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

Welcome to the presentation of Fasadgruppen's Full Year and Q4 Results for 2023. In the room, we have our CEO, Martin Jacobsson; our CFO, Casper Tamm; and myself, Adrian Westman, Head of Communications and Sustainability. Martin will take this away with the presentation, and then we will conclude with a Q&A session. So please, Martin.

Thank you, Adrian, and welcome, everyone, to this presentation for the fourth quarter. So all in all, we see a mixed quarter here. We see a continued tough competition situation, especially in Sweden, and where it stands out is especially in Stockholm. However, we've seen a stable to slightly positive development in our other Denmark and Norway and Finland. In the quarter, we introduced a new organizational structure with an operations unit meant to support our subsidiaries through several specialist functions, optimizing such as cash flow and health and security. We completed 3 acquisitions in the fourth quarter and we also announced a new this morning. We have also strengthened the balance sheet with a strong cash flow here in the fourth quarter. Looking at the revenue side, we see a total growth of 1% in the quarter; however, we saw a slight decline organically by 2%. The downside here was especially Sweden. We saw an organic growth in Denmark and Norway and Finland. We also saw across our markets some unfavorable conditions due to the cold weather in -- especially in November and December, postponing some projects. However, I'm glad to see that the multidisciplinary projects in between our companies have increased. In the quarter, there was an increase by 50%, which is quite remarkable, I would say. So this is an indicator then for our continued cooperation among our subsidiaries. Then taking a special look at our subsidiary. SmartFront has an organic growth of 130% in the Q4, and that is then especially linked to an energy efficiency solution. We also saw some 20% growth of Alnova, our balcony subsidiary located in Gothenburg, which grew especially then backed by our Teknova asset acquisition that we did here in October. So that was an asset acquisition of a special, say, producer of balconies. So they help to improve the production facilities of Alnova. Taking a look at the results. We saw an increase of our margin of 0.1 percentage points during the quarter compared to same quarter last year coming in at 9.1%. And I'd like to highlight here that when we took a decision back in 2019 to have a diversified position, in 2019, we actually grew to our second country outside of Sweden and that was the start of our diversification strategy, which is paying off now. We see, to have this broad space of geographies in our 4 countries here is paying off to be a quite positive strategy. When one market is weaker, another is stronger and so forth. And that provides stability, which we're very proud of. And to mention or highlight when I mean a tougher market in Sweden, then we saw a negative development in the Stockholm area where we take out our subsidiaries focused on the Stockholm area. They saw results here in the fourth quarter, which were down 40% compared to the same period last year. But then we are actually able to grow the margin in those times is quite positive, I would say. And also a highlight here, coming back to SmartFront, which I mentioned. They grew the profit by some 265% with a margin above 10% for the first time, which we're very proud of. Taking a look at the order backlog. We saw a decline of some 4% here organically in the fourth quarter. The main reason for that is the tough situation in Sweden, but also then especially companies focused on new build, which we have in our portfolio. The order backlog for those kind of companies were actually down 40% year-over-year here in the fourth quarter. But that means that taking a look at the renovation company, so to speak, that order backlog was actually up. Taking a look at some of our countries. We saw growth here organically for our backlog in Denmark and Finland. And overall, across our markets, we see a strong demand for energy efficiency measures, backed not only by the European Union's new regulations here, which is coming into effect very soon. I'll get back to that in the coming slide. Moving on to the cash flow. We saw a trend that followed our normal seasonal pattern with a strong Q4 cash flow. The operating cash flow came in at SEK 210 million, same level as last year and working capital continued to improve by some SEK 82 million. And the total improvement in working capital for '23 landed at roughly SEK 124 million. We had a cash conversion of roughly 105% in 2023 despite that we increased our mainly growth CapEx by some 74% in '23. However, I'm not satisfied here. I think there's more to be done. We will continue to work on improving our working capital. Then zooming out, looking at '23 as a full year. We landed a revenue of record SEK 5.1 billion, the largest so far in Fasadgruppen's history for a full year. For the full year, we also had an organic growth of 1%. Adjusted EBITA came in at SEK 448 million, above last year; however, the margin was down by 0.7 percentage points compared to 2022. Profit for the period decreased also, mainly then hampered by increasing interest rates costs. And then that also means that the earnings per share decreased somewhat by roughly 20% here in 2023. However, the cash flow improved by almost 36% in 2023. But on note here is also on the graph to the right here is that Sweden is still above 50% of total sales, but barely. And then coming back to the diversified initiative that we took in 2019 is then paying off into our diversified strategy here, as I mentioned earlier. Looking at our financial capacity and our net debt. We saw that the net debt continued to decrease in Q4 compared to Q3, meaning a net debt to adjusted EBITDA of 2.3x. However, on a pro forma level, that would be 2.1x. We also saw this interest -- increasing interest rates affected us almost by a factor of 3. If we take a look on the full year of '23, we came in at an average interest rate of 5.8% compared to 2.0% in '22, so we are clearly affected by the increased interest rate environment. Looking at the M&A development. As I mentioned earlier, we closed 3 acquisition here in Q4, and we continue to target high-quality candidates that will be margin-accretive. And you could say that we've seen some positive developments in acquisition multiples in our markets. I would more classify the current market as a buyer's market. And there are also plenty of opportunities if you are a bit opportunistic, and one example of that is the asset acquisition we did of Teknova here in October, as I mentioned, which came up as a possibility. And we were agile and could take that decision quite quickly to do that acquisition. So I'm very glad that we did. But all in all, I would say that there's plenty of opportunities in all of our markets to continue our M&A journey. Then on this slide, you see the top 3 acquisitions here is the ones I mentioned in the last report: Rosborg, Teknova, and Surface, I will not highlight those further. But 2 new here in the quarters then, Alument, which I will get back to next slide, and then Elenta, which we announced this morning. So Alument is a specialist company with offices in Denmark and then in Kolding and in Copenhagen. Their niche is then to do renovations, installations and glazing of balconies. They had revenues of some DKK 37 million in their revenue year of '22/'23. The customers include both private owners and housing associations across Denmark. So it's complementing our current balcony portfolio companies well, and we see several synergy opportunities with our existing balcony subsidiaries. Moving on, we, this morning announced a growing niche player called Elenta, which is, you could say, a one-stop shop for roofing solar panels and energy storage devices and then located in Oslo, Norway. Last year, they had revenue of some NOK 24 million, but an organic growth of roughly 100% or above. We saw that Elenta, they have a focus on industry and warehouses. But noteworthy here is that we only acquired 60% of the company, which is new strategy for us. We have only acquired the companies by 100% earlier. But this is then backed by aligning our interests, and we have also an option to acquire the company to 100%. Then moving on to the preliminary deal for EPBD, the European Council and the Parliament reached a deal -- or preliminary deal, I would say, in December last year. And this deal is then expected to be finalized in the first half year of 2024. And overall, I would say, positive for Fasadgruppen, and the trend is quite clear and the statement is that all buildings should be zero emission by 2050. So this is a long-term trend for us. We will continue to assist our customers in improving the best possible buildings, and we are eager to assist in that space. Then taking a look at our financial targets and our dividend policy. With the 2023 outcome, we can finalize here that the growth for the year was 12%, slightly above our target of 15%. Noteworthy here is that we've mentioned that it should be a 15% over business cycle. Looking at the profitability side, margin came in at 8.8% for the full year, to be then measured by our target of above 10%. So we're not satisfied there, of course. We have also a target to achieve 100% cash conversion, which we actually did here by roughly 105%, which I mentioned earlier. Looking at the capital structure, we came in at 2.3x on a non pro forma basis, as I mentioned. And the Board also proposes this morning here that the dividend should be kept at SEK 1.7 compared to SEK 1.7 last year, meaning no increase nor a decrease, to say. Also would like to zoom out here to mention some developments since our initial public offering back in 2020. Back then, we had revenues of some SEK 1.3 billion. And now we ended this year with the revenues of SEK 5.1 billion. So it's been hectic years with strong growth where we've seen the EBITA margin also developing in line with that development. The operational cash flow has improved severely during these years. But on the negative side, we see the earnings per share here declined somewhat compared to last year, but that's mainly affected by the interest rate environment. So to sum up before we open up for questions. I would like to highlight then that we saw a tough competition in especially Stockholm in the fourth quarter. Our strategy to have a diversified geographical exposure is paying off, meaning that we can keep our profitability even in tougher times. We saw a strong cash flow development. And we -- as I mentioned just now, the Board proposed a dividend of [ 1.7% ] (sic) [ SEK 1.7 ]. We continue to see plenty of M&A opportunities and we continue our strive for our 10-10 target by 2028, meaning to have SEK 10 billion in sales with at least 10% margin by 2028. That is just, I would say, a clarification of our financial targets to grow by 15% annually meaning that you double every fifth year. And I'm also then very glad to announce that we are having a Capital Markets Day here on the 2nd of September at 1:00 p.m. here in Stockholm. So I hope to see you there. And with that, we open up for questions.

[Operator Instructions] The next question comes from Max Bacco from SEB.

Well done in the quarter, I should say. Starting off with the quarter then, did you have any project completions or something else supporting the profitability during the quarter more than normal? Anything to take into consideration there.

Max, thank you for the kind words. No, I wouldn't say that there is anything standing out in that regard, I would say. I would say that several of our subsidiaries have had their best year ever in '23 and some have not performed as well. So it's a broad mix in that sense. But I would not say that there's any project really standing out in that sense. It's a general, to say, profitability increase for some of our subsidiaries.

Okay. Perfect. And the next one, you commented in the report that the weather was quite challenging in Q4. And I mean, just looking out the window here in Stockholm, it looks like it's quite challenging starting Q1 also. Have you seen any later starts to the projects more than normal this year?

I mean, we don't give any guidance in that sense. But I would say, I mean, we are aware that January is normally cold. So it's nothing that stands out in that regard. I would say that November and December were more cold than usual, so to speak. But I wouldn't take it that far that generates the doubt in that regard. But there is normally a lower activity in January than in, for example, December as well. So I wouldn't say that there's anything standing out for January.

Okay. Perfect. And on the price pressure, mainly in Stockholm down here. Did you see that it got worse during the quarter in Q4? Or was it on a stable level when comparing to Q3? And do you see any risk that it will get worse going ahead?

Yes. I mean, as we've mentioned in several reports before, we saw a tough competition in Stockholm. But I wouldn't say that it grew even worse in Q4 compared to Q3. It's been a tough market out there for quite some time now. And to see -- I mean, I wouldn't say that so there may be, if you just compare quarter-over-quarter, I would say a stable development in that sense. But in terms of how it looks like now in Q1, is too early to tell. And I mean, in that sense, we don't give any guidance, as I mentioned.

Okay. Perfect. And 4 more questions, quick ones. Yes, on SmartFront, I mean, tremendous earnings growth during the quarter, 265% year-over-year. I think we had this question before, but on an earnings level or EBITA level, how much of group earnings do SmartFront account for now roughly?

It's just a few percentage points. So...

Yes. So still below 5%, something like that?

Yes, yes. Clearly below.

Okay. And the order book, I mean, you commented in the presentation that the order backlog for new-build-focused companies was down 40% year-over-year. Does that include both new-build residential and new-build commercial? Or is it mainly the residential side that is so negative?

I would say that it's mainly residential in that sense. But I would say, yes, we have not classified that. The 40% which we mentioned is in total. We only take full new production, but it is mainly in residential.

Okay. Perfect. And with the order book that you had now ending 2023, I mean, how long into 2024 do you have an order book to execute on, if you understand the question?

Yes, I understand. And we -- as I mentioned before, we want to have some space as well because we know that some orders will be coming in late. But I would say we have pretty good foresight up until, let's say, August or September.

Okay. Perfect. And the final one, I mean, based on the projects in the order book and given the price pressure that you see and so on, do you see -- I mean, you had some big comments about this in the report. But do you see a possibility to improve the profitability here during 2024 compared to 2023 levels?

I mean, we -- of course, that is always our ambition, to increase the margin in that sense. But it's too early to tell, Max. In February, but that's our ambition.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl here for Nordea. A few questions. Firstly, looking at the backlog or the organic component of backlog down 4%. This on -- I mean, if you're doing the same mix, looking at the market , how do you stand versus the market in the quarter? I guess, on one hand, it's quite nice for the subsidiary to have a healthy backlog, good visibility, of course, entering 2024. But on the other hand, as you said, the market is quite challenging from a pricing point of view. So yes, how do you try -- how do you manage the companies obviously strengthen the organization. Yes, a little bit if you can elaborate on this.

Yes. So exactly, so the order backlog, I would say, development, I mean, in general for the renovation market, as we mentioned, is up. But then it comes down to these local markets on how it is affecting them. And remember, here, our entrepreneurs have been around for a very long time in that sense and have handled various challenging markets throughout the years. And of course, we support them in the best of our efforts. But I think it's more important than ever that our subsidiaries keeps on cooperating and assisting each other in that sense and helping each other to land new projects, which we have an indicator of, as I mentioned also, that there, we see an increase by 50% of our multidisciplinary projects of our several subsidiaries. So that is one thing that we can assist in, let's say, call it, assistance in sales company-wise throughout the subsidiaries. So there is one action taken in that regard, and I think that will continue to increase. But then at the end of the day, it varies on which kind of market they are operating on. And as we highlight here that the Stockholm market is the market that is mostly affected. So that stands out. But in some markets, we don't see any, I would say, unusual activity levels, I would say business as usual. So yes, I don't know if that gives some...

Sure. But you're -- so if you're growing in the renovation market, I mean, we've seen some indicators that the renovation market is not growing. So you're not worried that your current -- that your entrepreneurs are taking, I mean, projects to slightly lower margins, which we saw in 2023. I mean, when I talk to entrepreneurs and similar to your subsidiaries, they are pretty happy with the 5% margin, equally to 10% margin. They're happy that the margin is still quite good in a challenging market. But of course, you want to target above 10%. So yes, that might be somewhat challenging, I guess, to control, that they're not taking projects that might be with too low margins?

We are not satisfied with a margin below 10%, and our incentive programs is not connected to these kind of low margins that you are mentioning. So we have our aligned interest in that sense in keeping up the profitability. So of course, I mean, we are following, let's say, the order backlog margin closely, of course. You can see that development. So we have that under supervision. But of course, it is tougher markets in some places. But in some places, there's not. And we can see clearly where we are struggling in that sense and where we can put extra efforts in that sense. But I would say that our interests are aligned, say, both Fasadgruppen and entrepreneurs in that sense in keeping the profitability up, which I also think that the Q4 margin is also one proof of an indicator of that, keeping up the profitability level in -- where we grow the margin year-over-year here in the quarter.

And also your wordings on the Stockholm region sounds pretty tough. So we've seen the same on the installation side. Some companies are actually leaving Stockholm because it's not worth being there. So what is your plan with Stockholm? Are you downsizing operations? Or -- yes.

Yes. I mean, of course, we are adapting the cost base in that sense with -- as we mentioned earlier with layoffs in that sense. So we are adapting that our custom suit -- or you could say, the cost base in that sense. But I would say that in the longer term, of course, we believe Stockholm is a great market. So on a longer term, we're not worried about Stockholm. But the question is when will it be in better markets? And that's too early to tell.

Okay. Sounds fair. And also you mentioned that Alnova and Teknova have had a strong 20% growth in the quarter. If I remember correctly, Alnova were loss-making last year, right, or something like that at least -- or at least with low profitability, Teknova as well. So I mean, now that you are gaining traction organically, what is happening with the margins, for instance, in the quarter? And to what extent is that diluting group margins?

I mean, first of all, the Alnova subsidiary is performing very well, I would say, going in the right direction with increasing margins. So I'm very pleased by the development of Alnova. And of course, the new production facility of Teknova or Alnova Balkongsystem, as we say now, they have also been integrated very well, I would say. And from our reports from that operation is that the integration is going very well. And I'm very pleased with that development, actually. So they are performing well.

The next question comes from Sofia Sörling from Carnegie.

This is Sofia from Carnegie. My first question is if you could give some more details on the main reason why you see Sweden as a weaker market compared to Norway, Denmark and Finland? And if it's statistically end market, if it's the customer segments that differs? And or is it the differences in services? If you could elaborate on that.

Yes, Sofia. So I mean, I would say there are several factors on that, and we can only speculate on regarding what they are, so to speak. But what -- one indicator, I would say, is that the housing price situation, which escalated in Sweden also made our, I would say, the general property situation very reliant on the interest rate. So that means in Sweden, when the interest rates went up, the Swedish market was more affected by the higher interest rates than the other countries. And so that's one aspect. But I would also say that in a tougher market where there's an increased competition, I would say that when we have kind of extra work. We mentioned that earlier, Sofia, that in usual, when we get an order of say, let's say, SEK 1 million, then it usually grows by 20%, 30% by some extra work, which is not part of the calculation from the start. Then those kind of extra works usually will be very profitable; however, when there is a tougher competition situation, we see that it's harder to get the full payments, let's say, for these kind of extra works, where there's more of a haggle or hassle situation in that regard, which we also see that stands out in Sweden especially. And then the third factor, I would say also that in -- if we take a look at our total new-build mix, it is the largest in Sweden out of our 4 countries, so that's also affecting.

Okay. But do you say that this type of extra work is working well in the other geographical countries?

I would say, so. Yes, it's not as severely affected as it is in Sweden, yes.

All right. And you don't see any recent -- the service mix, products and service mix in the different regions that affects?

I would say, in general, it's not based on the services or products in that sense, It's more geographical regions, I would say, local markets.

Okay. All right. And then if you look into 2024, in what geographical market are you most optimistic about and perhaps both geographical presence and perhaps also service segment?

Yes. I mean, we're close to this guidance question, as I mentioned. But I mean, in general, we are an optimistic company in that sense. And we see several opportunities in all of our markets. So I would say, in general, as I mentioned, the order backlog we saw, if we take out the renovation order backlog in Q4, that grew in the fourth quarter compared to last year. So that is an indicator in one sense. And I would say that it's in several of our markets where we see potential. But I don't want to highlight any special country or so. But this -- but remember here that our kind of services, we see it mainly as a long service cycle on these properties. They need to be taken care of. It doesn't matter if it's a high interest rate or low interest rates, the demand to take care of our properties is still going to be there. And then also some property owners are having a tough time. When the dust settles, the properties will still stand there and have the demand to be upgraded.

All right. Okay. And then final question is on M&A. You mentioned that it's quite good potential at the moment. Could you elaborate a little bit more on that and perhaps give more details on the processes right now, is it taking longer time or it's a shorter time to actually make a transaction? And yes, if you could give some details on that.

I mean, I wouldn't say that it takes shorter or longer time than usually. I would say that we have plenty of discussions ongoing in all of our markets. And I would say that we had very hectic years in '21 and '22 with plenty of acquisitions. Then we had somewhat lower activity in '23. And I think that was just healthy to have a breather in that sense. But now we have the new organization in place getting warm, so to speak. And we're eager to rack up the pace, so to speak, in the acquisition front. Or I mean, looking ahead, I can't promise anything, but several positive discussions.

[Operator Instructions] There are no questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you. We have received a few written questions. First one, how much of the organic development was due to volume or price increases or decreases?

Yes. So we -- what we say there is -- the severe price increases that we saw, let's say, in the last couple of years was mainly due to the inflation in that sense, where the material prices went up severely. So that was the majority in the last couple of years here. But in the quarter, I would say that the material price has not -- has been quite stable development in that sense. So since we had an organic decline that is mainly then in volume, but I would say that's also affected by the cold weather and some postponement of the projects.

Second one, how do you manage key person risk in the companies? You are buying quite small companies, so obviously, there is a key personnel risk involved in the deals.

Yes. So I mean, when we acquire a company, we want to align the interest with the entrepreneurs. They all become part owners in Fasadgruppen, which has been our strategy since day one, so we are aligning our interest in that way. One number here that we usually say is that Fasadgruppen shareholders are some, let's say, 20%, 25% owned by entrepreneurs, Board members or key management personnel. So that's quite a large part. And so there, we have an interest alignment. And we are working very closely with the succession in that sense. We talked about that early in the acquisition process, so we are aware of that situation early on. But in general, I mean, we have a high retention rate of our entrepreneurs, where they feel that they're part of something bigger in that sense. It can be quite lonely as an entrepreneur when you are working with your own personnel. And now you get into larger company, where you have several like-minded entrepreneurs where you can exchange, let's say, various things that you've gone through, where it can be how to handle a project or personnel or whatever. Here, you become part of something big, which is quite positive from what we've seen and heard from our entrepreneurs. So I would say that, that's some key factors, making entrepreneurs want to be part of a Fasadgruppen.

Great. And then the last written question is related to earnouts. Is there a risk with earnouts that managers are solely focused on them instead of the longer term performance?

I mean, when it comes to earnouts, we are working with our earnouts. Can be through several years up to like, say, 5, 6, 7 years in that regard. But when we are, as I mentioned, aligning our interest, that this is just an overgoing period, we want entrepreneurs to continue to have incentive programs, which they have once their earnout period is over, which continues to be, I mean, in the same structure in that sense. So they should be financially compensated for their great work even going forward. So I don't see it as an issue in that sense. We've not seen any dramatic changes from when the earnout has ended.

Great. So then maybe a few concluding remarks or words.

Yes. I mean, we thank you for having to listen to this Q4 call. And we hope to see you at our next call and also at our Capital Markets Day in September. So thank you all for listening, and have a great day.