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

Good morning, everyone, and welcome to the presentation of Fasadgruppen's Second Quarter 2024 Results. In the room today, we have our CEO, Martin Jacobsson; our CFO, Casper Tamm; and myself, Head of Commerce and Sustainability Adrian Westman. And I will hand over to Martin for the presentation, and then we will conclude with a Q&A. Martin, please. Take it away.

Okay. Good morning, everyone. So I'm pleased to announce our Q2 results this morning. Some of the headlines that we will go through in more detail later are then that we see a tough competition still, especially in Sweden. However, we've seen some glimpses of hope here, especially in the Stockholm area. We'll get back to that more in detail later. We have taken measures now depending on the results that we announced this morning. And there, we have changed some of our CEOs and we've also taken our cooperation between the subsidiaries through to another level in order to send the results here. And we've also, for the first time in Fasadgruppen's history, started a company from scratch with the help of great entrepreneurs. And that is also a strategy that we will delve deeper into in the coming slides here. In the Q2 results, we've also seen an increase of our imported covenant of net debt to EBITDA, which is working then in order to enhance that in the coming quarters here to -- back to our goal. And during the quarter, which is great in the coming quarters, we also hopefully see a lot of these acquisitions being signed. We'll get back to that later in the presentation. Total decrease here of 0.5% in the quarter compared to the same quarter last year. Organically, we saw some revenue down of 4.2%, which is then mainly then from the Swedish operation -- or actually only from the Swedish operation as Norway, Denmark and Finland are all growing organically. Looking on the adjusted EBITA level, we saw a margin here at 6.2% in the quarter compared to 9.7% in the same period last year. And the main reason for the drop here is, as we've spoken about now for at least a year is the increased competition situation, which is then stemming from, let's say, that new build sector is heavily affected in Sweden. And with that comes a lot of you could say, market entry participants from the new build sector going into our main market, which is the renovation market. And just to give some perspective here is that we've seen at least a doubling of the amount of tenders given from new companies, so to speak, in certain areas. So that's just to give you some flavor to how we pressure the market is at the moment. And yes, with that said, I mean the new build sector is not something that is new or that it's heavily affected. But there are, I mean, a lot of positive signs in the market with the interest rate environment and several other of our customers stating that there is opening in the coming, let's say, quarters. It's too early to tell exactly when. But hopefully, we've seen the worst in terms of the market. Looking at the order backlog, it was a 16% decrease organically. And there, we saw actually a drop in Sweden, Norway and Finland, but an increase then in Denmark. And I mean, there are some timing issues also on the order backlog that you remember. You could also remember that the renovation markets often have shorter lead times than the new build. And so if -- when the new builds start going more active again, hopefully, that will have a positive impact on our backlog. And with that said, actually, we have pretty good foresight for the coming, say, 6 to 9 months in our orders. And also remember here, as we've spoken about a few times that some of the smaller orders or the oral orders are not included in this order backlog. We do not have any extra work in the order backlog either. So that's not included here. So remember with that. And what we also can conclude regarding order backlog is that the order backlog margin strengthened once more as it did in Q1. So it's -- this time, it's better compared to Q1 2024 as well as the same period last year, that is the Q2 2023 then. Looking at cash flow, we have a decrease in our operating cash flow, which is then mainly stemming from our weaker earnings compared to the comparison quarter. And we have, as we've spoken about for, let's say, 6 to 8 quarters in a row here improved our cash flow, and it's a continuous work here. So we are not, of course, happy with this level. I see that it's -- it's more to be done here to improve the cash flow even further. And so we are working with that continuously, let's say. Then looking at our financial capacity and our net debt, as I spoke about in the introduction and we will get back to, to see that our average interest rates in the first 6 months of this year was 6.1%. We've seen interest rate cuts. So hopefully, we could see some improvements in the interest rate for us going forward. Please remember that we have very short duration interest period rates of 1 to 3 months is the duration of our loans. But with that said, we can conclude that the net debt to adjusted EBITDA is 3.2x, and it's the same, actually 3.2x on a pro forma level. And of course, that is still below the bank loan agreement, which is in 3.5x, which we've said earlier, and as I mentioned in the start, we're working then to get that back to a more, let's say, normalized level around 2.5x, which is within our goal levels. And so still not satisfied with the cash flow situation in general. We are working with working capital improvements and are looking forward to see some improvements in the coming quarters here. So as I mentioned, we had in this quarter our first start-up, which is then in collaboration, you could say with us and the entrepreneurs of Elenta Solar [indiscernible]. And for those of you who remember, we have actually a company called Elenta in Norway as well. So we are broadening that brand with more solar cell solutions. This time, it's more then connected to the Stockholm and Malardalen area in Sweden. So it's actually both coming from our, let's say, from Fasadgruppen, but also from the subsidiaries that is then looking for a professional partner because we are seeing a lot of tenders coming around solars and solutions. And with this solution, we can now provide this service internally. So we're very grateful for that opportunity. And with that said, I mean startups can be a great way for us as we see to complete our M&A strategy when the opportunity arises. So hopefully, you can see more of these kind of start-ups in the future. During the quarter, we also announced two acquisitions. The first one is called Brenden & Co, which is one of Norway's largest scaffolding service providers. And we are, say, what we like about Brenden is that they are then only, you could say, focusing on the renovation sector. We have been working with Brenden for many, many years with our current Norwegian subsidiaries, we know them well. And they have actually developed themselves. And digital system that follows up this, you could say, logistics exercise, which is a scaffolding, a larger scaffolding company comprises of where they have developed that themselves, and we have actually acquired a part of that system called ProStillas. We acquired 15% of that. And we have an option to acquire ProStillas with 100%. And we see ProStillas, the system as an opportunity to be used within our other subsidiaries within scaffolding and hopefully, some other of our subsidiaries in the future in order to improve efficiency because this is a very, very efficient system in order to maximize utilization rates for scaffolding and other services that we provide. So very impressed by that solution actually. And Brenden is a very, you could say, a high-margin company. And with that, we actually are looking forward to enjoy the collaboration with Brenden going forward. So we welcome them. And the second acquisition is called JE:s Svets & Smide, which is located in Saltsjo-Boo in Sweden. And they are focusing on steel structures and forging complementing our other subsidiary called GAJ Stalkonstruktioner located in Eskilstuna, Sweden. And it's actually GAJ that acquired the company. So they're a subsidiary of our company then and very expertised within their niche, and have also enjoyed some good results. We're looking forward to improve them even further within the Fasadgruppen family. So we welcome JE:s Svets & Smide. We have a warm welcome in to Fasadgruppen. And as I mentioned, we also had several -- we have several new signed letters of intent in the quarter. And with that, it's actually across the whole Nordic spectrum that we have these new letters of intent and have some very interesting companies that we are looking forward to taking to the next level and hopefully be part of Fasadgruppen. So M&A, as you all remember, is part of our DNA. We -- just to reflect, you can say that when we started back in 2016, it was a small Group of 2 companies, and now it's more than 50 companies in the Group since 2016. So it's been a very hectic year since the inception, and we're looking forward to welcoming more of these kind of great companies into our home. So with that said, before we open up for questions, I would like to highlight then that the tough competition remains, but we see some improvements, especially then in the Stockholm area. And well, just to dive a bit deeper on that actually is that the number of tenders that we've gotten from the Stockholm area is actually better year-over-year, which is a great indicator for us actually. So that's hopefully, we can enjoy the better results in the coming quarters from that. And just to remember here also that when the price pressure started, it was actually in Stockholm area that it all started. So hopefully, that will be also that where the returns first, so to speak. We have taken structural measures within the Group and are looking forward to enjoy the results from that. We are focusing to decrease our net debt-to-EBITDA on -- back to the target level and within the coming quarters. And as I mentioned, several ongoing M&A dialogues, a lot of new letters of intent signed. And well, I would say that we are very well positioned to capitalize on our long-term market drivers, especially within energy efficiency, which we have spoken about a lot of times. And with that said, I would also like to highlight our Capital Markets Day, which is now set on the seventh of November 1 p.m. here in Stockholm, where we will dive deeper into the acquisition journey and, let's say, the latest market trends and where we will be heading in the coming years. Remember, our 2028 targets with SEK 10 million in sales with at least 10% margin still stands.

Great. And then I think it's time to move into the Q&A.

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

This is Max Bacco at SEB. Just perhaps starting with your balance sheet and the leverage, which is now, as you said, at 3.2x. I mean, you don't seem too stressed with approaching the bank covenants at 3.5x given that you have signed several letter of intents here regarding M&A. So just could you elaborate a bit on your view on the balance sheet and your financial position? Should one be worried about that?

One should not be worried about that. As we see it, Fasadgruppen is a very, light asset company with strong cash flows. And remember that the cash flow situation is seasonally adjusted, where you remember our fourth quarter is usually the strongest in terms of cash flow. And I would say in Q2, yes, it was an increase up to 3.2x but we had actually, I say, some headwinds in timing measures from the cash flow, working capital-wise. And I would say that, of course, the result is -- it's actually, I mean, hard to tell the future, wish I could. But as we see the tenders going up, some very strong market drivers around the interest rate. We also see the -- what our subsidiaries are saying, so to speak. So I'm not worried around that. I'm actually looking forward to get past this, let's say, first half year of 2024 in order to enjoy better times ahead. So no. To conclude, not worry around the balance sheet. But of course, sober enough to understand that this is a focus area for us.

Okay. Understood. And then on the order backlog, which was down 16% organically here in the quarter. I mean if we look back a couple of quarters since Q1 2023, the order backlog has been fairly stable, up or down a few percentage points organically. So this stands out. Is it something special in the quarter that explains the 16% drop? Or is it...

Yes. You can say that. In Q2 2023, there were actually some large orders that it could easily have been, I mean, signed in July rather in June or so. So there are some timing issues. And it's the same here in this quarter as some of our orders could have been signed in June or July. So I mean, there are always some timing issues regarding the order backlog, but that said, I'm not worried about that kind of, say, 16% organic drop in the order backlog.

Okay. Understood. And then on the profitability, I mean, quite significant drop year-over-year in the quarter. But at the same time, you mentioned that total order backlog margin continued to show a slight increase compared with last year. And you also said, I think the same thing here in the previous quarter in Q1. I mean how should we think about that dynamic that profitability in order book is going in the right direction, but in the P&L, in the wrong direction.

Yes. I mean, hopefully, the let's say, trough around margin drop is pretty close by in those terms. So -- of course, it's hard to tell exactly when the trough has been in terms of, let's say, year-over-year improvements once more, but that's our best take is that it's very close by, if not already past.

So I mean to follow up on that, do you see -- I mean, entering here it's 2 -- Q3, Q4, I mean do you see the foundation perhaps for a better profitability at least compared to the Q2 levels 2024?

I mean, absolutely, in those terms of margin-wise, you could say. But I would say that usually, the second half of the -- of our, say, our financial year is, of course, the strongest. Remember that Q1 this year was also pretty weak in that terms. But we see in a more normalized level in the second half of the year in those terms. So if you just compare -- will H2 be better than H1? Yes, that's our best take as of today, of course.

Better than -- okay. Yes, understood. Understood. And then finally, the last one. I mean when we now enter it's to 2024 and look at the price levels in the market and then perhaps mainly then in Stockholm, Sweden. How does those compared to the price levels that you saw in H2 last year? Is it the same level? Or is it slightly below?

You mean if the price pressure, so to speak has deteriorated or? No, I wouldn't say, I mean, same level as in Q1, so to speak, but it's not any deterioration. So.

But compared to last -- the second half of last year, I mean, the price pressure is it worse or is it also on the same level?

On the same level, I would say, actually.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl from Nordea. A few questions may be coming back the leverage situation, as alluded to, quite close to the covenants now. Maybe if you could give an idea of the combined sales from the signed LOI perhaps also timing-wise, when you expect to close them? And also, how do you plan to finance them if it's cash or perhaps with shares or -- yes.

Yes. I mean, too early to tell regarding any indication of the sales, unfortunately, Carl. But what I can say is that, I mean, regarding financing, of course, as I mentioned, we have an improved cash flow situation usually in the second half of the year and we see that this year as well. And in terms of -- you could say, we've already proven that was, let's say, new tumor box where we don't acquire 100% of the company. So that's also a solution regarding these, but we have -- still have the option to acquire 100%. So that's also one factor that one can use during these, say, times where the leverage situation is around these levels, if you understand what I mean. And so with that said, it's a combined effort regarding how we can welcome these new subsidiaries. Timing-wise, I would say, if you just take historically, when we have a letter of intent signed, usually it takes between maybe 3 to 9 months before we see a signing. So that's still the same level as historically. So that's a timing-wise round up, I would say.

And taking a step back a little bit to just know your view and that is that we saw you give the M&A pace a couple of years back, then we saw you or more or less stop doing M&A in order to take down leverage, then we saw you using another capital allocation measure in terms of share buybacks, which weren't fully materialized, I think. And now you're accelerating M&A again when the balance sheet is quite stretched. I mean -- and also looking at -- I mean net financial is currently you're paying SEK 110 million. I mean is eaten out from free cash flow currently. So how do you look at capital allocation? Because we've seen so many changes, I think. So yes, what is the strategy more or less around it? What is the most accretive measure you think?

Yes. But of course, we are a very acquisitive company in the foundation card. And I wouldn't say that if you go back, you alluded to the 2021, 2022 situation where we let's say, annually acquired more than SEK 1 billion sales. And of course, that was not the level of -- in 2023, but I wouldn't say that it was only due to leverage reasons. It was also a good time to integrate these companies fully into our organization and good for the company that they took the time to -- after these hectic years of '21 and '22 to welcome them, let's say, properly in that. And of course, -- with that said, the strategy is, of course, to continue with our acquisitive journey. And in terms of the allocation strategy that it, of course, depends on the situation. As we see it now, we see very favorable market trends we are -- for every acquisition we do, we become just a small step better than we were before. And with that said, I mean, we're looking for these new companies to be welcomed into the Group. And of course, to have that in a way where the financial, let's say, situation is under control as well. So of course, we see these companies being welcomed into a professional and structured organization where we can increase the value of this company. So we're looking forward to do that with these as well. And of course, the share buybacks, as you -- also in autumn last year where we had an all-time low situation on the share price. And it is also a tool that we can use that is up to the Board to engage that once more at these levels if needed. And so we have the manage from the AGM. But of course, at the end of the day, we are an acquisitive company. We continue to where the best companies within our niche in the Nordics, hopefully, some other markets as well coming in the coming years. And in order to reach our goal of SEK 1 billion in EBITA and by at least SEK 1 billion by 2028. So SEK 10 billion in sales and I believe 10% margin. So that is still valid that goal and what we are striving to achieve.

And coming back a bit to the cash flow then. I mean, for second half. Let's say, you will probably pay for Brenden, JE:s Svets, right, in the next quarter, which is not shown in the net financial. What is that, SEK 100 million? Then you would have SEK 50 million in net financials setting up further free cash flow, negative organic EBITDA growth. So how -- where do you think the leverage ratio could end up year-end? Because I struggle a bit, especially since you plan to do more M&A depending, of course, on the timing of that. How do you plan to get down the leverage ratio with that in mind?

But, of course, I mean, it's tough, unfortunately impossible for me to predict the future here. But of course, as we see the results as is the most essential part of the, let's say, the covenant there. As they -- as we see it have the conditions to improve there -- from there, of course, the foundation of the acquisition journeys. And I mean, that said, I would say that we will still be within our covenant level at year-end, if that's an indication at least. But of course, hard for me to tell the future, but we see we have the possibilities to further grow, and that's what we are aiming to do, and we see that we have the opportunity to do so within say, our market environment. which is, of course, yes, under pressure, but the long-term drivers are as valid as ever be a great opportunity, timing-wise to do these acquisitions.

Okay. Very clear. And you also said that you made changes for CEOs, in plural. How many CEOs are we talking about you made changes? And do you have an idea of what the extraordinary costs will be, I guess, here in Q3 or Q4 when it's executed upon?

Yes. I mean, in terms -- it's low single digits, you could say. But I would say that we have not included those kind of costs before in adjustments. So it's too early to tell regarding that.

But a couple of million, I guess, is realistic.

Yes.

Okay. And you have found new CEOs internally to these subsidiaries? Or is it still ongoing?

Yes, it's -- that's -- some of the solutions. We've done that some externally. So it's a mix, I would say.

The next question comes from Sofia Sorling from Carnegie.

Sofia Sorling from Carnegie. I just have one last question to you. It's also about cash flow. So expect for the more preferable seasonal effect ahead in Q3 and Q4 mainly. How will you improve cash flow given [indiscernible]?

Yes. Okay. I think it was a pretty bad line actually, Sofia, but I think your question was around cash flow and working capital improvements. Is that correct?

Yes.

Yes. Okay. Thank you. So I mean -- so we have seen working capital improvements, let's say, during the last 18 to 24 months. And you say it's a mix of how we are working with our suppliers. And in terms of -- you remember, we have centralized purchasing units where we are improving the number of, let's say, phase outstand -- days outstanding for the payments. And so that's a continuous improvement around that. And so we're still looking to improve that even further. And of course, working with our customers. And we'd also say choosing the right project is very important around cash flow-wise, tougher market environment that is even tougher to choose the right projects. But remember that a lot of our companies are actually making, say, all-time highs around these levels. So with that said, they can also see some -- it's not every company has seen an increase in the competition. So some are actually seeing a decrease due to, let's say, various reasons and bankruptcies could be one form of explanation and fewer market participants. So with that said, they are also in the opportunity to enjoy an even better situation than not only on, let's say, on our results wise, but also on the cash flow situation where you -- if you could become the most preferred partner for your customer where you deliver excellent results, which we are aiming always to do, of course, then you can also improve the cash flow situation. So that's one of the areas where we improve the companies that come into Fasadgruppen in order to improve this very important aspect of the game.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you. And we have received a few written questions as well. The first one on the leverage. Do you see your debt-to-EBITDA ratio going down from the 3.2x already in Q3 '24, which is your planned time line to be back to the decided leverage of 2.5x? Yes, we can start with that.

Yes. On the first one, of course, it's hard to tell exactly when we see the improvements, remember that it's usually in the Q4 -- let's say, Q4 seasonally, that is the best cash flow-wise, but very hard to answer that question around the future if it's improved already in Q3 2024. Planned time line regarding the desired leverage of 2.5x goal level, I'd say, in the coming couple of quarters. Can't be more explicit than that, unfortunately.

Okay. And then what does the backlog decrease experienced in the first half of '24, the minus 16% for the evolution of sales looking at the second half of 2024.

Yes. I would say that it's actually order backlog is not the entire answer to the solutions easily to stare at that number, so to speak. But remember, a lot of these, say, renovation project, which is at the core of our business could have very short lead times. It could be that it's raining in through the roof classic example and the customer was held next week when we come, say, a couple of months. And then if it's that short lead times, it's never shown in the order backlog. And with that said, it is often where we see a lot of those kind of projects going into our sales. So I wouldn't stare too much on the order backlog in that sense. But I wouldn't say that that's the full indication for the half year that it should be down 16%. That's not a correct statement in my view.

Great. And then one final written question. What is your view on share buybacks versus M&A versus dividend? I know this is also a question for the Board, but it would be interesting to hear your view. Yes.

But of course, my view is -- it depends. I mean, if you have your share price at certain levels, it could be beneficial to do buybacks. It could also be in terms of M&A wise, if share price is say, very high on what -- depending on what your view is on that, to use your stock as a payment method. And the same is if I would say, generally, the dividend could be a healthy indicator for a company. But of course, as an acquisitive company, we have, in my view, a pretty small dividend in terms of, let's say, net results, 30%, which is the Board's view. So the dividend is, let's say, a healthy indicator, but could -- those -- that capital could also be used to in terms of M&A or buybacks in another sense. So it depends is the diplomatic answer, of course. But we want to be using all of those kind of tools in that toolbox in order to optimize shareholder value.

Excellent. But then maybe we can conclude?

Yes. Yes. So one concluding remark is that you could already now actually engage into our Capital Markets Day through an entry on our web page, where you can register. And so it's easily to find that link through our -- actually we have a new investor site. Hopefully, some of you have seen that. And there you can sign up, and hopefully, we will see you at the Capital Markets Day. So with that said, as it is no further questions, I would like to conclude by thanking all the participants, all of the employees, all of our shareholders and our -- all of the ones that are collaborating with us. And wish to speak to you soon again, hopefully at the Q2 -- Q3 presentation or at the Capital Markets Day.