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

Welcome to the Green Landscaping Group Q3 Presentation for 2024. [Operator Instructions]. Now I will hand the conference over to the CEO, Johan Nordstrom; and Head of IR, Magnus Larsson. Please begin your meeting.

So, good morning, and welcome. Today I'm again joined by our Head of Investor Relations, Magnus Larsson, and he will be covering the financial section of this presentation, as our new CFO will join us later in the year, as we have previously communicated. Just a short introduction to report [ there ] that the third quarter, from my perspective, it was yet another solid quarter. We delivered an organic growth of 3%, and we are at 2% organic growth for the rolling 12 months, and this is despite having faced market headwinds for more than 1 year. And of course, during this time, our EBITA margin has remained above 8%, which is our main focus, and I'm quite happy to see that we have a stable margin going on here. The cash flow in the quarter was very strong as we did have somewhat weakened cash flow in the first -- or delayed cash flow in the first and second quarter. And as anticipated, that resulted in a very strong cash flow performance in the third quarter. And of course, we would like to welcome the 3 new companies joining our Green Landscape family, and we also announced the arrival of yet another one. And our ambition, as we previously have communicated, that is roughly doing 8 to 10 investments in new company in 2024, and that plan really remains intact. Now, moving into the report. Green Landscaping, we are one of the leading landscaping companies in Europe. If we look upon the market, we believe the market is quite attractive because it is stable, it's a big market. And in particular, it's supported by 2 macro trends. And that is urbanization, meaning that the cities are growing, and that's where we are active. And also from a sustainability perspective, that is really supporting our growth in the marketplace, applying the right business model that is really about having the local entrepreneurs being able to serve the customers in the way the customers should be served and they are quite, I would say, agile in what they can do in the local marketplace. And that has turned out to be a very successful strategy for us, in particular in terms of how to make money in this business. And then, of course, we have been investing in new companies for quite some time. And I believe we are getting better and better in choosing what companies to go with, how to onboard them and how to develop them into the future. So we do have a well-proven M&A strategy. Moving on. Just to sum up for the last rolling 12 months. Sales increased by 7%, where we have an organic growth of 2% and of course, investing in new companies contributed with 7%. And again, given the market condition, I believe that is a solid performance. Profit margins increased by 1%, and that is, of course, if [ you're ] looking from the margin per se, we are actually going from 8.9% to 8.4%. And that is a slight decrease in the profit margin, and that really is a reflection on the market condition that we are feeling the headwinds in the market, there are [ an ] increased competition. And our absolute main priority here, that is on the profit margin per se. So we would like to see a stable revenue and basically a stable profit margin as well, and I think that's pretty much what we are looking at. So we are clearly keeping it together given the market conditions. Now in the third quarter, it's basically the same trend really where we see that the net sales increased by 8%, where we had a 3% organic growth. And I think the 3% organically in the third quarter was -- that is a solid performance. I won't say I'm surprised about it, but it was a tough quarter and having an organic growth of 3% in the quarter, that was really hands down to the local Managing Directors, they really performed in this aspect. And then again, the EBITA increased by 1%. So we see that we are having the volume, but we have a harder time keeping in line with the profit margin per se, but still delivering an 8.4% profit margin in the third quarter. That is a strong performance. And then, of course, in terms of the financial gearing, as we made 3 acquisitions and we had a good cash flow, that basically meant that the gearing stays at 2.7%, and that is -- I'm not overly concerned about it, but I would prefer to be at 2.5%. So [ we'll ] see what's going to happen into the future here, but we are keeping a very close track on that one. And as I stated before, given the company's performance, we are in control of that one. So we are [ comfortable ] with that level. Then we have slowed down the pace on the acquisition side, and then we will see a deleverage by [ itself ] given what we are doing. And as I mentioned, we did 3 acquisitions in the quarter. So that's to sum up really what's going on here. So all-in-all, we are keeping it together. I think our local MDs deserve the praise for what they are doing. Next slide, please. As I did mention, if you look upon the rolling 12 months, we are -- sales is growing by 7% and EBITA by 1%. And it's a very stable development, I would say, given the market conditions. We are on track. And if we didn't have had, I would say, a very strong focus on the profit margins, we might have seen a slightly higher revenue really, but perhaps a bigger contraction on the profit margin side. So we try to keep a very close eye on profit margins. We want to make money. We don't want to be locked in into any long contracts where we do not make money and so forth. So the focus is on the profit margin. And as I said, our Managing Directors are doing a solid work keeping our profit margins up. Next slide, please. So if [ we ] look upon Sweden, their revenue side of SEK 2.8 billion, it's pretty much a flat curve there. And then we see a slight decrease in -- even though it's at 10%, again, it's -- we are moving from 6.7% EBITA to 6.1%. And yes, to be frank, I'm not too happy about the profit margin in Sweden. They are performing, but [ there ] are more that can be done there. And then, of course, in the third quarter, we saw a slight increase in revenue, but again, we see a decrease in the profit margin there. And as we have communicated earlier, we had one major loss-making contract. And I'm so glad that, that contract [ is ] ended by the end of the third quarter, so we can move on in the Swedish section again. And being at this profit margin, my opinion is really that it should not trail some of the other regions. So I'm not happy with being at 6%. Now this is not a quick fix either, but this is something that we will work on moving into the future. And I would like to see a steady increase in the profit margin on the Swedish market because there's no reason why we shouldn't make more money in this particular market. And again, it's our biggest market, of course. So it is of great importance to us. Moving on to Norway. Here, we can see that the sales increased by 4%, and we actually had a quite nice organic growth of 5% in Norway for the rolling 12 months. And that given -- again, given the market conditions, that is very well done by our colleagues from Norway. And then again, being at a 9.9% margin, that is a healthy margin given the industry we are in. Then in the third quarter, we see that the net sales was a rather flat curve, but we saw a 4% increase in EBITA, and that is very well done by our colleagues from Norway. And that means they are right now 40% of the Group's revenue and 42% of the profit from the Group. So that is quite nice. And then again, looking upon Other Europe, and from an investment or capital allocation standpoint, that is our primary focus because we -- our plan or aspiration is really to become #1 in Europe. And in order to do so, the biggest market in Europe, that is the German market, and this is not a consolidated market. So of course, we are focusing very much on capital allocation and which company to go with and so forth. And that means for the rolling 12 months, we have -- we see a revenue increase of 63%. So quite a high number. But when you are coming from low numbers, then the percentage goes up. But from a revenue, we are at SEK 866 million. Organic, we saw a slight contraction of [ 2% ], while acquisition contributed by 64%. And of course, the EBITA is fantastic margins. We are at 19.3%. They will come down to more normalized as we grow this particular market. And in the third quarter we saw that, again, we are growing by huge percentages, 41% in sales. And the EBITA, again, a 22% margin in the first quarter, that is a really healthy margin. So I believe we are quite successful. We have been working on developing the German market, and we are getting into, what I say, a more -- I won't say a stable increase, but now we have a number of companies, We have the platform in place, meaning we have the Munich office. We have local employees. We learned German. And now we are basically coming into more of, I won't say steady state, but we can clearly see the future. We have a good pipeline. We have established ourselves in a good way in Germany, and we have some really fantastic companies in Germany as well. So I'm happy with the performance, in particular Germany. And then just mentioning a few companies that joined the Green Landscaping Group. So we're starting out by Markussen, and that is led by Florian in -- up in Narvik, and that is quite north of Norway. It's a really great company, and they do offer a full range of services in that area. They have an annual revenue of NOK 130 million with 45 employees. And it's really a sweet spot company in terms of size, in terms of what they are doing, and they will clearly be a great addition to the Group. Moving on to the next company, and that is [ Mr. ] Stange. This is Stange Grunanlagen & Winterdienst, and they are located in Neubrandenburg, that is 1 hour north of [ Berlin ]. And this is also, to some extent, a sweet spot company for us because it's very much a recurring revenue business they have. They serve the municipality of Neubrandenburg. And they actually have both summer where they are doing the [ street cleaning ] and that type of thing. But in that region of Germany, you actually have winter as well. So it's a quite full service year around and 90% of the revenue is actually to the municipalities in that area. So it's a stable business model, and [ he ] will fit nicely into the Group as well. And the next one, this is Sascha Buk in -- BUK Garten- und Landschaftsbau in [indiscernible]. And this is, to some extent, slightly different from what we typically do because [ he is ] serving the high-end gardens within and around the Munich area. So you have high net worth individuals who have very high requirements and work with [ leader ] architects and that type of thing. And he is that #1 company who serves that market in [indiscernible]. Revenue-wise, EUR 8.5 million with 30 employees, been doing this since back in 2011. So he knows what he's doing, and it's another great addition into the Group. So welcome to Sascha Buk and his team. And then the last one that we actually announced that we haven't closed yet, this is Turun in Finland, and they operate in [ Turku ]. And again, it's a full range of landscaping services, but this company also adds something that we, to some extent, have been missing in Finland, and that's the recurring revenue side on the maintenance. So this is maintenance with long contracts and that type of thing. And we do want to see that as part of our business as well. They have an revenue of EUR 3.6 million and 20 employees. So welcome to Turun and being part of the Group. So that really concludes my part of the presentation here. So I'm going to hand it over to Magnus, who will walk you through the financials.

Thank you. So let's just dive into a few of these items. And just to repeat, we had net sales of SEK 1.5 billion for the quarter and SEK 6.2 billion for the rolling 12 months. We had an EBIT margin that again went above our financial targets and ended up at 8.4% for both the quarter and the rolling [indiscernible] months, respectively. We had a very strong contribution from the segment Other Europe, partly offset by higher common costs, partly according to a new accrual routine that we have similar to the preceding quarters. A little further down, we had a solid order backlog, and we conclude that the order intake remains solid. Again, you should not read anything into this short-term as there is no short-term correlation of the book-to-bill, but rather a testament to the stability of the market. Looking at the cash flow. Cash flow from operating activities went up quite a bit, as we mentioned, as we had significant customer payments early in the quarter. As you see from the graph, there is no -- not a very clear seasonal pattern to cash flow, but a tendency to be stronger in Q4 and Q1 in particular, and you see that Q3 in this year stood out on a -- from a historical perspective. Breaking down the cash flow for the quarter. I'd like to bring your attention to the center of the graph, where we had cash flow from operating activities of SEK 121 million, which almost exactly matches what we have spent on investments in companies, acquisitions, as you see there. This, of course, varies from quarter-to-quarter, but this time, it's close to a [ schoolbook ] example of how we spend our cash being the kind of company that we are. A bit further to your right in the picture, you see that we spent another SEK 10 million on repurchasing shares that we will use as part payment for future acquisitions. The financial leverage, we remained at 2.7, as the CEO mentioned, same as in Q2, with headroom to the covenant despite it being above our target level. Loan maturity profile is as uneventful as it usually is. We've got our maturities coming in 2026. And just as a reminder, we've got only short-term interest payments. So there's a quite quick correlation between changes in interest rates and our interest cost as well. Quick glance at the financial targets. We are at 7% rolling 12 months with a growth target of 10%. We remain above the EBITA margin target. We are slightly above the financial gearing target. But again, it's okay to be there for a short amount of time, and we have not paid a dividend. And with that…

So just to sum it up in that case, as I did mention for the rolling 12 months, we see that sales grew by 7%, and that is, of course, a mix between the organic and of course, the acquisition side of it. But again, given the market condition, I think that is a solid performance and our main and #1 priority, that is the EBITA and keeping a focus on that one. So even though we see a slight decrease, that is in profit margin. It's only a reflection of the competitiveness of the market. But on the other hand, when we are at 8.4%, it's still a very solid performance. And as I mentioned earlier, I do believe that we are keeping it together in a good way and our local Managing Directors are really performing out there. So I'm happy to be able to report the progress of the company. So by that, I think that concludes the presentation, and we do open up for any questions.

[Operator Instructions] The next question comes from Mads Brinkmann from DNB Markets.

If we can just start with the margin in Sweden, please, and the Swedish contracts. Obviously, good to hear that it's been concluded here in September. Just any color you could provide us, please, on the actual impact in Q3, that would be great, but also how we should think about, obviously, the margin in Q4, but also any sort of potential spillover from the contract into Q4, legal costs, exit costs, et cetera? That would be great. And then, if we could just touch base as well, if you could add some color on the management changes, maybe some of the rationale why it's being done, but also why it's being done now? And then I guess, lastly, you obviously state yourself that you're confident that you're going to close more acquisitions this year. How confident are you that you are going to close those? And is it going to be in Germany? Is that fair to expect? But also in relation to that, are you sort of starting to see the positive effects of having an actual, I guess, a platform in Germany now that has quite a bit of [ clout ] compared to some of the competitors? Is that starting to pay off? And are you starting to see more leads coming into that platform? And is it fair to assume that you can execute more transactions in Germany going forward because of those effects?

Okay. So, if we should have had -- I'm -- to begin with, [ to mention ], I'm very happy that we are out of that contract. It was a big burden to us and I am so happy that we were over and done with that particular contract. It's not a major swing in the profitability in the Swedish market because we have a fairly high revenue in Sweden, and this is one contract, but it was one contract that was quite annoying [ to me ]. We haven't disclosed really the magnitude of the losses we have suffered from that particular contract per se, and I won't start doing it at this time either, I'm afraid. Should we have had any major spillover, meaning that we should have costs associated with closing that particular contract, that would have a major or material impact on the fourth quarter. Then we probably should have mentioned that one. We -- at this point of -- this is also a tricky part because you don't know with 100% certainty what type of cost that will occur when you end a contract because you basically make an assessment of the contract and then you have to fix what you haven't done properly, and we are in the process of actually doing that. But my -- [ what ] you say, judgment at this point of time is that, yes, there will be some cost, but it won't be any major material impact, so to say, on the fourth quarter to begin with. So that's where we are with that particular contract. So yes, there will be some costs associated with closing down the contract, but not to an extent that it will have a significant impact on our fourth quarter performance per se. So I hope that concluded the first question you had. And then in terms of the management team, we have been, as you know, 4 guys who have been doing this for almost 10 years now. And, again, the company has grown significantly. I won't say it's grown by 10 [ times ], but it's not far off. And that means that we have known for the last 2 years that we need to change the way we do things as the company have changed. We are operating in 6 countries. We have 50 subsidiaries. We are a significantly bigger company. We're a public company and so forth. And the management team has to change with it. So this has been, what [ you ] say, brewing, boiling. We have been talking about what should be done. And then when Carl-Fredrik decided to leave early on this year, that was kind of the tipping point that, okay, let's do something. And that means right now we are building a new management team, and I do like to have people coming up from inside the company. So that actually meant that I took Jakob, who has been Head of the M&A. He's been with the company for a long time and moved him into a center position within the company and focusing much more on profit, operational side of the business, and he's well known, well regarded and he knows basically all the companies. So he is in a very good position to perform in that role. We also elevated Daniel, who is the [ Region ] Manager in down South. He has been with the company also for quite a long time, and he will take charge of the more of the operational side, the Lean stuff, working that one, and he does have experience in that one. He actually came aboard with -- when we acquired Svensk Markservice back in 2018. And then, of course, we elevated Sam who has been with -- Jakob's right-hand guy on the M&A side into the management team as well. And then as I mentioned, we will be joined by Marcus as a new CFO. So we're actually adding capacity and capabilities and structure to the management team in order to meet the future demands on the company moving into the future. So it's just building -- what [ you ] say, increasing the capabilities of the management team, reflecting the size and the future of the company. So it's no revolution here. It's evolution, and I'm quite happy with that performance. And then, of course, we're talking about the acquisitions in the pipeline. And in the beginning, we are not that many people working on the acquisition side. It's more of you go out and talk to -- searching for companies, then you move into a negotiation phase and then you close and then you start all over again. So that's the way we've done it historically. Now when we have a bigger team that we have started to develop 2 years ago, that means that we have a more even flow and we have a more stable pipeline of companies. And we actually -- if you look upon the companies that we are saying no to, that one has [ 5-folded ], I would say. So we are clearly doing a very good work on scaling the market. And the main focus is, of course, on the German market, or the German-speaking market, I would say. So it's both Germany, Switzerland as well as Austria that we're looking at. And I believe we have a more solid pipeline today compared to what we had like 2, 3 years ago. So it's -- I think that answers your questions really, but -- so I'm going to hand back to you, Mads. Do you have any follow-up questions on my answer?

No. I think it was great. Thank you very much for the good clarification.

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

Okay. Thank you very much. And as I said basically in the beginning that it was yet another solid quarter for us. We are growing. We are focusing on the profit margins and being at an 8.5% EBITA margin for the rolling 12 months. It's quite a healthy margin given market conditions. And also, as I said, now for the third time, I'm really happy with what the local MDs are doing, hands out, they're doing a very good work. And yes, it's -- I'm happy with the performance of the company at this point in time. So I think that really concludes the presentation. And so, thank you for listening in, and I hand it back to the operators.