Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to today's webcast presentation with Balco Group. With us presenting today, we have the CEO, Camilla Ekdahl and CFO, Michael Grindborn. [Operator Instructions] With that said, I'll get the floor to you guys. Please go ahead.

Welcome. For our first-time listeners, we make a very short summary of Balco Group, who we are. Balco Group was founded in 1997 and today consists of the company's Balco AB, Balco Altaner, TBO-Haglinds, RK Teknik, NMT, Stora Fasad and Söderåsens Mur och Kakel. The head office in Växjö and we have about 500 employees. We operate in mainly 2 segments, renovation and new build. But the core expertise is in the renovation area, and it's to replace old balconies with a new one and glazed -- make it glazed balcony. However, the group has a broad offering of balcony solutions, including both open and glazed balconies as well as complimentary offers, such as facade renovations. We are the market leader in Scandinavia with the key markets, Sweden, Denmark and Norway, but we also have a strong challenger positions in mainly U.K. and Germany. All glazings of the balcony results in energy savings. Simpler glazings provides 5% to 10% energy savings while Balco's patented glazing provides a documented energy savings of 15% to 30%. Facade renovations with additional installations gives an energy savings of about 10%. That said, we go into the quarter 1 and some highlights. And we actually had the best quarter 1 revenue as ever with a net sales increase of 13% up to SEK 326 million. However, we also made a cost-saving program, and that was of course depending on the tougher markets conditions we have seen on the markets where we have some pending order intake and also some lower profitability. We will provide savings of SEK 15 million annually and have a cost affecting comparability of SEK 5 million in the quarter. On this cost-saving program, we have focused on indirect manning. So we are keeping all our operational resources, so we are well prepared for taking a new order intake when it comes. About 90% of Balco's turnover comes from the renovation segment. And here, we see now that the customers are getting more used to the higher interest rates. And this is especially for the Swedish markets where we had a very low interest rate before. Still, there are some concerns about it, of course, because the interest rate increases are not over yet but we start to see the end of the increases. So we are confident that the order intake will pick up again when we see that we are stabilizing the interest rates. Yes, we come to the acquisitions. We have made one acquisition during the quarter that was NMT Montageteknik i Norden, which has a turnover of the last financial year of SEK 49 million. NMT is a turnkey company and that -- the company has been one of Balco's strongest competitors in Northern Sweden, and I will come back later in the presentation and talk more about NMT and what they can contribute to the group. Yes. So let's go to the financial figures.

Yes, I'll run you through some financial figures for the quarter. And as mentioned, a good net sales growth and stable profitability. Our net sales increased by 13% to SEK 326 million. Of this acquired group was 3%. Currency effect was 1% and organic growth 9%. All of the organic growth came from price increases. So the volume increase was not there, so all coming from price increases. Our adjusted profit was SEK 28 million, up from SEK 27 million last year, corresponding to an adjusted operating margin of 8.7%, where we had 9.2% last year. The order intake amounted to SEK 245 million. And the order backlog is now SEK 1.241 billion, roughly SEK 300 million less than a year ago. Profit after tax amounted to SEK 14 million, corresponding to earnings per share of SEK 0.68. Operating cash flow, as normally in quarter 1 was quite low, and it was negative by 11. It was negative 14 last year. So quite normal for first quarter, but normally has the worst lower cash flow for the quarters. Renovation segment, strong growth in net sales. It grew by 21% to SEK 299 million, and it corresponded to 92% of the total net sales in the quarter. Order intake in the quarter amounted to SEK 199 million. It was 81% of the total order intake in the quarter. Adjusted operating profit amounted to SEK 26 million, down from SEK 33 million last year, corresponding to adjusted operating margin of 8.6%, down from 9.8% last year. Order backlog for the renovation segment is now SEK 1.091 billion, and it corresponds to 88% of the total order backlog. Go to other segment. New build segment. Here, we had a good order intake in the U.K. market. Net sales in the quarter amounted to SEK 26 million, down from SEK 42 million last year. Order intake amounted to SEK 46 million, more or less the same as last year, where we had SEK 52 million, and it corresponds to 19% of the total order intake. Adjusted operating profit for the quarter was SEK 1.4 million, down from SEK 2.5 million, corresponding to an adjusted operating margin of 5.2%, down from 5.9% last year. Order backlog for the new build segment is SEK 150 million, and it corresponds to 12% of total order backlog. And I will look at our financial position and balance sheet. It's still strong. We are prepared for doing more acquisitions. At the end of the quarter, our equity amounted to SEK 746 million with an equity ratio of 57%. Net debt to EBITDA, including leasing debt was 1.2x, the same as last year and excluding leasing, 0.9x. And during the quarter, the acquisitions of both Arutex that we made in end of last year and NMT Montageteknik was completely and paid for. We still have acquisition headroom. We have a banking agreement with Danske Bank that is valid to October 2024 with a sustainability-linked revolving credit facility of SEK 510 million and overdraft facility of SEK 75 million. And to have a look at our financial targets. Balco has a growth target that we should grew our sales by 10% per year. Looking at the last 12 months, we have a revenue growth of 18%. We also have a profitability goal that our earnings per share should grow by 20% per year. They were not so good. Our earnings per share has decreased by 16% over the last 12 quarters. Our capital structure sales, but our net debt to EBITDA shouldn't exceed 2.5x other than temporarily. Here we are on a good level, 1.2x, including leasing debt and 0.9x, excluding leasing debt. Our dividend policy is that we should distribute 30% to 50% of our profit after tax to our shareholders, and the proposed dividend for 2022 is SEK 1.5 per share, and it's 40% of profit after tax. We also have a sustainability goal, but more than 30% of the group sales should provide 30% energy savings to our customers and be compatible with the EU taxonomy. Here, we see that 9% of the sales is providing 30% energy savings to our customers, but 61% of the sales is compatible with EU taxonomy. So all [indiscernible] of glazing in renovation segment, gives an energy saving is like an installation element to the house and therefore, is within EU taxonomy. And some sustainability updates. We see sustainability as a prerequisite for our long-term profitability. And we are working quite strongly with this to continue reducing environmental impact offering more sustainable materials, providing waste manage -- improving waste management and providing opportunities for our customers to reduce their energy consumption. And this has improved our ESG rating with Sustainalytics, it went down from 20.8, 2021 to 18.7, last year and we are now ranked as the low-risk company and actually among the 20% of all companies in the world with the lowest ESG risk rating. We have also worked and improved our CO2 equivalent per worked hour. We have a goal that until 2025 compared to 2019, we should reduce it by 35%. And we look at Scope 1, we have already reached that goal. We have reduced the CO2 equivalent per worked hour by 37% in Scope 1. And looking at Scope 2, we have reduced it by 30%. We have also had good improvements in our accident rate that is measured by a number of accidents at work per 1 million hours worked and it reduced from 13 in 2021, down to 8.2 in 2022. And over to you, Camilla?

Yes. The market update. So as I said before, we can now see here and especially in Sweden, that our customers are getting more and more used to the higher interest rates. However, there's still uncertainty about where the top will be. So we still see that some of them are waiting. And what they're mainly waiting for is both, of course, the increase that we are now expecting here in April but also what will happen in June. And that, as you know, is a big discussion, how much the increase will be in June. So we still see some waiting on the market. But as we know, we are in the renovation segment, as we said, and the pent-up demand is not disappearing. So we still see that the interest in our progress are really big, and we have a lot of meeting with our customers and we also have found some solutions for them to help them to take the decisions here short term. And we are very confident that the order intake will take place again when we have seen the top, so to say, of the interest rate here in Sweden. On other markets, we are not at all as affected as we are in the Swedish market regarding the order intake. Both in U.K. and Germany, they are -- we are less affected by the interest rate increases. We can also say like that, that the customers that we are meeting here in Sweden since we are working with renovation are old associations and the old tenant-owned associations, they have a very strong financial positions in many times. And that means that they can take the balcony investments without making a very, very big increase on the monthly cost for the residents. And that is, of course, helping us in the discussions we have with our customers. We have also parallel here taking some of our companies that will focus more on the publicity owned companies because here, we see that they continue to invest in renovations. And some of them have actually increased it during this time. So some of our balcony companies are more focusing around on the publicity owned companies. And as I said, the new building for social housing in U.K. and Germany has still a good demand, and we have a very good product for these markets. As you have seen, we still have a very good -- we have a very good financial situation. And therefore, of course, we continue also to look on acquisition. And acquisitions are an important part of our strategy and the experience from our previous acquisitions has given us a clear and structured process for how we successful those and integrate and develop the acquired companies. And we are looking for European balcony companies or with -- other companies that can complement our green transformation product offering. There are some other things that is important for the companies that we are looking at, and that means that they need to have a very strong position in a market niche. They should be profitable, well-managed. Their business philosophy and culture needs to be in line with our culture we have already. The business model should be sustainable, and we also want to continue commitment from the management and key employees in the companies. And of course, we can offer them back our financial stability. We can offer the cooperation and the knowledge sharing we have in Balco Group. And we continue with an acquired company that they should continue to work as stand-alone companies, and we are doing synergies effects in between us. And then we look on the acquisition we have made here in quarter 1, which was NMT. And this is a little bit different from what we have, so to say, in our core strategy. Because if you take from the background here, NMT was founded in 2016 and they offer turnkey contracts in balcony renovation in Northern Sweden and mainly to the tenant-owned housing associations. They have 11 full-time employees and a turnover of SEK 49 million during the most recent operating year. And they were a very strong competitor to Balco in Northern Sweden. They didn't have any own products, but they were selling other products, and they had a very, very strong -- they were a very strong competitor to Balco. Now when we have acquired them, we see that we will integrate both the assembly and project organization, and these will be fully integrated with Balco, which is a little bit different from what we usually do with our acquired companies. But this is depending on that NMT didn't have their own products from the start. So therefore, we will integrate them. And we will create a hub in Northern Sweden, together NMT, together with Balco's resources, and that is because we see it's very important for us that we are very close to the customer. We have seen that their success in NMT business is really the very, very good relationships they have with the customers in the Northern Sweden. So we see NMT as a very strong contribution here ahead in our group. If we take some concluding remarks. As we said, the turnover is the best ever for the first quarter and decreased by 13% to SEK 326 million, with adjusted profit margin of 8.7%. We have made the cost saving program, and that will give us a cost saving of about SEK 15 million annually and has an effect of the comparability on the result of SEK 5 million in the quarter. And as we have talked about several times, we are waiting now for the top on the interest rate increase that will come down. So when it has -- where we have reached the top, we can see a stabilization on the market. And we expect also then the order intake to increase more. The outlook ahead is once more again, the renovation. We are working in the renovation, the interest is there, the need is there, so we need the stabilization. And also once more again, we have a very strong financial position, which means that we can continue to grow through selective acquisitions that strengthened our market position, both in existing -- mainly in existing markets, but both in Sweden and in other markets out of Sweden. And that was all from us. Questions?

[Operator Instructions] And we'll start with a question that came in here. We'll take the number ending in 31.

Good afternoon, everybody. This is Nicklas Fharm with SEB Equities. So my first question would be, it would be very helpful if you could just walk us through the composition of the savings program that you launched in connection with today's results. I assume because there are limited sort of nonrecurring costs associated. This is not primarily staff-related reductions. But please, if you could give us an idea of where you will save SEK 15 million?

Yes. We have other cost reduction program, and it's coming from -- 10 people have to leave the company, but they have already left now when we have taken the cost for this. Yes, on the remaining salaries of these 10 people. Then we have another 5 people to quit for themselves, but they are deciding not to replace. So in total, it's 15 people less. So it comes from savings in salaries, all of them.

Very clear. Well, while we're on the topic, can I also ask you to update us on the ongoing savings program, the SEK 20 million program? And what were the actual contributions for these Q1 results today from that savings program, please?

Yes, we have seen that we have expected result from this. So these people the cost were already taken in December. So we have a saving of roughly SEK 5 million coming for this -- during this quarter.

Excellent. Thank you again. Can I ask you -- I've been looking and maybe I missed it, but what's the M&A contribution to Q1 order intake, please?

We have acquired order intake from NMT of roughly SEK 30 million.

Excellent. And before -- and then maybe I can come back later into the call. But if I may, just one final question. Would it make sense, you think, to assume that the decline that we now obviously are looking at in terms of orders for rather obvious reasons. Would it make sense to assume that this decline would -- decline would sort of further accelerate into current trading in Q2 and perhaps even in Q3 compared to in Q1? Or should we expect something more similar to Q1 for that matter?

Our expectation is not that it will be worse in quarter 2. We expect that we will be on the same level or better.

And we'll take the next question calling in with a number ending in 23.

Hi, everyone. This is Sofia Sörling from Carnegie. Thank you for your presentation. Great question from the previous speaker. I had an add-on question on order intake. I was curious if when you have your discussions with tenant association. Do you have any -- do you recognize any new consumer preferences? For example, if I recall it correctly, you have roughly 50-50 percent sales glazed balcony versus open balcony, has this changed during the last quarter or during this first quarter in 2023, could you see any changes in consumer preferences? My first question.

I would not say that we see any difference in the preferences regarding a glazed or open balcony in itself. But what we have seen is that on the glazed balconies that we are selling, the customer may not so add on everything on it before we could be that we have roll the curtains, you have all extra on it, so to say. Now it's more maybe that you go back to a little bit more the basic, what you actually need to have. And other things, what is good to have, that can be that we are selling it in a later stage there. So for taking the decision, and that is also how we are going to the market, but make it easier for them to take the decision to make the investment, we are trying to reduce that first investment cost for them.

All right. And also, when you talk about this pent-up demand and you say that many of the tenant associations posted their investments. But maybe this is a tricky question, but with all the tenant associations that you discussed, do -- like if you would make a rough high level estimate of how many would actually post their investment and make this Balco method or how many will actually do like more of a quick fix renovation of their balcony or how many could actually wait for almost like -- for a longer period of time, for example, like 3 years. If you would do the estimate of all this pent-up demand and would you say that perhaps 80% of cost of investment and go through like a Balco method later on or like only 10% will do a quick renovation take? And what is your take when discussing with all the tenant associations?

Yes. It's, of course, different versus who you talk to because it's depending on, as I said, depending on the finance, they have in the tenant association -- owned associations. If you have good finance, which most of them have that we are discussing with, they are rather waiting and then wait for the right time to make, so to say, decision and to make it really as they want. If they have worse final situation, of course, then they need to go for the renovation, the other method. But it's very difficult to say. I don't dare actually to say any figures here. But it's more depending on which kind of -- how the good financial status they are in.

And I will also say how bad is their slabs and balconies are today if it needs to do a really bigger renovation of it. It's normally cheap but to wait and do -- do it for the Balco method. While if you can do just some simple renovation that last for another 10 years or 15 years, then perhaps they go for a quick.

If the financial situation is not there.

If their financial situation [indiscernible].

All right. And also, I was curious about this quite small market for you, the U.K. market and Germany. But for example, first, U.K. market, what would you say is the trigger for you in the U.K. market at the moment or current trading? And also in Germany, it seems like Germany has the largest renovation market. So how are you working to reach this large renovation market in Germany?

If we start with U.K., U.K., we're working on a new building there. So there, of course, the amount of new build households, that is what is driving us there. And we see that there is still a big demand in U.K. for new houses. And there, we work a lot with also projects to the social housing. And that is, of course, that's needed. And it's more -- it's very common there that they are placing a balcony on the social houses there. So that's the driving force there. In Germany, we have seen also there, they have a big demand for new build. So we have actually started to implement the products that we have seen that is successful in U.K. We are starting discussing them in Germany. We also have another product, which is also good for new building industry, which we are discussing in Germany. So we have some ongoing discussion with new building also in Germany because we see also there, there's a really big demand for building new households. But in Germany also, we have the renovation. And then we are mainly connected to the [indiscernible] market, where they have already put money, so to say, into the foundations for doing the balconies. So there, we also see that is also the trigger that we are working with that client group because if you look on the tenant-owned client group in Germany, you have a little bit similar situation as in Sweden. They are a little bit postponing, they're a little bit more waiting. But the other ones, both the new building and this [indiscernible], they are really doing their investments continue [indiscernible].

And a final question here regarding what is your ambition with Northern Sweden? What are your expectations in order intake, for example, maybe the second half of '23 and beginning of '24? And also when you mentioned a new hub in Northern Sweden, should we expect like a new production facility in Northern Sweden or what do you mean by a new hub?

With the new hub, we mean that we have office in Sundsvall, which you can, of course, always discuss if that is not of Sweden or not but because we have a big part of Sweden that we get. But still, so to say, there is where NMT has their office, and we're expecting that to be the hub. When we meet in the hub that is connected to designers, project managers and assembly organizations, business manager and sales. So no production.

And but you expect -- what is your expectation of sales growth in Northern Sweden?

We don't give any predictions, so to say, about sales growth in different parts of the country. But we know that -- we know we have a big so to say, interest in also Sweden. We know that there is also a new build industry coming up. We are not into the new building industry yet, but we might be if we are interested in it. So we don't want to give any predictions about sales income in different areas of Sweden.

And then we have phone number calling ending with 31. Raising his hand. So we'll give you the word.

It's Nicklas Fhärm with SEB Equities again. Three more questions, please. Could you give us an update on sort of cost inflation and the impact on sourcing and cost of goods? The way I read your comments in the report is that it's mostly mix effects and other effects, perhaps that has impacted the gross margin. But for the record, would you just give us a quick update on sourcing environment, please?

Yes. If we look compared to end of last year, it's stable on the material side. Steel is stable and also aluminum and the glass. So -- but of course, compared to 1 year ago, we have seen material increases and that has mostly been compensated [indiscernible] per SEK. So that has, of course, an effect of the total gross margin compared to last year. But if we look at the last of quarters, Q3 and Q4 last year, we are on the say more better level of gross margin, and we have also more or less the same mix as we have end of the last -- last year. We expect for the current situation, this level of roughly 22% of gross margin should be perhaps the standard of coming quarters.

Right. Right. Got you. Can I also say, I mean you really maintain a strong balance sheet, of course. But I would just be interested in update, if you could update us on the pending earn-out payments in next year relating to RK and Stora Fasad? I think it sums up to about SEK 30 million according to the original sort of disclosure.

Yes, the original was roughly SEK 30 million, as you said, but we made a -- as you perhaps remember, in December, new calculation. So right now, we expect roughly SEK 20 million.

Excellent. And final question. I'm obviously aware that you've changed financial targets since a while back. But your old or previous margin targets of generating EBIT preferably above 13%. Is there any reason -- I mean, given the acquisitions you have made since then and the change in the overall group structure, is there any reason for why that margin level would have changed if you would have made a margin target today for any reason?

As a matter of fact, we are discussing this, probably will do an update also of a new margin target at the end of this year. So we'll come back...

Okay. I will take the next question that's coming. The next question is regarding your gross margin levels, where you have commented that it will weaken. So the question is compared to what level?

Yes, [indiscernible] compared to last year. Of course, it went down from more than roughly 25% down to 22%. But that's mostly because of the mix change that we sell from other markets and also other companies in the group has grown more than the margins in Balco AB, Sweden and Norway have more -- have the highest gross margin and balance share of the total sales has gone down, and we expect it to be lower in the long run where we're doing done more acquisitions. So we expect more perhaps future margin, at least we're looking at this year to be around the level of the adjusted gross margin of this period, roughly 22%.

I'll take the next question. What are the geographical trends in the order intake?

As it has been, if we look the recently quarters, as we have said before, is that we have had a good order intake, both in Germany and in U.K. So they have been, so to say, following a good pace. And the reduction in order intake has been mainly Sweden, but also Norway. So Sweden and Norway has been sort of say, less order intake and where we have been struggling a little bit more with the discussions about the interest rates.

And we'll take the last question here. What are the main risks facing Balco Group? And how are you managing to -- managing these risks to protect shareholder value and ensure sustainable growth over the long term?

The main risk would, of course, be if we see that -- if we look on the Swedish because Sweden is still a very, very important market for us. And the main risk would of course, if we see that the inflation rate is not going down at all. We are keeping a very, very high interest rate and that they need increase the interest rate even more after June. And when I say even more, I mean a lot more because otherwise, the most of the discussions we have right now with our customers is that they -- as I said before, they are expecting an increase in April. They are also expecting an increase in June. So that is not so to say, giving any problem for us, mainly that it's postponing things. But of course, there will be -- could be a problem for us if that -- it's not affecting, and they continue to increase even more, and I mean much more then. What we're doing to prevent it is that we have -- we are working and therefore, we are working with the cost structure, of course, to reduce our costs. We are working with different tools to our salespeople. How they can help the customer to take decisions, how we can help them with the financing and also to show them that you -- quite often, they don't need to increase the monthly cost as much as they expect from the start before we look on the balance sheet. That is how we work with it. And of course, also, as we said, that some of our companies are now also going more into the social housing. Before we have been very, very heavy on the tenant-owned side but we are also having companies now in our group, which have very good products for the social housing. So we are a little bit splitting out, so to say, now to make sure that we are not 100% depending on tenant-owned but that is still our big customer market, of course.

Okay. Thank you very much. Camilla and Michael for being here presenting today and answering all our questions. And a big thanks to all of you who called in or type in your questions and follow along Balco Group's Q1 report. Hope you have a great rest of the day and until next time. Thank you, and goodbye.

Thanks a lot. Thank you. Bye-bye.