Fasadgruppen Group AB (publ) (FG) Earnings Call Transcript & Summary

Welcome to the Fasadgruppen Group Audiocast with Teleconference Q3 2022. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I am pleased to present CEO, Pal Warolin, and CFO, Casper Tamm. Please begin your meeting.

Welcome, everyone, to this presentation, Fasadgruppen Third Quarter 2022. My name is Pal Warolin, and I'm the CEO of Fasadgruppen and together with our CFO, Casper Tamm, we will guide you through this presentation. Next slide, please. Let's start as usual with Fasadgruppen in brief. Fasadgruppen, we are the market leader in Scandinavia within facade work. Facade work is a highly specialized and local market with a high level of partnership. By facade work, we mean almost everything related to the shell of the building. So the service offering consists of, for example, masonry, plastering, installation, renovation of balconies, installation and renovation of windows, roof, glazing, almost everything you need a scaffolding to do. Fasadgruppen, we are focused on midsize project in the range of SEK 1 million to SEK 100 million with an average project size of about SEK 3 million to SEK 4 million and at least 75% of our projects relate to renovation. We have a very active M&A agenda with the aim to consolidate the highly fragmented Nordic facade industry. The group currently comprises about 50 businesses across Sweden, Denmark, Norway and Finland in a decentralized structure. We have almost 2,000 employees. Next slide, please. Take a look at some key financials of last 12 months. First of all, the net sales is, for the first time, more than SEK 4 billion. As a positive note, also the cash flow was better. It is improving. It is improving slowly. So the cash conversion is a little bit better. I'm also confident with a healthy order backlog, almost SEK 3.2 billion. Next slide, please. The third quarter in brief. I take a closer look to the third quarter. We have a strong organic growth driven by inflation and also energy renovation demand. We have a lot of activities and a lot of projects more than normal. So it's not only the inflation. We have some impact on margins from price surges on material in the second quarter. But overall, we've been successful in protecting profitability. We haven't been 100% successful with moving extra material costs to the customer, but very close to it. The net sales is up 69.3% compared to last year, which almost 15% was organic. The adjusted EBITA margin, 11.5%. We have a very strong growth in order backlog, driven, of course, also of inflation, but also from a really strong demand. We have made 3 new acquisitions in the third quarter, and we are the first entry to Finland. Next slide, please. We take a closer look at our 3 acquisitions in the third quarter. First of all, Rovakate in Finland, is the first entry to Finland as just as mentioned, with a market size of about SEK 25 billion. Rovakate is founded in 1973. It's specializing in facade and roofing works for industrial buildings such as power plants. The company is run by 2 entrepreneurs. They're serving customers across the Nordic region and the Northern Europe. Very proud of this first acquisition in Finland. The second one, Altana, a Danish company. It's actually a pretty young company compared to our other subsidiaries in Fasadgruppen but they have a very impressive journey so far. They founded in 2013. They are a full service provider of balconies. They have a really strong position in Copenhagen, and it provides great cross-selling opportunities in Denmark. And we know them for a while because they have been working with some of our subsidiaries in Denmark. I'm also very proud to announce this fantastic acquisition. The last one, the third one, Jan Tryk facade works. It's a little bit smaller acquisition compared to the other 2s but it's a very typical Fasadgruppen company. It's a perfect asset acquisition by our subsidiary, P. Andersen & Son. They offer masonry and plastering with large share of renovation projects. and it's established Fasadgruppen in the Jutland region. I'm also very happy with Jan Tryk facade works. Next slide, please. Case study from the third quarter, sustainable renovation across our market. This time, it's not a single project. This time, we really want to show that we are well positioned towards a market that demands energy-efficient solutions for buildings and that we use materials that are produced very energy-friendly. We have about 1,000 projects ongoing right now. The project on this slide is very typical Fasadgruppen projects. We can go to the next slide and take closer look to 3 of those specific projects. The first one in Norway, our subsidiary, DVS Entreprenor,. It's located in [ Brennaveien ] power plant. It's a very old building and a very elegant building, where we have changed to more energy-efficient windows. The second case here is in Denmark, our subsidiary, BYENS TAG & FACADE located in Copenhagen, and the project is called Vanlosegaard. And it's a typical apartment building almost 100 years. It's actually a building designed by the famous architect, [Bismarck]. We have done roof replacement with solar panels and optimization of ventilation. The third one project is in Sweden, our subsidies Mjondalen Mur & Puss located in Lund campus Vipan. It is building for the university in Lund. And we have done classic brick laying and the brick that was prescribed in this specific project was produced with natural gas but we changed it to bricks produced with biogas instead, which gives a 60% reduction of CO2. Next slide, please. We will move on to some financials. So I will leave over to Casper.

Thank you, Pal. Then I will take you through some highlights in the Q3 financials. So next slide, please. So we saw a strong organic and profitable growth for third quarter. Revenues were up SEK 1.2 billion, and we had a strong organic growth in nearly 15%. Here " companies were comparable out of a total of approximately 50. Adjusted EBITA reached SEK 139 million with a healthy margin of 11.5%. We had some negative impact here from cost inflation on materials. Coming to the order backlog. It reached SEK 3.2 billion, and we have seen an increase in the order backlog since the start of the year with SEK 1.2 billion. Profit for the period was SEK 105 million and basic earnings per share was SEK 2.15. In the previous year, number of shares is up approximately 9%. Operating cash flow was strong and there was SEK 125 million. This was mainly due to improved net working capital development in the quarter. We will return to a bulk figures in later in the presentation. Next slide, please. Coming to net sales. So acquired growth in the quarter was nearly 55% out of the total 69% on a year-on-year basis. In the start of the year, 17 new acquisitions have been made until the end of the third quarter. And as already said, we have -- we saw a strong organic growth with nearly 15%, up from approximately 4% in first quarter and more or less on the same level in the second quarter. Here, we have a smaller impact from exchange rate changes with 0.9 percentage points. The organic growth besides the exchange rate changes includes essential effects from cost inflation on materials, which we estimate to approximately 5% to 10% for the quarter. Coming to the order backlog. Also here, we saw a strong increase in the organic growth, up with 36%, well above second quarter here. Also here, we had some essential effects from cost inflation on materials, and we estimate the effect to approximately 10% to 15% for the order backlog organic growth. New acquisitions amounted to approximately SEK 0.8 billion out of the total increase of SEK 1.2 billion from the start of the year. Now next slide, please. The quarter saw an adjusted EBITA increase of 48% on a year-on-year basis with a healthy margin of 11.5%. and also here some negative effects from cost inflation, which has impacted profitability, but still on a healthy level. Nonrecurring items in the quarter amounted to SEK 9.4 million and includes M&A costs of SEK 2.8 million. And positive effects on earn-out revaluations is SEK 13.5 million and also some other costs with SEK 1.2 million. Turning to the next slide, please. Just some comments on the P&L. Looking on other revenues, where you will find the effects from positive nonrecurring items like revaluation of earn-outs, which amounted to SEK 66 million in the quarter. For depreciation and amortization, here, we have our acquired intangible assets with the depreciation, ongoing depreciation of approximately SEK 8 million to SEK 9 million for the quarter. In other operating expenses, we find negative nonrecurring items like the M&A cost and also negative earn-outs here. The effects from revaluation earn-outs in other operating expenses was SEK 53 million for the quarter. Going down to net financial costs. Here, the interest cost and external debt was SEK 8 million for the quarter and SEK 40 million on the accumulated period until September. Going to the next slide, please. So some comments on the balance sheet. We had a total balance sheet now of SEK 4.9 billion. Looking on the asset side, we see major changes for brand and especially goodwill due to the active acquisition agenda. And here, we have no depreciation included. On the equity side, we have seen during the year a new target or new share issue in March, SEK 410 million. And we also in acquisitions have added SEK 125 million as offset share issues. We had a dividend in second quarter of SEK 58 million, which also impacted the equity side. On the debt side, we had interest-bearing debt from our finance institutions of SEK 1.6 billion compared to SEK 0.8 billion in the comparable period. The net interest bearing debt was SEK 1.4 billion here, giving us a net debt to adjusted EBITDA of 2.8 on the same level as the comparable period. Yes. We go to the next slide, please, saying something about cash flow and cash conversion. As already mentioned by Pal here, we saw a strong operating cash flow in the quarter, which improved our cash conversion also which was increasingly stronger than in the comparable period. The change in net working capital was negative for the revolving 12 months. And here, the negative development in the working capital is considered mainly to be the active work we have done during mainly second and partly third quarter to ensure prices for projects through the earlier purchase of materials, and this has created a delay in relation to when invoicing to the customer can take place. We see a larger number of projects will be completed during the fourth quarter in the seasonal cycle, which usually has a positive effect on the net working capital development for Fasadgruppen. So we feel confident also here. Next slide, please, and then I'll leave it over to Pål here to do some remarks -- closing remarks.

Thank you, Casper. Some concluding remarks. First of all, we have a record strong order backlog. We are well prepared for next year and it gives us good confidence going forward. Number two, we have a focus on margins and cash flow. We will continue with the hard work to keep our margins and also focus on our cash flow. We believe that we have a great possibility to improve that even if we will take some time. Number three, M&A opportunities remain solid. We have closed 1 acquisition after the third quarter closed, really good acquisition, great margins and focused on renovation. And our pipeline is still very strong, and we will continue to consolidate our industry. All in all, we have a positive view on 2023. We are positive going forward given what we see right now. But of course, it is important that we are humble about it. Thank you very much. We are ready for some Q&A.

[Operator Instructions] Our first question comes from the line of Carl Ragnerstam of Nordea.

It's Carl from Nordea. A few questions. Firstly, maybe just one clarification regarding Casper's comment on the organic backlog growth. Maybe I misheard, but was it 10% to 15%, the pricing effect on the organic growth? Or was it the underlying volume growth?

No, there was 10% to 15% pricing effect, makes strong cost inflation there.

Okay. That is super, very clear. And also, I mean, obviously, then you had quite good underlying volume growth as well, right? And I mean, have you seen -- do you see the same quite strong picture everywhere in all end markets and all geographies? Or do you see a better development in some end markets?

No, it's actually pretty much the same in all our markets. The only thing perhaps is on the -- of course, on the new production, but it's -- as you know, it's a very, very small part of our total revenues. But then we can see going forward, it's -- the market is probably getting down.

And also, I mean, if you look at the housing cooperative market, I guess it's 30% of your sales. Have you seen any weakness there from, I guess, higher interest rates but also from, of course, the higher the energy costs that they might postpone projects or pause the process?

Actually, it's a really good question, Carl. But so far, it's been very, very stable even to that market housing properties. As you mentioned, of course, when the interest going up, everything will be more expensive, but it's also from very low levels. And we can also see an increasing demand from energy savings. So the total picture for housing properties is still -- I'm still very optimistic there even if -- of course, as I just mentioned, we have to be followed closely. But what I can see right now, it's still very stable there.

Okay. Very good. And also, we have heard that some of the installation players, window manufacturers might announce or have announced new price increases. So is it fair to assume that you might see a tougher raw material situation in the coming few quarters? Or would you say that it will be compensated by sort of lower prices on steel or other wooden products?

I mean, what we have experienced this year so far, and I will be close to that before. So it's been extremely difficult, and I believe that we have handled that pretty good. So I mean, I mean it's -- of course, it's much easier for us if the prices are back to normal. I mean it's stable as normal. But I'm also pretty confident that we have been handling it pretty good so far. So I'm sleeping pretty good going forward regarding that situation.

Okay. Very good. And also, you had positive revaluation of earn-outs in the quarter. Is it a specific company that is not performing that well? Or is it simply that the earn-out structure was set quite optimistically?

Quite optimistically. In general way of speaking, I mean, if we have when we have this negotiation with the sellers, perhaps they won't have some more money for it. And then we tell of course, you can have more money if you earn more money going forward. And sometimes it happens like that, and it's what's happened in this specific case as well.

Okay. So it's no big deal for any of your newly acquired companies.

No, no.

No, no. They have delivered as expected, you can say.

And Carl, it comprises of 10 to 15 companies where we do these changes. So it's a lot of -- it's not just one. It's several of them earn-out companies.

[Operator Instructions] Okay, there seems to be currently no further questions from the phone. So I'll hand the floor back to our speakers.

Okay. I just want to say thank you, everyone, for listening. And I hope to see or hear you in the fourth quarter. So thank you very much for today.