Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to today's webcast with Balco Group. With us today as presenters are CEO, Camilla Ekdahl; and CFO, Michael Grindborn. [Operator Instructions] And with that said, I hand over the floor to you, Camilla.

Thank you. All welcome to our presentation. First, for new listeners, a snapshot of Balco Group. Can you take it up? It's not working? Yes. Balco Group was founded in 1987 and consists of several companies in Sweden and Denmark with sales offices in Norway, U.K., Germany and Netherlands. The head office is in Växjö, and the group has over 500 employees. Balco operates in 2 main segments: renovation and new build. The core expertise is in supplying closed balconies and balcony solutions primarily on the renovation market and the tenant owner associations. However, the group has a broad offering of balcony solution, including both open and closed balconies as well as offerings such as facade renovations. Balco Group is a market leader in Scandinavia, with key markets being Sweden, Denmark and Norway, but we also have a strong challenger position on the other Northern European markets. All glazings of balcony results in energy savings. Simpler glazings provides 5% to 10% energy savings, while Balco's glazing provides a documented energy saving of 15% to 30%. Facade renovation can give additional about 10% if they do additional installations. So we go over to the highlights of quarter 2. We had good net sales and stable profitability in a challenging market. The net sales amounted to SEK 346 million, and the adjusted EBITDA margin improved to 8.9%. I have several times talked about that Balco can contributes to the needed green transition with our own -- with our energy savings glazings, but I can now proudly also say that we have developed a patent-pending solution with a smartly placed air-to-air heat pump, where the piping is integrated into the balcony's glazing. During month -- during the month of June, we have reached an agreement with a housing association in Norway regarding our installation. And we are also a chosen supplier for 2 other Norwegian projects where the votings will take place during the autumn. In Norway, the apartment [ pillar ] are heated with electricity, and therefore, the air-to-air heating pump solution is very interesting for them. And with the Balco solution, where we can integrate it into the glazings, it's also very nice looking from the outside. During the quarter, Balco also took the first order in Sweden as a supplier for solar panels together with our glazed balconies. Of course, we will also continue to develop our core products. And there, we have a product that we launched a couple of quarters ago, which we call Levitate, where we have had very good sales in U.K. in the new building segment. That was a steel balcony, but we have now also launched [ an alder ] version, which then gives us a lighter product, easier to ship and also easier to install. We have established a final assembly of the product locally in England, and that will give us even more we are -- than even more competitive in the U.K. market with the Levitate product ahead. I would say also that there are still challenging market conditions, and we can see that continued interest rate increases has affected our order intake during the first half year. We assess that this uncertainty remains until we can see clear signals from the central banks that the increases are over. And with that said, I hand over to Michael, which will go more into the figures.

Yes, and some quarter results and also update on year-to-date results. If we look at the quarter, our net sales amounted to SEK 346 million, down from SEK 351 million last year. Acquired growth was 9%. The currency effect was positive by 1%, and our organic growth was negative by 11%. Year-to-date, our net sales has increased by 5% to SEK 672 million. Our adjusted profit EBITDA improved to SEK 31 million compared to SEK 29 million last year, with an adjusted operating EBITDA margin of 8.9% compared to 8.2% last year. Year-to-date, our EBITDA profit is SEK 59 million, with a margin of 8.8%. Order intake in the quarter amounted to SEK 301 million, down from SEK 364 million last year. And year-to-date, the total order intake is SEK 547 million. Our order backlog right now is SEK 1.195 billion. It has decreased by roughly SEK 400 million compared to a year ago. The earnings per share improved to SEK 1.25 in the quarter. And year-to-date, it has improved to SEK 1.93 per share. Our operating cash flow amounted to minus SEK 7 million in the quarter, and year-to-date, it's minus SEK 18 million. And the cash flow depends a lot between quarters about when we get timing for new building permissions and also the different phases of the projects. If we have a look at our renovation segment, we had good growth in net sales and also improved profitability. Net sales in the quarter increased by 5% to SEK 322 million compared to SEK 306 million last year, which caused 93% of the total net sales for the group. Order intake was SEK 288 million, down from SEK 350 million last year, and it was 96% of the total order intake. Our adjusted profit improved to SEK 30 million compared to SEK 25 million last year, and also the adjusted operating margin improved to 9.4% compared to 8.3% last year. Order backlog for the renovation segment is SEK 1,054 billion. It's also decreased by roughly SEK 400 million compared to a year ago, and it's 88% of the total order backlog. If we have a look at the new build segment, we had a decrease in sales by down to SEK 24 million compared to SEK 45 million last year. The order intake was more or less the same as last year at SEK 13 million. Also our adjusted operating profit decreased down to SEK 0.3 million with adjusted operating margin of 1.3%. And both the net sales and the operating profit is affected by that maritime business that, in the recent years, has been both a quite big part of the new build segment and also the most profitable part for the last years. Our new build segment has no longer any turnover. We also have some projects in the U.K., which we have stopped during the quarter due to our customers have some financial problems. Order backlog is SEK 141 million for the new build segment. Next page, we have a look at our financial position, which is still strong. At the end of the quarter, the group's equity was SEK 757 million, an increase by SEK 26 million compared to a year ago. And the equity ratio is 56%. Our net debt, including leasing, divided by EBITDA, was 1.5x, an increase from 1.3x last year. Also, net debt, excluding leasing was 1.2x compared to EBITDA, an increase from 0.7x last year. And the increase comes mostly from -- we have done 3 acquisitions during the autumn last year and spring this year of Söderåsens, Arutex, and NMT. We still have acquisition headroom. We have a revolving credit facility with Danske Bank which is of SEK 510 million and also an overdraft facility of SEK 75 million. So we still have a lot of unused cash flow in the revolving credit facility. If we look at our financial targets, we have a growth target in the group, but we should achieve a growth of 10% per year. And looking at the last 12 months compared to 12 months before that, we have a growth of 13%. Our profitability target is that our earnings per share should grow by 20% per year. Here we have seen a negative growth of 8% for the last 12 months. Our capital structure goal is that net debt to EBITDA shouldn't exceed 2.5x. And here, we are at 1.5x, including leasing, 1.2x, excluding. We also have a dividend policy, but we should distribute 30% to 50% of our profit after tax to our shareholders. And we last decided it, decision taken in May is that the dividend for 2022 should be SEK 1.50, and it's 40% of the total net profit after tax. We also have a sustainability goal about 30% of the group's sales should be within the EU taxonomy. And last year, it was 61%. And some more about sustainability. Balco has now an ESG risk rating from Sustainalytics of 18.7, which means that we are a low-risk company and among the 20% of the companies in the world with the lowest ESG risk. During last year, we improved our waste handling. So the part of the waste that was recycled increased to 77% compared to 67% a year ago. The share of female managers in 2022 was 21% compared to a total share of female employees of just 11%. We are in a market where it's quite few female employees, but as you see, we can give good opportunities for them also in the group. So I hand over back to you, Camilla.

Yes. If we talk a little bit -- talk a little bit about the market update. I've talked about it quite also before, but as we said, we have challenging market conditions right now. But we can see that the number of inquiries and discussions about products has increased during quarter 2 compared to quarter 1. Our customers have started to get used to a higher interest rate level, but we can see that especially in Sweden since the inflation is not coming down as quickly as we would like to, some customers are still postponing their decisions. We assess that the uncertainty will remain until the central banks clearly communicate that their interest rate increases are over and that we can expect more stable interest rates going forward. However, the need for renovation of balcony remains. And as we said also before, around 90% of Balco Group's turnover comes from the renovation segment. And that makes us confident that the order intake will take place again in the future when we have more stable market conditions. Some of our companies focus now more on the publicity owned companies, which continues to invest in dual renovations also during the a little bit more challenging market conditions. New building for social housing in U.K. and Germany has a good demand, and we have very good products for these markets. And as I talked in the highlights, we also now launched the new product, Levitate Aluminum, which makes us even more compatible on the U.K. market. We continue also to work with acquisitions. As Michael said, we made 3 acquisitions during the autumn and the start of this year. But acquisitions are an important part of Balco Group's growth strategy, and we see now that opportunities are coming up for us. What we're looking for are European balcony companies or with activities that can -- either European balcony companies or companies with activities that can complement our green transformation offering. And when we are taking in companies, we offer them a decentralized business model where the company retains its own brand identity and culture, or it can also be, as we made for NMT, that we integrate them more into the Balco Group because they don't have their own products, and therefore, it's better to integrate them. So it can be, of course, a little bit different business model with each company we are buying, but the decentralized business model is our main focus when we are doing acquisitions. Concluding remarks. We had a good net sales, SEK 346 million, and we have an improved profitability during quarter 2. We have new products developed and launched, but we are affected by the interest rate increases and that's especially in our order intake. If we look ahead, the need for renovation, as we said, that will remain, and we are very sure that the order intake will take place again. But the lower order intake that we have had in the last year will probably affect our sales and earnings during the next coming quarter. Balco, as we said, has a strong financial position, and we plan to continue to grow through selective acquisition, and we have discussions and opportunities right now coming up also for us. That was all from us. So questions?

[Operator Instructions] So I will start by letting in the person that have a cell number ending at 05.

Nick, I am from SEB here. Okay. And I just wanted to ask a question regarding the different geographical markets. I see year-over-year development in Sweden was quite good. But the clear weakness was in the other Scandinavia. Could you elaborate a bit on where exactly you've seen the weakness, in which country and then in which segment?

Yes. As you mentioned, Sweden is doing quite okay. Also Germany and U.K. is developing well. Denmark has still strong sales, net sales and also quite good profitability. The order intake has been tougher in Denmark. It's taking longer time. They still have a lot of discussions with the decision making and especially we'll ask just to get signature of a contract takes a longer time. That's why it's affected the order intake in Denmark. In Norway, as we mentioned roughly a year ago, we have had some problems with some projects. We have also had quite tough conditions in Norway to get order intake from autumn last year until May of this year. So we have had a very low order intake during that period. So that has also affected net sales in Norway during the first half of this year. Now we have got some quite good order intake the last 2 months. So it looks better for the coming half year in Norway.

And in terms of how the tenant owner associations are discussing right now, I mean, are you seeing cancellations or [ where ] in terms of order intake was like in the discussion like to which -- sorry, the tenant owner associations like how are you feeling in the discussions? And why are they not pulling the trigger? Is it only because of the interest rates right now that is the biggest uncertainty?

The main factor is the interest rate and the uncertainty. As we said, they are starting to get used to the higher interest rates and that especially, of course, in Sweden. But Sweden, as you know, is our main market. But what they are waiting for is more or less that we -- they know where the top will be on the interest rate. As soon as they feel that, okay, it will go up to maybe 4.5%, 5%, then they need that to [ calculate ] it. So that is what we see. That is the most that they are postponing. But we have always seen in some projects, and that's why we still have quite good order intake, and we have discussions with them is that we are trying to really reduce sometimes the project to what they are really, really needed to do as a renovation, as a first step. And then they can add on products later on for accessories, for example. So it can be also that the projects [ are quite a ] bit smaller, they don't add on all the accessories in the first place. That's also 1 of the trend we can see now when the when the interest rate is higher.

But we haven't got any cancellations this first half year.

No cancellations.

And we see that it's much more activity. So they are starting to get more and more used to the level -- and for us, I think it's even a little bit positive, that they are not saying the Central Bank, but it will be a decrease, quite soon that we really see the interest rates on a good level because then they know, but it's no need to wait any longer.

And as we may have touched upon the renovation segment, it's obviously, the strong one in this quarter and especially looking at margins as well. But new build year-over-year is underperforming, I guess, you could say. But in terms of, I mean, the renovation market, it looks like it's going all right, but in the new build market, I mean, what have you seen so far in the start of Q3? It hasn't been very long, but have you seen anything like going forward that makes you a little bit more optimistic on the outlook [ within ] new build.

New build is mainly coming from U.K. And in the U.K., we have been affected by the -- in the sales on the first half year, depending on that we had, as Michael said, -- we have 1 customer that had some finance programs, and we are not expecting on it on the project side, but we said, okay, then we don't do any more work until we are certain that they also can pay. And that's why we are affecting the sales on the first half year on the U.K. market. Now we see what we have got as information that we called now and that means that we can then start growth project again as well as we also will start the other projects that we have had order intake on. And we see also now that when we have the material prices [ are more stable ] actually going down and that we have taken the new orders on a higher margin with the material costs. That is also giving us more confidence on the new building segment ahead.

Okay. You mentioned here also in the report regarding the new builds at the maritime business [ just related ] to your turnover. Do you expect this to come back in the future?

We have not closed down the maritime segment, but we know that these orders, so to say, and quotation period, so that come back quite seldom. So we are not expecting to get any new orders within 1 to 2 years ahead. But we are, of course, always in contact with the existing customer we have there. So if it comes up, that will they will build new boats, we will, of course, make a quotation on them also.

I will now hand over the word to the cell number that ends with 23.

This is Sofia from Carnegie, can you hear me?

Yes.