May and SEK 0.75 in November 2023. And if we look at the 2 business segments and start with the Renovation segment. Here, the order intake was down 67%, down to SEK 138 million. Revenue was very strong, 22% increase, up to SEK 327 million. Order backlog at year-end in the Renovation segment is SEK 1.146 billion. And our adjusted operating profit for the Renovation segment in the quarter was SEK 35 million which is an adjusted operating profit margin of 10.6%. If we look at the New Build segment. Also here, order intake was down by 26%, down to SEK 50 million. Revenue was stable at SEK 56 million in the quarter, order backlog has decreased and is now SEK 129 million at year-end. And here, we don't have any new orders for the Maritime segment, and that's the reason why the order backlog has decreased in this segment. Our operating profit in the quarter was SEK 3 million with an operating profit margin of 5.9%. And if we look at the full year of 2022, our net sales increased by 19%, up to SEK 1.334 billion, acquired growth was 4%, a positive currency effect of 2%, and organic growth was 13%. And also here, the organic growth comes from price increases. Renovation segment has accounted for 87% of the net sales and New Build segment of 13%. Order intake for the full year was SEK 1.109 billion and Renovation segment has accounted for 89% and New Build segment or 11% of order intake. Our adjusted operating profit for the full year amounted to SEK 105 million and adjusted operating profit margin was 7.8%. And our operating cash flow for the full year have been very strong and was SEK 200 million for the full year. And I look at the 2 business segments for the full year, Renovation segment. Order intake, down 37% to SEK 984 million, while revenue has increased by 23%, up to SEK 1.164 billion. Adjusted operating profit was SEK 98 million with a margin of 8.4% for the full year. New Build segment order intake stable compared to the year before of SEK 125 million. Also revenue has been stable at SEK 170 million while operating profit has come down slightly to SEK 10 million with a margin of 6.1%. And if we have a look at our balance sheet, we still have a very strong financial position. Our equity-to-asset ratio is at 56%. Our net debt compared to EBITDA, if we include leasing, it's up 0.7x. And excluding leasing, it's down to 0.2x and net profit for the period was SEK 76 million, and with corresponding to an earnings per share of SEK 3.78. And we are prepared for further acquisitions. We have a very low indebtedness as you see above, and we also have a banking agreement with a sustainability linked revolving credit facility with Danske Bank that is valid till October '24 with a possibility option to prolong it by 1 or 2 years if we do it within October '23. If we have a look at our financial targets for the group, we have a growth target of 10% that Balco Group sales should increase by 10% per year and we had a strong growth in '22 by 19%. Our profitability target is that our earnings per share shall grew by 20% per year. Here, earnings per share declined by 8% in '22. Our capital structure, we have a goal that our interest-bearing debt compared to EBITDA shouldn't be -- exceed 2.5x more than temporarily. And here, we are just at 0.7x including leasing and 0.2x, excluding leasing. And we have a dividend policy that Balco shall distribute 30% to 50% of profit after tax to shareholders and the proposed dividend of SEK 1.50 per share, is 40% of the total profit after tax. We also have a sustainability goal that 30% of the group's sales shall provide 30% energy savings to our customers, and here, the year-end peak was 11%.

Yes. And we continue to work with our sustainability work and to reduce our environmental impact. Balco has improved its ESG rating from 20.8 to 18.7. And we are ranked as a low-risk company, and we are actually among the 20% of all companies in the world with the lowest ESG risk. And as Michael already said before, we have a goal that 30% of our glazing projects should provide 30% energy savings. In previous year, we had 11% which were in the 30%, but we also had 41%, which gave 15% to 30% in energy savings. And some concluding remarks from my side is that we actually have a revenue growth even in a strained economy, but we have been hit on our profitability with increasing costs. The renovations are postponed, but we see a big interest and a great interest in our solutions and our products that we have. And the renovation market is less prone to macroeconomic risks than other industries because you need to do a renovation, even if you might postpone them for a while, they are needed to be done. I will also emphasize our very strong financial profile that we have that we can actually take advantage now, on opportunities that we can see, on acquisitions coming up ahead. That's all from us. Thank you. Questions?

The first question here is from Sofia Sörling.

Could you please just on profitability to start with and could you just again elaborate a little bit on how -- why the gross margin decreased so much compared to the same quarter last year from 26.3% to 20.1%. And perhaps the top 3 main reasons, it's the -- and that's my first question.

Yes. Main reason is really that we have shift in sales that more part of our sales are coming from both companies that have a lower general gross margin. They are in general, below 20% all of them and also from [indiscernible] where we have a lower gross margin like U.K. and Germany, that is developing well, and we have less sales in Sweden, Norway. So that's one reason. Number 2 is that we get compensated for increased material cost by our material index but would just get compensated SEK for SEK, so we don't get the extra margin on the -- on that side. Then we also have seen even if it's not the biggest cost for us but energy cost has really increased. It's not been more or less anything that we have talked about before, but especially in November, December, the energy costs were high, we have a couple of million extra costs in just energy costs compared to last year.

All right. Okay. Then a couple of questions on your order intake. Could you give us a split between organic order intake and acquired order intake during the quarter? And also, what would you say is the main reason for this? I mean at least compared to the previous same quarter last year. The drop in order intake is this because of the -- the customers are [indiscernible] or are they canceling orders? Or if the, you could say, are the demand just low at the moment, what do you say?

We have not received any cancellation of orders in quarter 4. We have seen, as we said, that they are postponing, but you should also remember that the quarter that we are now comparing with the previous -- the quarter 4 in 2021, that was an all-time high. That came after the pandemic. So we are comparing with a very, very strong quarter. But there is a lower -- there have been -- even though that we are comparing with a very strong quarter, there was a lower order intake in quarter 4. And it's mainly coming back to the -- their postponing.

And acquired order intake is less than 10% of the total order intake.

Okay. And my last question, you mentioned that you want to reach out to these more public-owned companies and private property owners. Could you give us some more -- or elaborate a little bit on how you will reach those companies?

That's a little bit different that you need to work in a little different way because you need to be very close to them and work with them when they are setting up the project itself. So to say, to make sure that we -- you can get, so to say, a good feeling for your product and that is the product they want to have later on. So it's a little bit different, and you also are always working in competitions with others. Sometimes when we're working with BRFs in Sweden, for example, some of our companies are there as a single supplier to them. But as you know on the public market, you also are into this, what you call it public tenders, exactly. It's a little bit different way to work with it.

So the next question is from a person that have a cell number that ends with 631.

Thanks, operator. This is Nicklas Fhärm with SEB Equities. So I guess my first question would actually just to go back to your sort of idea on the outlook here and how perhaps the end of the first half will play out. So my question is twofold. First of all, you're right that you expect stabilization or actually a pickup in order intake on the back of the stabilization of interest rates and inflation rates. Are there any other sort of more near sector like sort of data points that would support that statement? Or is this mostly based on macro and your assumptions of how macro will play out?

It's based on both that we also see that the material prices has, so to say, stabilized. So we see also that is also, of course, one of the things that we can see a stabilization on. They don't need to expect, so to say, this uncertainty any longer on material prices. If nothing else happened on the market, you never know. But as we can see right now, and we are basing it on the discussions when we are discussion because we are in very close discussions with all our customers. And we base this estimation on our discussions with the customers when they are planning to have their votings. And then they say to us quarter 2 is the quarter when they will start up again.

So would it be sort of base case trying to forecast order intake in sort of the end of the first half of this year. Would that be to add back what you kind of lost in Q1, i.e., around 60% of the order intake? Would it be reasonable to assume that that's what you expect to have back in terms of order intake in -- towards the end of Q2?

I would say that the main part will come back in end of quarter 2, but some of it will actually go over, I think, to also start of quarter 3.

Yes. Makes sense. Thank you. Can I also ask you a little bit of a -- bit detailed question. But just for the record, so obviously, you have completed the restructuring program, and as I understand on an annualized basis, you are now counting on about SEK 20 million or so in a lower cost base going forward, right?

Yes.

Can we also assume that all the sort of permanent restructuring costs have actually been charged to these results that we're looking at today, i.e. about SEK 11 million. Is that the total?

Yes, yes. That's great.

Okay. Yes. Excellent. And can I also ask you to -- and then this is my last question for now, and maybe I can come back later in the call. But I know it's the Board that proposes the dividend. But it would be very interesting to hear if you could share your thoughts on the dividend level vis-a-vis sort of your M&A opportunity as you go into 2023, implicitly, of course, given the balance sheet that you have?

Yes. We have had a discussion with the Board about this, and we thought this was a good level to have it on -- in the middle of our financial targets between 30% and 50%, it's on 40%. And we see that we have a strong balance sheet, so we can give a good dividend to our shareholders, but we have also a lot of discussions ongoing for acquisitions, and we see good opportunities to land a few acquisitions during '23. We hope to land at least this goal that we have 1 to 3 acquisitions and hopefully on the side of that. So we see good opportunities, and with a strong balance sheet, we think this is a balanced dividend to both that our shareholders can get dividends but also we have possibilities to.

Make acquisitions.

Yes. And yes, these opportunities which we see in the market and do good for them.

So I will now give the word to Anders Björkstål.

Can you guys hear me?

Yes.