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

Welcome to the Fasadgruppen Q4 2022 Report Presentation. [Operator Instructions]. Now, I will hand the conference over to the speaker, CEO Pal Warolin; and CFO, Casper Tamm. Please go ahead.

Welcome, everyone, to this presentation, Fasadgruppen's Fourth Quarter '22. My name is Pal Warolin, I'm the CEO of Fasadgruppen. And together with our CFO, Casper Tamm, we will guide you through this presentation. Let's start, as usual, with Fasadgruppen in brief. Fasadgruppen is the market leader in Scandinavia within facade work. Facade work is a highly specialized and local market with a high level of craftmanship. By facade work, we mean almost everything related to the shell of the building. So the service offering consists of, for example, from masonry, plastering, installation and renovation of balconies, installation and renovation of windows, roofs, placing, almost everything you need a scaffolding to do. We are focused on mid-size project in the range of SEK 1 million to SEK 100 million, with an average project size SEK 3 million to SEK 4 million. At least 75% of our projects relate to renovation. We have an active M&A agenda with the aim to consolidate the highly-fragmented Nordic facade industry. The group currently comprises approx 50 businesses across Sweden, Denmark, Norway and Finland in a very decentralized structure with about almost 2,000 employees. Then take a look at some key financials for the full year '22. We have increased the net sales a lot, so we can see that we are getting closer to SEK 5 billion with an adjusted EBITA margin, 9.5%, close to our financial target. Actually, our financial target is over 10% of our business cycle. I'm not satisfied with the margin, but we must keep in mind that it's been an extreme year regarding the cost inflation this year. I'm more satisfied with the cash conversion. We can improve the cash flow. I'm also confident with a healthy order backlog of close to SEK 3 billion. And then we want to take a look at how Fasadgruppen, how we have developed since the IPO. And to the fact it has been 2 years when we went public, it's actually a pretty nice picture that I'm proud of. First of all, if you take a look at the net sales, we have more than tripled the net sales since the IPO, and we have also almost tripled the adjusted EBITA from SEK 149 million to SEK 432 million. And if we take a look at the earnings per share, it's more than doubled from SEK 271 million, SEK 5.62. And the cash flow is almost triple, from SEK 156 million to SEK 402 million. And then go to the fourth quarter in brief, we really had a strong organic growth but a lower margin driven by material cost inflation. We have been able to pass on the extra cost to the customer, but not in the full margin. We have a strong cash flow, more normalized than earlier this year. The net sales was up 62.5% compared to last year, of which 20.4% was organic. The adjusted EBITA margin of 9%. The order backlog was up 54.6%, of which almost 13% was organic to really see that the demand remains strong. We made 1 new acquisition in the fourth quarter and 20 in total for the full year. Let me take a closer look to the acquisition and first, to the acquisition we made in the fourth quarter. We acquired Sydskiffer byggnads AB located in Halmstad, Southwest Sweden. It's very typical Fasadgruppen company. Founded in 1980, focusing on renovations of historic buildings and churches, especially in schist. They also have extensive experience from public procurements. They really strengthened the Fasadgruppen in Southwest Sweden. They saw 2 great entrepreneurs, and I'm very proud in our journey. And then if we take a look at the -- for the acquisition for the full year '22, it's actually been a record year in terms of acquired annual sales. 20 businesses acquired within assessed annual sales of SEK 1.25 billion. We have really strengthened positions in all our markets. We made the first entry to Finland. We have also this year, seen a very stable acquisition multiples. We have an exciting pipeline ahead with several ongoing dialogues. And then we're going to take a look at the market situation. We have a stable order backlog and healthy amount of request on all our markets, so the underlying demand remains stable. I mean, most property owners continue to follow maintenance plans. Order backlogs within new construction on par with last year. If you take a look at our subsidiaries which have a large amount of new production, the rate orders for '23. Energy efficiency measures' increasingly important for property owners, especially as the energy price has increased so sharply. So if you take a look at our 3 major market drivers: The first, housing shortage; number two, delayed renovation needs; number three, energy efficiency. We can see some movement from 1 driver to another, but the total picture is very, very stable. If we take a look at the pictures, you can see 4 different typical projects ongoing from different subsidiaries in Fasadgruppen, and they all come from different customer bases. A reason why the market driver, energy efficiency, probably will increase even more going forward is that very recently, the European Union has moved forward the positions further. A draft legislation to be put to a vote by the European Union Parliament in spring '23. And if the legislation goes through, it will lead to all buildings within the European Union need to be at least Class D regarding energy performance by 2033. So to achieve the new minimum energy performance standards, the renovation rate would at least need to be double. Then we take a look at some case study for the fourth quarter. And this time, we wanted to present 1 of our subsidiaries, Bruske-Delér Fönsterrenoveringar. They founded in 1988, so we acquired them in '21. 20,000 window repairs each year. In many of them, they changed the glass to more energy efficient. I mean, it's very typical for Fasadgruppen company that we help our customers improve their energy savings. They really have a strong position in the Stockholm region, serving tenant-owner association, property owners and property managers within Stockholm Municipality. They have several active framework agreements. They are also involved in many multi-disciplinary projects, working together with other Fasadgruppen subsidiaries. And to give you some examples of ongoing new projects for '23, they have Nicolai School in Nyköping, The Nobel Foundation Building, and 5 projects from Stadsholmen. So this was to give you a better understanding of what a typical Fasadgruppen company. Then it's time for financials, so I will leave it over to Casper.

Thank you, Pal. So I will take you through some highlights in the Q4 financials. So next slide, strong organic growth and cash flow characterized the fourth quarter. We had revenues, which reached almost SEK 1.4 billion, with an organic growth of 20%. We had 48 companies that were comparable out of a total of 50 companies. Adjusted EBITA was up to SEK 125 million with a margin of 9.0%, negatively impacted from cost inflation on materials, as Pal already talked about. Our order backlog reached nearly SEK 3 billion and is up SEK 1.1 billion since start of the year. Profit for the period was SEK 67.6 million, with basic earnings per share at SEK 1.36. And in the period here, number of shares is up approximately 9% during the year. Operating cash flow was SEK 210 million, and the strong operating cash flow was due to the improved net working capital development in the quarter. We will return to both figures later in the presentation. So next slide then. Looking on our net sales, we saw an acquired growth of nearly 42% in the fourth quarter. And as already talked about, this is of course due to the new -- 20 new acquisitions that has been made until the end of the year. We also had a very strong organic growth in the quarter here, which reached 20.4%. And it is the strongest in 2022, with an upgoing trend over the quarters of the year. Exchange rate changes had a positive effect on the organic growth with 1.7 percentage points. And besides the exchange rate changes, we have also saw essential effects from cost inflation on materials, which we estimate to more than 10% in the quarter. Order backlog. We saw a strong increase in organic growth also here, up with nearly 13%, mainly driven by effects from cost inflation on materials, new executions amounted to approximately SEK 0.8 billion out of a total increase of SEK 1.1 billion since start of the year. So then we go further in the presentation here and look on our adjusted EBITA for the fourth quarter. So we saw an adjusted EBITA increase of 19% on a year-on-year basis with a margin of 9.0%. And as already talked about, the cost inflation for materials had a negative impact on the margin for the fourth quarter, in line with third quarter this year. We have seen an increasing negative impact from cost inflation, especially in the second half of the year. Non-recurring items amounted to SEK 9.4 million and included M&A costs, with minus SEK 1 million earnout revaluations with a net positive effect of SEK 3.4 million and other costs here of SEK 3.1 million. And then we go further here and look a bit on our P&L here and some comments. In other revenues, you will find effects from positive non-recurring items like revaluation of earnouts, which was plus SEK 86 million in the quarter and plus SEK 153 million in the full year. Going further down in the P&L here, we have depreciation and amortization. And in depreciation, we have acquired intangible assets, which amounted to SEK 13 million in the quarter and SEK 37 million in the full year. And further down then, other operating expenses, here we find the negative -- mainly the negative non-recurring items like M&A costs and earnouts. And negative effects from revaluation of earnouts was minus SEK 89 million for the quarter and SEK 142 million for the full year. And finally, the net financial costs. Here, we have an interest cost on external debt, which was SEK 16 million in the quarter and SEK 30 million in the full year. And then next slide here, looking a bit on the balance sheet and leverage. We had a total balance sheet of SEK 5 billion, sorry. And on the asset side, we see increasing support in brand and especially goodwill due to the active acquisition agenda during the year. And -- but this has no depreciation included. On the equity side, healthy increases also. We did target a new share issue in March 2022 on which decreased the equity with SEK 410 million. During the year, we have seen offset share issues on acquisitions that added a further SEK 125 million, and we also had a dividend which had a negative impact of SEK 58 million. Moving further down here on the debt side. Interest-bearing debt from finance institutions was SEK 1.6 billion at the end of the year, and the net interest-bearing debt was SEK 1.3 billion. This leaves us the leverage key indicator here, net debt through adjusted EBITA, that has improved compared to third quarter and was down to 2.5x at the end of the year. Net debt through adjusted EBITA pro forma was approximately 2.2x to 2.3x at the end of the year. And then we go further in the presentation here, and we have cash flow and cash conversion. The net working capital development for the current quarter performed significantly better than last year, up with 126% on a year-on-year basis. This is the main reason for the strong operating cash flow and improvement in cash conversion for the fourth quarter this year. The change in net working capital was negative for the full year, but the cash conversion improved compared to last year and reached nearly 80%. The main reason for the improvement in the net working capital for the fourth quarter is the seasonal development of the project activity during the year. A large number of the projects will normally be completely primarily during the fourth quarter in the seasonal cycle, which had a positive effect on the net working capital development for the last quarter of the year. Then I'll leave it here for Pal here to make some conclusive remarks.

Thank you, Casper. It's time for me for a quick summary, but let's start with a look at our financial target, the fact this is the fourth quarter. First of all, regarding the financial targets, the revenue growth is the annual growth of 15% over a business cycle and the outcome for '22 was almost 70%. Regarding profitability and an EBITA margin, more than 10% over a business cycle, and the outcome was 9.5%. Regarding the cash conversion, to achieve a cash conversion of 100%. The outcome was close to 80%, and it's actually an improvement on last year, but it's still not quite there. The capital structure interest-bearing net debt shall be less than 2.5x adjusted EBITDA. It's -- the outcome, 2.5x. And regarding the dividend policy, Fasadgruppen's aims is to distribute 30% of the group's consolidated net income. And today, the Board of Direction gives a suggestion to the Annual General Meeting, a little bit more than 30%. And then some concluding remarks. First of all, extraordinary impact from material prices in '22, but more stability expected ahead. I mean, we have certainly had challenges with our material supply this year. We received several price increases at short notice. But now, we see a completely different stability. Back to normal, I would say, where they hold the prices through the projects, and this gives us much better conditions. We have stable underlying market with a healthy amount of requests, so demand is there. We're going to have a focus on margins and cash flow going forward. We have many ongoing M&A dialogues. So all in all, of course, we are obviously humble about the future because if there's anything we learned in recent years is that almost anything can happen. I mean, COVID-19, price inflation, war in Europe. But I also believe the way we have handled and the way we have performed in the recent years, and what I can see right now, I'm very positive for '23. Thank you. We are ready for some Q&A.

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A few questions. Firstly, on the margin. During the quarter, looks a bit thin. You said it's partly due to raw materials, but is it possible to sort of help us bridge the margin year-over-year? I mean, what portion of the margin drop would you say is due to raw materials solely? And if you had any other headwinds during the quarter, it would be good to know. And I mean, it sounds like the raw materials are starting to ease out. Is that correct? And if so, when would you say that we will see sort of a more stabilizing margin from here? Because it's -- I mean, looking back a few quarters here, it rather looks like the margin is accelerating downwards.

Thank you, Carl. First question regarding weak margin in the fourth quarter. I mean, I would say that the cost inflation has a bigger impact in the fourth quarter. As you also see, the organic growth was even stronger in the fourth quarter. So I didn't -- perhaps I didn't expect it to be that strong organic growth, and therefore also, I didn't expect a little bit lower margin than I was expecting. But going forward, I mean, I'm very comfortable. I'm very comfortable that the cost inflation has a really huge impact for us. So going forward, when we have this feeling with -- not only feeling, we have the knowledge about a more stable market from our suppliers, then it's much better conditions for us. It's -- actually it's not a big deal if the material price is increasing. The problem we told you this year is when they increase it with very short lead times, and that was the big change going forward.

And is Q1 too early for us to see the sort of more neutral impact from raw materials? Will it take a couple of quarters until you sort of catch up with pricing?

Perhaps -- I mean, perhaps we will take a little bit longer to find out. It's more like the first quarter, it's much lower activity than the other quarters, so -- but I probably expect that we -- from most projects that we start this year, it's looked much better. The conditions are better.

Okay. Also good. And I mean, correct me if I'm wrong, but it sounded like you had flat order backlog growth year-on-year in the quarter for new construction. Is it correct?

Yes. For new construction, actually, the order backlog for new construction has been very strong both a year ago and right now. So I believe we mentioned that before that we're -- and I added in the presentation, the order backlog for '23 from the construction are looking very good. And then what happens '24, '25 it's impossible for me to have any point of view or thoughts about it right now.

So we should expect you to deliver flattish sales growth in new construction during 2023 then if you see no cancellation, that is. Is it correct then?

Yes, yes.

Yes. Okay. Very good. And also, could you shed some light on sort of the demand by end market groups, if you have seen housing cooperatives being more cautious or commercial property owners, if you have seen any trends worth mentioning?

No. The only thing we really noticed is on new construction side on the residence is going down. But on the other side, we see a really increasing demand on the energy efficiency, as I mentioned in the presentation here. So the total picture is very stable.

Okay. That's very good. And maybe you mentioned it, I'm not sure. But I mean, leverage has come up a bit, 2.5x. What would you say is the pro forma leverage number in your view? And also secondly, would you say that you have a good M&A headroom here entering '23, or will you be more -- or will we see a sort of a slowdown in the M&A pace here in order to delever?

As we said in the presentation, the net debt through the...

EBITDA.

EBITDA pro forma is -- was approximately 2.2x to 2.3x. What was your next question there, Carl?

And whether you feel that you have -- I mean, with the uncertainty in the end market and with the 2.2x to 2.3x net debt-to-EBITDA pro forma. Would you say that you have M&A headroom entering '23, or will we see a more focus on more organic growth and more sort of a consolidation phase?

No I mean, we have absolutely headroom for more acquisitions, but we will probably focus much more on our own cash flow. So we -- probably, we will not have exactly the same headroom as we had a year ago, but we have still plenty of headroom and we can still do a lot of interesting acquisitions, absolutely.

The next question comes from John Hiltner from Enterfund.

Can you hear me?

Absolutely.

Super. First question is on your cash flow. It looks -- even when adjusting for the net working capital effect, it's a bit stronger than the P&L. And I see some differences. Just to start, your tax and your interest rates are much lower in the cash flow than in the P&L. Will that come back, or is there something else behind it?