Balco Group AB (BALCO) Earnings Call Transcript & Summary

Hello, and welcome to today's webcast with Balco Group, where CEO, Camilla Ekdahl; and CFO, Michael Grindborn will present the report for the second quarter of 2024. [Operator Instructions] And with that said, I hand over the word to you.

Hello. Thank you, and welcome to our quarter 2 report. This is Camilla Ekdahl, the CEO; and Michael Grindborn, CFO. First of all, for all new listeners, I will make a very short snapshot of Balco Group. Balco Group was founded in 1987 and consists of several balcony and facade companies. The head office is in Växjö, and the group has today approximately 650 employees. We operate in 2 main segments, the renovation and new build and the core expertise is to supply glazed balconies and balcony solutions primarily on the renovation market and to tenant-owned associations and replace existing balconies with new glazed balconies according to the Balco method. And with the Balco method, we mean that we cut off old balconies slab, we replace with a new fresh and offer a bigger one, and then we make a glazing on it. But we also have a broad offering of other balcony solutions and as well as complementary offerings such as facade renovation. Balco Group is a market leader in the Nordics with the key markets, Sweden, Denmark, Norway and Finland, but we also have a strong challenger position on other European markets, mainly U.K., but also Germany, and we have a production facility in Poland. All glazings of Balco results in energy savings, simpler gives 5% to 10% energy savings while if you use the Balco patented glazing, we can provide a documented energy savings of 20% to 30%. That said, we go into the quarter 2 report and some highlights. We had an increase in the order intake and increased by 26% to SEK 380 million versus SEK 301 million previous year. The increase comes from the acquisitions we made during quarter 1. The organic order intake was 11% lower than previous year, and this was actually lower than expected considering the prospect list we are working on. But we still see that it takes longer time to get the orders in, especially on our key customers, tenant-owned associations. We'll continue to have a good development in sales on our newbuild segment in the U.K. The net sales increased by 8% to SEK 374 million versus SEK 346 million previous year. And here also the increase comes from the acquisition we made. The organic net sales decreased by 23%, which was expected with a lower order intake we had previous year. We had a strong cash flow. It improved to SEK 64 million versus minus SEK 10 million. And we have during the quarter continued to focus on our costs, and we will continue to do so. We have a strong focus on increasing our order intake and profitability, and we are working on our cost structure. And we made some structural changes during the quarter with moving of production to streamline the production side and focus certain processes in different facilities. And I would like to take the opportunity here also to go a little bit more deeper into a market update and to explain a little bit the different situations we have on our different markets and also the focus and the challenges we have on them. So if we start with the Nordic countries, and we talk about the market situation we have on our largest market, Sweden, it has clearly improved with the interest policy rate cut we had in May and also the clear signals for more to come. We also saw today with the low inflation figures, we hope that, that will give a further decrease already in August and then another 1 or 2 before year-end. Customer activity has increased, as I said, and the interest in our product is high, but our customers, which I said was mainly the tenant-owned associations, they have also experienced other cost increases during 2023 and start of 2024. So we see that they want to evaluate more options or opportunities before decisions are made. And this means that we also have -- we have not seen the real boost for the order intake in the Swedish market yet. If we continue to Denmark, here it's even clearer for us that it takes longer time. Also here, we have a strong interest in our products, and we are handing out a lot of quotations. But even when there is a decision made that the way they will take the investment, we can see that the final signatures still takes a long time and even longer than before. So in the Danish market, we have had a too low order intake, and we have also seen some price pressure from our competitors here. The Norwegian market has made a good development. Here, we see a clear increase in activity and order intake for the first half year if you compare to the same period previous year. We can see that our solution to be a turnkey supplier of balconies and including also facade, air-to-air heat pumps and solar panels have given good results. We have also seen during the period, an increase in the sales of our Clima walls solution. And the Clima wall is when you cover the whole facade with a glazing and this is when you can get up to 30% energy savings. So we see that the energy savings initiative that we are taking are really heading off in Norway. If we look on Finland, which is a market we have invested a lot in during quarter 1, we can see that there is a great need to renovate properties. There is a demand for both balcony products and major renovations. We see a good sales development or order intake development from our company, Suomen Ohutlevyasennus. And the other acquisition, Riikku that has mainly been focusing on new building segment before, we are now working on to broaden our portfolio to also talk more about the balcony slab. So we are -- they should not be only a glazing company for new building industry ahead. They should also work with as a balcony company for -- also for the renovation market. But of course, they are not letting the new building market down. They are still on that market also. If we look on the countries outside [indiscernible] where we are -- have the most of the sales, we can talk about the U.K. market. And here, the sales continues to be good with our product Levitate and we are focusing here on the newbuild industry as we have said several times before. Here, we have managed to improve our profitability even though that we have a quite tough market competition. And after the election, the Labor Party announced that there is a need to build another 1.5 million houses the coming 5 years. So we see a continuously good potential here for our Levitate products ahead, including also the Irish market. In Germany, we focus mainly on 2 customer groups. One is [indiscernible]. They have a large portfolio of rental properties in their regions, and they annually renovate the share of their portfolio. So this means that they are returning customers. It is important for them to create an attractive housing in their regions. And here, of course, we can contribute with the Balco glazing. The other focus group we have is the modular house builders. Germany as well as we're talking about U.K. that needs a lot of buildings. In Germany, they talk about [indiscernible]. So they need to build a lot of new apartments. But since the increase has been high also on the construction costs, we can now see that it drives more and more construction to be carried out with modular projects, which means that the high proportion of prefabrication in factories. And we have good solutions for them regarding the balcony both if there are prefabricated houses for concrete, steel or wood. And we have made some smaller projects before within the segment, but during the quarter, we received a major order of about SEK 37 million, and we can see also a potential here ahead to be into the new building area also in Germany. Yes, that was a little bit about the market update. So let's go into the quarterly figures, Michael.

Yes. And some financial update and start with net sales, it increased by 8% in the quarter, up to SEK 374 million. Here, acquired growth was 30%. We had a positive currency effect of 0.4% and the organic growth was minus 23%. If we look at the net sales year-to-date, it has increased by 4% up to SEK 700 million compared to SEK 672 million last year. Adjusted operating profit on EBITA level amounted to SEK 19 million, corresponding to an adjusted operating margin of 5.0%. And year-to-date, our operating profit has been SEK 35 million, also with an adjusted operating margin of 5.0%. Order intake increased in the quarter by 26%, up to SEK 380 million. Acquired order intake was 37%, and our organic order intake was minus 11%. Year-to-date, the order intake has increased by 34%, up to SEK 732 million compared to SEK 547 million last year. Order backlog has increased by 16%, up to SEK 1.384 billion. And the earnings per share in the quarter was SEK 0.15. And year-to-date, the earnings per share is SEK 0.25. Operating cash flow was good in the quarter and improved to SEK 64 million compared to minus SEK 10 million last year. And year-to-date, it has improved to SEK 82 million compared to minus SEK 20 million last year. And look at the 2 segments we have and start with the Renovation segment, the larger segment we have. Net sales in the quarter amounted to SEK 251 million, down from SEK 322 million, and it corresponds to 67% of our total sales. Year-to-date, the net sales in the Renovation segment is SEK 473 million, down from SEK 621 million. Order intake in the quarter amounted to SEK 254 million, down from SEK 288 million last year, and it corresponds to 67% or so of the order intake in the quarter. Year-to-date, order intake has been SEK 539 million, up from SEK 488 million last year. Adjusted operating profit amounted to SEK 11 million with an adjusted operating margin of 4.3%. And year-to-date, the operating profit has been SEK 21 million with an operating margin of 4.5%. Order backlog is SEK 1.29 billion, more or less the same level as last year, and it corresponds to 74% of our total order backlog. Our newbuild segment increased the sales in the quarter up to SEK 123 million. And year-to-date, the net sales has increased to SEK 228 million compared to just SEK 51 million last year. Order intake has also increased in the quarter to SEK 126 million and year-to-date, the order intake is SEK 193 million, an increase from SEK 59 million last year. Adjusted operating profit has improved and was in the quarter of SEK 7 million, with a margin of 5.5%. And year-to-date, operating profit is SEK 12 million with an operating margin of 5.4%. And last year, we had just 3.3%, so a good improvement in the newbuild segment in our margins. Order backlog for the newbuild segment is SEK 355 million, an increase from SEK 141 million last year. And I look at our financial position. At the end of the quarter, the group's equity was SEK 798 million with an equity ratio of 47%. And if we have a look at our interest-bearing net debt, excluding leasing debt in relation to adjusted EBITDA pro forma, it amounts to 2.4x compared to 1.0 last year, and it's -- like this, it's calculated when we have discussions with banks. So that's why we want to show that figure. Our banking agreement with Danske Bank is valid until October 2026, and it is a sustainability-linked revolving credit facility of SEK 510 million and an overdraft facility of SEK 75 million. And I look at our financial targets, Balco Group target that we should increase our sales by 10% per year during business cycles and here we are at minus 9% our last 12 months compared to the last 12 months before that. Earnings per share, we have a profitability target that it should grow by 20% per year during a business cycle and here we are at minus 75%. We also have a build of our capital structure, but the net debt to EBITDA shouldn't be more than 2.5, and it's calculated as the net debt, excluding leasing debt and the pro forma adjusted EBITDA. And here, we are at 2.4. We also have a dividend policy that Balco should distribute 30% to 50% of profit after tax, taking into consideration needs for Balco's long-term growth and prevailing market conditions. And we -- decision from the Annual General Meeting was that you should have no dividend for the financial year of 2023. And back to you, Camilla.

Yes. Well, it's acquisition strategy. As we have said before, acquisitions have been and are an important part of the Balco Group's strategy to grow. We are looking at selective acquisitions, which support our strategy, overall strategy, and we are mainly looking for European balcony companies or companies with activities that can complement our green transformation product offering. And this is what you saw when we made the 2 big acquisitions during quarter 1, with Riikku and Suomen Ohutlevyasennus. They are a selective acquisitions, and they are supporting our overall strategy. And we are, all the time, getting in proposal for acquisitions and we are evaluating them, but we are selective in our -- when we go ahead with them or if we discuss with them further on. Some concluding remarks. The net sales in quarter 2 was SEK 374 million and the adjusted EBITA margin 5%. Order intake, SEK 380 million and the operating cash flow was SEK 64 million. And if we look -- if we summarize our outlook, there is a clear increase in activity in the Nordic market but the processes continues to take longer time, as I said. And this means that we estimate that we have an effect on our net sales and earnings also during the second half of the year. We see continued potential in the newbuild segment in U.K., Germany and also Ireland. And of course, as you understand, we are not satisfied with the profitability that we now have and that we show you and the entire group continues to have a strong focus on increasing the order intake and also continues to work on our profitability levels. And as we also previously communicated, the company's priority is to retain our important key expertise within the group as we have a long-term focus and know that the market potential remains. So that was all from us from the reporting side.

[Operator Instructions].

Sofia Sörling from Carnegie here. Can you hear me?

Hello, Sofia. Yes, hello, Sofia.

Yes, hello.

Great. Okay. So my first question is related to profitability ahead. You mentioned earnings will be negatively impacted also in the second half of '24, but it seems like the profitability now is low profitability mostly related to the Renovation segment. Do you expect only improved volumes will actually improve profitability ahead? Or is it something else that you expect will -- that you need to do in order to improve profitability during '24 or into '25?

Yes. We have done some measures as we mentioned, on the production side, and we are still looking if we should -- what we can find to do further improvement, but we think it still will be affected, especially in quarter 3 and also for the whole year of '24. So we expect it to profitability be more or less on the current level during this year. But when volumes are coming back, especially as you said on the Renovation side where we have too much capacity, both in our production and project organizations. We expect when volumes are coming back of course, the profitability to go back up on better levels. But we expect that, that will happen perhaps in probably beginning of 2025.

We need order -- better order intake and better volumes before.

Okay. And you mentioned the capacity is very high at the moment. Can you give us some estimate of the current utilization rate of all production or the production capacity now and the potential?