Nordic Waterproofing Holding AB (publ) (NWG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Nordic Waterproofing Q2 Report 2020. Today, I am pleased to present CEO, Martin Ellis; and CFO, Per-Olof Schrewelius. [Operator Instructions] Speakers, please begin.

Okay. Thank you very much. Good morning, everybody. Thank you very much for calling in. We appreciate your interest. And we're going to go straight into our presentation. As you can see, we've had a strong second quarter this year and basically improved our KPIs at all levels of the P&L. Moving to Page 2, I would like to start with an update on the virus situation. As you've seen, cases, fortunately, have come down quite a bit so far in Scandinavia and most of Europe, which are our markets. Our first priority has been from the start and continues to be, of course, to make sure that our employees remain healthy and our customers and suppliers, of course, also, whenever there is a contact. And we are fortunate to report that we have very few confirmed cases among our colleagues. We did not see any negative impact on our financials, of course, during the quarter. We have obviously continued to focus on customer credit risk, cost control and cash preservation. Obviously, our results show that we don't really have any incidents in that respect, but we continue to be very vigilant in case there's a renewed number of cases. The future impact on our business is, of course, very difficult to set. We've had a very strong quarter in spite of the pandemic. But obviously, there's a significant risk that general GDP might slightly fall -- has fallen, of course, for some sectors and might fall also in the building and the construction industry, the rest of the year and especially next year. So in that case, obviously, there would be an impact on our business really. Moving on to Page 3. We have had a sales increase to SEK 949 million. It's 7% increase. All of that is organic growth in local currency. We've had a very small impact, 1%, from acquisitions and a slight currency effect since the Swedish krona has slightly strengthened in the quarter. EBITDA is up 34% to SEK 166 million. Operating profit, EBIT, up 43% to SEK 137 million. Cash flow was good also, SEK 114 million compared to SEK 78 million last year. And the earnings per share come out at SEK 4.55 per share. Moving on to some more color on what's been going on, on Page 4. Strong sales development was, I would say, the continuation of the strong demand picture, which we've seen, especially in Scandinavia, over the last 3 years. But also there might be -- it's difficult to quantify, but there might -- we suspect there is an effect in some cases and especially in our rubber business, SealEco, where we believe some customers have been holding a bit because they had concerns that we or other suppliers might not be able to deliver. We have to stop a plant. That hasn't happened, of course, but we do think there has been an impact on our sales figure to some extent. We see a continuation of strong demand. We've had a 10% increase in our Products & Solutions business, whereas the Installation Services has slightly reduced by 3%. We have had strong development, especially, I would say, in Denmark or -- throughout our geography, but Denmark, Sweden, Norway has been very good for us. And the rubber business had a very solid development overall, despite the fact that the U.K., which is a significant market process, has been closed down in the beginning of the quarter. And we had slightly weaker quarter in Veg Tech in our green infrastructure business, but we don't have a concern basically about the business level going forward there. Regarding our prefabricated elements business, Taasinge Elementer, we continue to implement measures to improve profitability. But we are so far quite -- so quite far profitable from our targets. But we continue a very active program of profit improvement. All in all, as we said, the best quarter ever by quite a long distance, due to increased volume, very strong volume demand, good cost control and also paradoxically from the virus situation, some cost avoidance because, obviously, traveling has been reduced significantly. We hope that this is going to come to an end very soon, of course. But it does have a positive effect on the P&L. Other items, we've seen during the quarter, Page 5 is -- as you probably have noticed already, the Danish Competition and Consumer Authority decided to finally close the investigation of the roofing felt market in Denmark, which, of course, is good news and confirms what we've communicated all along that we did not believe there was a case there. Nynas, our main supplier of bitumen, has come under U.S. sanctions for a while. Those have now been lifted. And the restructuring of the company has also been continuing. It's been extended to 15th of September. And we believe that Nynas will continue to operate normally since we are no longer subject of the U.S. sanctions because of the Venezuelan owner. We also had taken measures to be able to operate entirely without Nynas. So it's a highly unlikely case of Nynas not being able to supply. Of course, we are able to get good quality material from other suppliers. We have received an advance tax ruling regarding our project to move -- to re-domicile our parent company from Denmark to Sweden. So the Danish tax authorities have confirmed that this will not trigger any adverse tax consequence. So we are continuing to work on that project. We have also renewed our financing agreement during the quarter. It has a maturity date in June 2023, and a total volume of EUR 75 million of term loan facility, EUR 40 million of revolving loan facility. So on top of having a relatively strong balance sheet now at the end of the quarter, we also have room in our financing agreement, should we need additional cash, for example, for acquisitions. We have also made an acquisition. During the quarter, we have acquired 25% of the shares of Playgreen Finland. It is a company mainly active in the field of offering design, sales and installations of solar energy solutions. We had an option to acquire an additional 55% of the company within 2 years, if we so desire. This is another step, obviously, in the direction of sustainable building solutions, which we've been active with over the last 3 years. Moving on to the outlook right now on Page 6. As I said, the impact of the pandemic is difficult to evaluate, but we do believe that building and construction will move, to some extent, in line with GDP development. So should there be a significant slowdown, we would certainly feel the effects of that. But we still see a fairly strong demand in our -- especially in our Nordic core countries. In Finland, there has been talk about a slowdown for a little while. We have not seen any significant proof of that, but it might well happen. Our order book in Installation Services in Finland is slightly down compared to last year. But the order book can be quite volatile. So I won't see that as a sure sign of a slowdown yet. And we continue to have good, strong demand in the prefabricated elements business, both in Denmark and Norway. With that, I pass it on to you, Per-Olof.

Yes. Thank you, Martin, and then I move to Slide 7. And as we've said, I mean, this was the best quarter ever we've had in sales. We reached SEK 949 million, and we're up 6%. On a rolling 12 basis, we are now close to SEK 3.3 billion in turnover. And this is, as we said, mainly driven by our legacy bitumen business and SealEco. Following that, we also had a strong result with the best EBITDA quarter. So ever here on a rolling 12 basis, we're up to SEK 427 million and an EBITDA margin of 13.0%. And this basically comes from improved volumes and lower costs on, I would say, most of the lines here. If I then move to Slide 8, and we look at Product & Solution and our -- mainly our legacy bitumen business also had a really good quarter with plus 9% in sales and a very good EBITDA at SEK 148 million. And if I then move forward to Installation Services on Slide 9, where we saw a bit weaker quarter in sales, minus 3%. This comes mainly from market in the rural part of Finland being weaker, but also in the flooring business in Finland that has had a bit of a weaker quarter. In spite of decreasing the sales, profitability was kept up and increased from SEK 23 million to SEK 28 million in the quarter compared to last year. Then moving down to the income statement on Slide 10 here. As we said, we had a good quarter with increased profitability. Margins increased about 3% driven by lower cost into the manufacturing here. Expenses are under control, and as Martin said, partly low due to COVID-19 and the activities that can't be performed. Net finance items improved from minus SEK 12 million last year to minus SEK 2 million this year. And basically explained by negative exchange rate versus last year turning into positive this year. Then moving down to Slide 11 and the balance sheet where, as Martin said, we have a strong balance sheet now. During the quarter, we did renew our financing agreement. And the net debt is currently very low at -- so 1.6 over EBITDA, but also 0.5x over the -- net debt to equity ratio is 0.5. So we did see some increase in annual accounts receivable and inventory in the quarter, which is quite normal due to our seasonality. That is to be expected. I could also just mention that what also helps is we normally distribute the dividend during the second quarter, which has not been done this year. However, the AGM authorized the Board of Directors to distribute a dividend of up to SEK 4.50 per share, up until the next AGM. Then moving down to Slide 12, and the cash flow here is we had a good increase in the cash flow from operating activities, moving from SEK 78 million last year to SEK 114 million this year, of course, helped by the volume and the operating result here, but also from careful monitoring of accounts receivable to hold this down. And we have so far not seen any negative impact on the bad debts following the COVID-19 pandemic here. However, even...

Yes, Per-Olof, sorry to interrupt you. I think there's a small typo in the second graph where '19 and '20 is inverted, I think. We have actually an increase over last year.

Yes. You're -- sorry, sorry about that. You're correct. Okay.

Just to avoid any confusion.

Yes. But you're correct. There is an increase, and the labels are wrong here, unfortunately. Okay. Sorry about that. Okay. Then I hand it back to you, Martin, for Slide 13.

Yes. Thank you very much, Per-Olof. Our financial targets are unchanged. And as you can see, we have ticked all the boxes, basically, in terms of sales growth, profitability and capital structure. And dividend policy obviously has been slightly impacted by the virus situation. And we'll see, we'll hopefully be able to distribute the dividend before the next AGM. And in that case, it would probably be the amount we've mentioned previously, SEK 4.5. Moving on to our last, Page 14. The outlook is unchanged in the sense that we still are not able to give guidance because of the pandemic, and we just basically play it by ear. And as you've seen so far, we haven't seen any significant negative impact. So we -- right now, I would expect in the very short-term to -- business to continue as usual. But things can change very quickly. So we are not in a position to give any more guidance than this. So this is our presentation. Thank you very much for calling in. And now we are looking forward to your questions.

So speakers, we have 2 questions so far. So the first one is from Mr. Kenneth Toll from Carnegie.

Yes. So first, could you talk a little bit on what you're doing to improve profitability in passing year? You said that you're working on it, and there is not much effect yet. But what are you doing a little bit more in practical terms?

Yes. Excellent question, of course. So we obviously operate on several levels. In terms of our sales volume, I would say that we are reasonably satisfied. The issue we have and which we are addressing and working on is the price level. So we have traditionally been very much focused on volumes and making sure we get good dynamic in extending our sales because, obviously, there's a strong underlying positive trend. We've seen customers being very keen to use wood-based solutions and also to use prefabrication to speed up their work on the job site. And we, to some extent, neglected to make sure that our price level reflects the attractiveness of our solution. So that's one very important aspect to bring our sales prices up. In terms of internal cost effectiveness, there's a number of measures we are working on. One of them is to move as much work as possible to Latvia, where we have a better cost position. But the obstacle to that, obviously, is that our Latvian plant is still relatively small, and we need to train people to expand it. But we're very actively doing this with our plan to build a new, much larger facility in Latvia. And this project is going on right now, it's in the planning stage. Third, we have worked on being more active in incentivizing our employees to work efficiently. We didn't have any significant incentive systems previously, and we've put that into place. And we spend a lot of time making sure everybody is on board in terms of being really productive. And that doesn't only go for the plant, where we also use some automation projects, precutting of pieces to make the assembly easier and faster. But it also concerns our design department where we can make a lot of progress in terms of making the design as easy to manufacture as possible. Again, we sort of had a culture, which has a lot of value to adapt as much as possible to the demand of our customers and maybe in some cases neglecting a bit the manufacturing friendliness of the solutions we come up with. So now we are pushing towards taking the manufacturability of what we are designing more into account than we used to. So those are the key areas we're working with.

Okay. Great. Then also on -- I remember last quarter, we talked a lot about the hedging contract for bitumen. And we have seen the oil price go down and then recovering a little bit and then stabilize. So how do you feel that -- I mean are -- do you see that bitumen products in the market or that pricing there has started to come down now where maybe the bitumen prices have been affected by the lower oil price? Or can you talk a little bit about the dynamic in the market and also your hedging over the next 12 months?

Yes. So in terms of the market price, we haven't seen any big changes. So no significant either price increase or decrease at this point. In terms of our hedging policy and the bitumen situation, we've had quite a bit of volatility, I would say, mainly in the first quarter had a little spike downwards, which didn't last very long and now price is coming up again to the level of about $43, $44 for Brent barrel. So I would say, over the 6 months, a reasonably stable situation also compared to last year. In terms of hedging, we hedged to the level which was, of course, above the low point of the first quarter, but which is quite similar to last year's prices, slightly lower than last, but not very far. So the impact on this quarter is a bit tricky because some of that cost goes into inventory, and I won't be able to tell you to the exact in detail what the impact was. But I would say that now, we are moving towards cost situation which corresponds to our hedge, which was -- it's about EUR 50 per barrel. And that will continue quite stable until the end of next first half year.

Okay. And do you -- so that will give you a slight cost disadvantage maybe in coming quarters to compare to some? It might remain...

Yes. That's -- obviously, that's -- yes, yes, that could happen. It all depends obviously where Brent moves over the next 6 months. But I would say, in terms of magnitude, it's not going to be very significant.

Okay. Yes. So yes, I mean, you reported very strong margins here in the second quarter. It was a big surprise for me. But this dynamic didn't have much to do with the strong margins that -- I mean you were hedging and pricing in the market and so on.

Yes. No, I think the biggest effect on our margin was the volume. The volume is this -- obviously very strong at 7% more than last year. And that has had also a significant effect, of course, on the bottom line, plus the cost avoidances we've seen.

Okay. And then, finally, acquisitions. You acquired a minority in one company here in the quarter. But -- and your balance sheet is really strong. Are there opportunities out there? Or are sellers more hesitant when times are uncertain?

No. I wouldn't say that. I think there are absolutely are opportunities, and we have a number of projects going on in the pipeline at the early stage. But the fact is that the process becomes much more cumbersome and much lengthier because there's a lot of restrictions on traveling still and you can't really do due diligence that easily. And in some countries, there is a full stop. We had one project to buy a manufacturer in India, for example, and there's nothing going on there right now. So in the very short term, there are a number of obstacles, but we continue to work on the projects we have.

We have the next question from Mr. Karl Bokvist from ABG Sundal Collier.