Green Landscaping Group AB (publ) (GREEN) Earnings Call Transcript & Summary

Thank you very much, Arlena, and welcome to our third quarter of 2020 report. As mentioned, my name is Johan Nordstrom, and with me here today is our CFO, Carl-Fredrik Meijer; and then I suggest we dive into the report. So next slide, please. Just a brief information about Green Landscaping. So Green Landscaping today is the leading Nordic landscaping service provider. We have presence in Sweden with 24 entities and in Norway with 3 entities. The way we operate in terms of our structure is a highly decentralized structure, meaning that we're close to the customers on a local basis, and we have a localized decision-making. So we depend heavily on the decentralization idea. We have a very diversified contract portfolio with multiyear contracts, which gives us, I would say, a good visibility in terms of revenue and also profitability moving into the future. We have an active, I would say, M&A agenda. And we have, so far, this year, completed six acquisitions. So I would say that we are growing quite nicely in terms of acquired growth. So that in brief is Green Landscaping. So let's move on to next slide, please. And that's our key financials, for the last 12 months. So right now, we are approaching SEK 2 billion in revenue. We have an EBITA of SEK 83 million. That gives us an EBITA margin of 4.2%. We have a very healthy backlog, order backlog, close to SEK 4 billion. And so far, we have had an acquired sales amounting to amounting to SEK 420 million. So as I mentioned, we have a very active M&A agenda. And then we move on to next slide, please. And that means we are moving into the third quarter highlights. And we are pleased to present a strong development in the quarter as sales is up as was profitability. And we have also, as we mentioned, acquired 2 more new companies. So that means that we had or achieved SEK 551 million in sales for the quarter. We had an EBITA of SEK 40 million. And that gives us a healthy EBITA margin of 7.3%, which we are quite pleased with. The net sales growth were 12.1%, that is also a healthy development. Organic growth was 0.5%. And if we compare the organic growth,with comparable entities as, I would say, we removed 1 entity, loss-making entity in the beginning of the year. So if we adjust for that one, we had an organic growth of 3.5%. And that is pretty much in line with, I would say, a normal market growth development, excluding any effects of COVID-19. EBITA amounted to SEK 40 million, as I mentioned, compared to SEK 29 million last year, and that gives us a healthy increase of almost 40%. And as I mentioned, the EBITA margin was 7.3% compared to 5.9% a year ago. Cash flow was a negative SEK 13 million. The reasons why that one was negative are two-folded. Firstly, there is a seasonality effect, meaning that we start-up new projects in the third quarter and that consumed cash for us. And also, we have during the course of the year here, upgraded some of our IT infrastructure systems. And that means that we have had a delay in invoicing going out to the customers. And we are, of course, in the process of remedying that situation. So we don't consider that being a major problem. But of course, it needs to be sorted out before the end of the year. Net debt amounted to SEK 707.1 million. And as also mentioned, that we have acquired 2 companies in the quarter, TH Anlegg and Hadeland, both in Norway, which we welcome to the group and are very happy to have as partners going forward. Next slide, please. Just a few words on the COVID-19 situation. As we are, as everybody, I would say, in the society, impacted by COVID-19 and its effect, we take it very seriously. In terms of operation, how we managed the situation, I would say, it works in a good way. Most of our work is done outdoors. So from that perspective, I think we are in a rather good situation even though we have several activities inside the company to make sure that we do not spread the COVID-19 as we are trying to be cautious. In terms of customers and revenue, we see that there's a slow -- the business has somewhat slowed because of the absence of meeting. And that means when we can't meet with the customers, we can't get additional work and we can't get the contracts done. It's not that it disappears or it's a major difficult to us, but it slows the whole process down when you can't have physical meetings, everything takes a little bit longer. So to some extent we can see that it affects us -- or we have a slight negative impact in terms of revenue and deal-making because of the COVID-19 situation. But it's -- we are talking about the capital percentage here, not more. So that's pretty much about the COVID-19 situation. Next slide, please. As we mentioned, we are growing by 12.1% and we are quite happy with that growth. It is a high-growth company. Primarily it's driven by acquisition and that's a central part of our strategy and it works out nicely. So 12% growth in this situation is a healthy sign, I would say. The organic, we mentioned that one of 0.5%. So we're still growing organically but not as much as on the M&A side where we are very active. Next slide, please. And coming back to the growth here, I'm not going back too much down in history here, but if we look upon the last 12 months -- for the fourth quarter of year '17, we were roughly at SEK 800 million, SEK 850 million in yearly revenue and have grown quite steadily ever since. We made one major acquisition in the fourth quarter of 2018 and that was Svensk Markservice and they had a revenue of about SEK 800 million with, I would say, a very low profitability. So the growth ever since up till the fourth quarter of '19 is pretty much that Svensk Markservice came into the business. In the meantime, we have had some development on the profitability, but we spent, I would say, the large part of 2019 on integrating Svensk Markservice and improving the profitability on that company. And that's pretty much what we see in the picture here that the profitability didn't change that much even though we incorporated SEK 800 million. But having Svensk Markservice a part of the group meant that we became the clear market leader in Sweden. And that's the platform that we built and that's one of the reasons why we have been successful in Norway. That's because of the platform we were able to build in Sweden. And then, of course, as I believe everyone knows, we had a very mild winter in the Scandinavian countries in the fourth quarter of 2019 and in particular the first quarter of this year. And that's why we had some setback in terms of both revenue and in particular, I would say, in profitability. And right now we have the second quarter and the third quarter where we show very good progress in terms of both growing the company and in particular growing the profitability. So we are kind of happy with the trend where we are heading at. So I think that concludes this slide. So next slide, please.

Okay. Order backlog, as you can see, it's up to almost SEK 4 billion and it's up 27% compared to Q3 last year. The growth in the backlog is primarily driven by acquisitions and in specific it's Hadeland Maskindrift, which has large and long contracts. You can also mention that we do have a very large portfolio of contracts, it's thousands of contracts. A typical contract is 3 to 5 years with a few extension years. So it's a strong development. Next slide, please. On page 9 you can see an example of one of the recent projects we've worked on. And this time we will mention a project by Tranemo Trädgårdstjänst. It is a quite large construction work. It is a warehouse for nelly.com in Borås. This is an online retailer. And this project is SEK 10 million-plus in size, so this is a bit unusual, but it happens. So this is to give a flavor of the type of work that Tranemo Trädgårdstjänst performs and delivers. We can move on to the next slide. On page 10, we show a second example of a recent project and this is our subsidiary Jacksons Trädvård launching a subbrand called Ravenwood. And this is created through demand from customers and skilled employees at Jacksons. And this is interesting because we manage to recycle or use deadwood and create these furniture, art projects, landmarks, meeting places for all park and forest lovers out there. And this is also -- you can mention, this is part of a circular business model where we reuse the material and create value, so it's quite interesting. We've done a little bit more than 5 projects so far and there's a strong interest and demand going forward. Next slide, please. We have a -- this is the segment slide. So we see a healthy performance, a healthy margin in 4 out of 5 segments. As you can see, our biggest segment is Region West, which is 41% of sales in the quarter. Also we have profitability of between 8% and 11% in 4 out of 5 regions, which we are quite happy about. Of course, we see that Region East is not in that league and is a mere 0.8% in profitability. And this is, of course, being addressed. We can see progress in, I'd say, 5 out of 6 of the units where one is not out of the woods yet and more actions are needed. You can also say -- I mean point out that Region Mid, of course, has a quite low margin year-to-date, but they were severely impacted by the mild winter during first quarter. Moving on to next slide, Page 12, financial position. And in terms of leverage, our net debt-to-EBITDA pro forma is 2.9x, which means that there is room for continued acquisitions. In this quarter, we have -- we usually tie a lot of working capital. We did so last year and we did this year. And this, of course, impacts the cash flow in the quarter, and so we expect net debt to come down going forward. Cash flow from operations, as Johan mentioned, was minus SEK 13 million, but on year-to-date the cash flow is positive with SEK 76 million from operations, SEK 76 million. I'd like to mention we did a rights issue of SEK 150 million in the second quarter to be used for acquisitions and we have so far year-to-date used SEK 202 million for acquisitions. Next slide please. Over to you.

Yes. Okay. So back again talking a bit more about the acquisitions we have done. So far we have done 6 acquisitions in this year and they combined have a revenue of SEK 500 million. So I would say it's quite substantial, both in terms of number, but, in particular, in terms of the revenue they bring with us. So the companies that have joined the Group, it's GAST Entreprenør, who came in the first quarter in Norway. We have Park i Syd in the southern part of Sweden. We have TH Anlegg that came in, in the second quarter. And then we have Hadeland who came in, in the third quarter. And then Bengtssons Trädgårdsanläggningar and Oveland, who came in after the closing of the third quarter. So those are the 6 companies. Talking something about Park i Syd, which is a quality company. They are based out of Helsinborg, down south. It's a consultant company, meaning that they lead projects, they actually do physical work as well, in particular they are focusing on landscaping architecture, design. And among, the Swedish church is one of their big customers. It's not a super big company. They have an annual revenue of SEK 30 million and 13 employees. But they have project capacities. They basically do anything from starting point of a project through the cost and the design phases and down into the execution part of it. And they are a quality player, so we are happy to have them coming -- being a part of Green Landscaping. At the same time we acquired GAST Entreprenør in Norway and they are headed by 2 gentlemen here, Lars Ola and Paul. And we are quite happy with having them coming into the company. And they have, I would say, strongly been part of the success we have had in Norway as they had widespread contact network in Norway. They have a solid reputation. So they had -- it was a good first move into that particular market given -- yes, it was good to come in the market together with them. In terms of size, they have an annual revenue of SEK 85 million and they are quite profitable. So it was a very good addition having GAST coming into the group. Further on we had TH Anlegg, a smaller company who worked together with GAST. They were well known. They had discussions about them coming -- making one company, so to say, and then that was executed down the road. So they are nowadays a part of GAST Entreprenør. Moving into the next slide here. Now we are at Hadeland Maskindrift. Hadeland Maskindrift is a slightly bigger company. They have an annual revenue of SEK 200 million. They are doing, I would say, street maintenance in the Oslo region. They have several contracts with the City of Oslo and municipalities of Hadeland. And they basically do anything from snow removal during wintertime to pavement and refurbishment during the summer time. So they are a service provider taking care of the roads in the regions, similar to what other companies do in green, but we do it on the green side, these guys are doing it on the road and maintaining the roads. So we're quite happy having this company being part of Green Landscaping Group. Next slide, please. Moving on to the financial targets. We have a financial target of growing 10%, and we are on track on the 10%. In the quarter, we are, however, growing by 6.7%, not a major difference there. In terms of EBIT, we have a goal, mid-term goal of 8%, we are right now at 4.7%. So we clearly have some more work to do there, even though for the last 2 quarters we have shown that we are moving, I would say, quite rapidly towards our 8% target. The financial leverage, the goal is 2.5x. We are right now at 2.9x. And as the company comes in and they are profitable, we expect this number to start to decline for the coming quarters moving into the future. And then we had a 40% dividend and so far we have not made any dividend as we are growing quite quickly, I would say, through acquisitions. And it is a trade off between the dividend and the growth rate we have. So right now we are focusing on growing the business in Sweden and growing the business in Norway. Next slide, please. And that brings us to the last slide here that we are presenting in the quarter with strong growth and a significant margin improvement and 2 more acquisitions. So that means we are growing by 12%. We lifted the EBIT margin by 1.4 percentage, and in total we have made 6 acquisitions year-to-date. So we're quite happy with the performance here in the third quarter. And I think that concludes the report per se, and then we open up for questions.

[Operator Instructions] We have Dan Johansson, SEB.

Johan and Carl-Fredrik, Dan from SEB. A couple of questions from my side. First question, is it possible to quantify the impact from the closedown on the unit within Region East, just to get a sense of the underlying margin in the segment? Also have you taken most of the cost now or will there be a small impact also in the forthcoming quarters?

Dan, can you please rephrase your question? I missed the first one there.

Sorry, I will take it again. So is it possible to quantify the profit impact from the closedown of the underperforming unit within Region East, just to get a sense of what underlying margin is in the segment? Also will it take some more costs related to this in the coming quarters?

To start with the last question there, in the previous year, we had worked with adjusted EBITA, meaning that we have, so to say, adjusted for businesses that is not healthy or when we integrated quite heavily from Svensk Markservice. And then we made the decision that, moving into 2020, we will not report adjusted numbers anymore. That means we will take any cost in conjunction over the result as they appear. And we have not disclosed the cost per se. It's taken over -- as a running cost, so to say, over the results. So we are not disclosing that type of information.

And going forward, I think there is, as I mentioned, more work to be done. We see an improvement, but there is more work to be done.

And the second question in terms of M&A, 4 out of your 6 acquisitions have been in Norway. Is it fair to assume that the majority of the acquisitions going forward also will be in Norway? Do you still see good opportunities to do more also in Sweden?

Yes, I would say that that's fair to assume. The reason is really that we started out with GAST and before we made that acquisition, we made the assumption that there would be the possibility of acquiring a couple of companies in Norway. Then we were very happy with the inroad we did in Norway. And I would say that we have a healthy list of companies that we are in discussions with in Norway on them being a part of the group. So yes, there are a few companies we are in contact with in Norway. Sweden, to some extent, we consider it to be mature in terms of that we have a good market position. We have an ongoing dialogue with additional companies in Sweden. And we assume -- it is hard to say a number, but I would say something like 3, 4 companies a year going forward in Sweden while we are in a peak situation where we build up the market in Norway. And eventually that would become a new whole market. And then I believe that the frequency of acquisitions will normalize in Norway. But at this point of time, I would say it's a fair assumption saying that, yes, it will be a few more companies being acquired in Norway.

Interesting. Another question on M&A. The latest acquisition of Oveland, the company is located in the south of Norway. Will you build further on that platform? And will this part of Norway together with Oslo be a focus area going forward, or do you see scope to expand to other parts of Norway as well?

Yes. We see that we will have one cluster of companies, if you like, in the Oslo region. And if we are successful in adding other companies, which is the plan, in the southern part of Norway, which Oveland is located, so, yes, the intention is to add a couple of more companies together with Oveland so they will make a new cluster in that region south of Oslo.

Okay. And one last question on the order intake. The COVID situation is, obviously, an obstacle in terms of meeting customers. But at the same time, your organic growth improved compared to Q2 and was 3.5% adjusted for a closure of the unit in Region East, which is, in my view at least, a quite solid number. Is it possible to give some more flavor on the order intake in the quarter? Did it improve compared to Q2? Are you winning more businesses? What's your feeling about organic growth for the coming quarters?

No. We don't give forecasts in that perspective. But as I said, the COVID situation is like a wet blanket on the business. I shouldn't overemphasize it, but makes it harder to meet with customers. And typically we have to meet with the customers in order to gain business. So as long as we have a situation where it's hard to meet, even of course we meet through Teams and other technical medias. So there's an ongoing business and the business is solid, but it's a bit slow given that you can't have the physical meetings. So we see that we have projects that are being pushed into the following year and so forth. So we are not badly impacted by the COVID situation, but we are -- we see that it's a bit difficult, yes.

But the mainstay of our business is ground maintenance and smaller additional works and that continues to a large extent. I mean -- and hence the slow growth that we're seeing. And I think it's worth to mention that we started -- or know what happened during 2008, 2009 and 2012, where we saw that the growth rate, the market stopped growing, didn't decline, but stopped growing, and then the kind of growth started again afterwards. Maybe this is the situation again, we don't know, but...

[Operator Instructions] We have a question now from Fredrik Moregard, Pareto Securities.

First of all, trying to bridge the EBITDA development in the quarter, is it possible to give some indication of how much acquisitions contributed?

Fredrik, Johan here. Do we disclose that information? I'm looking at Carl-Fredrik here.

You can see that the -- I mean in terms of profit, Region West is, of course, improving a lot. And of course, some of that is from our acquired businesses during the year. So I think it's -- like we say, it's a mix of the synergies from Svensk Markservice, the kind of organic development in all our existing customers of becoming a little bit better every year. And of course, the acquisitions made. And so I think it's a mix of those.

But it's fair to say that the development of the acquired companies are, on the average, positive. So we are happy with the performance from each one of the acquisitions we've done.

Okay, sure. So positive mix from acquisitions coming through in the margin then.

Yes.

Also, is it possible to quantify the government support that you've received that you talk about in the report? What sort of impact has that had on your P&L?

It's very limited during the third quarter.

Do we have a number?

Okay, are we talking about SEK 1 million or SEK 2 million or even below that?

No, no, no. I mean, we have -- it's in the range of a few hundred thousand, so something like that.

Okay. That's very encouraging. Then, I mean, obviously this far you said you had some negative impact from the pandemic with regards to discussions with customers and perhaps some hesitations from customers. With regards to spending their budget and so on, coming into the fourth quarter where budgets are usually spent at the end of the year, is it possible that we could see some sort of catch-up effect during Q4 or have there been, so to speak, mid-year budget cuts for your customers?

Given the discussions I've had with the CEOs for the entities, I would say that there are a few, who have reported that there are budget cuts and, of course, that to some extent will have a bad impact on the revenue in the fourth quarter. But it is a limited number. For the remainder I would say it is more or less business as usual. They have their budgets, they are very tightly linked to the budgets. So on -- I would say on the average they won't be to the best of my knowledge today any significant change in the behavior from our customers. And by that we don't expect any atypical behavior in the fourth quarter. There's a couple of customers where we know that there are budget cuts and they are careful with spending their money, but it's a limited few reports we have had so far. Most of the customers we are in contact with are more or less business as usual in terms of the budgets.

Okay. And lastly from me, obviously you had sort of seen negative impact from the mild winter in Q4 last year and it got even heavier in Q1. Just thinking about Q4 this year so far starting off quite mild. When do we need to see -- to start to see more of a normalized, if I dare use that term, winter in order for you guys to improve your Q4 results from last year?

I believe that we are working very actively on changing our business model. I cannot change the temperature, I wish I could, but we all have to accept that, okay, we have to prepare the company for mild winters going forward. So when we plan the work in southern part, for instance, and we talk about budget internally, then we basically say we don't calculate for any winter whatsoever. So how does the company look like if it don't have any winter activities and what can you do instead? So that means that they are focusing on projects, landscaping projects, making sure that they have those orders and the relationship with the customers that we have the capacity to execute that type of work. So I would say that we are, in some cases, changing our business model. And in southern part of Sweden and also in the most eastern -- sorry, western part of Sweden, that's the same type of discussion we have with entities over there. It's more complicated in, I would say, the central Sweden and the east of Sweden because there we usually have winters. We have the large winter contracts. So they are still to some extent exposed. Even though we are changing, I do not see that there will be a material change for this winter in those entities. And also given the recent companies that have been part of the group, and this is by design that we have by purpose acquired companies who are more into landscaping services. And that means that if they don't have any winter, they actually have a good progress with the customer. So we are looking upon GAST, we're looking look upon Bengtssons down south and to some extent actually Hadeland. Those are examples of companies, who have a good business if you don't have any winter effect whatsoever. So it's kind of a hedging we are doing there that if it becomes a very strong winter, then we have contracts that will benefit from it where we have other entities who will not perform as well. But if I have a mild winter, we have new companies, who have joined the group and they will benefit from a mild winter compared to a year ago. So down south in the Gothenburg area and the new companies, those are the changes we have done to the business model.

Okay. So it sounds to me like even if there is a very mild winter comparable to the last one, we -- there should be good reason to see some sort of year-over-year improvement at least?

That's the preparations we have done and that's my expectation that, that should be the case. We should not be as badly impacted this year as we were the previous year, given that we changed our business model and that we have brought a few companies into the group who are, I would say, not that dependent on the winter.

There are no further audio questions registered, so I hand back to the speakers.

Okay. We received a few questions here. I think we talked about the most of them. One is, you've acquired 6 companies this year, SEK 500 million revenue, which is above your financial target. Is this a new pace for the company? Do you want to answer that?

It's very hard to have -- saying it's a new pace. If we have good companies and good contracts with the companies who want to join the group, then we make a decision that, that's the case we go for. Then in terms of the goal that we should grow by 10%, that's a goal that we communicated a couple years ago and that goal is still very much valid. So we did not change that goal. So our target is to grow by 10% and right now we have grown significantly more. But for the last 2 years, I would say we are growing higher than 10%.

Yes. Okay, thank you. That was all the questions. Do you want to...

Okay, I think that concludes the third quarter report for the year 2020 from Green Landscaping Group. So thank you, everyone, for listening in, and have a nice day.