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

Welcome to the Nordic Waterproofing Holding Audiocast with Teleconference Q2 2021. Today, I am pleased to present CEO, Martin Ellis; and CFO, Per-Olof Schrewelius. [Operator Instructions] Speakers, please begin.

Thank you very much. Hello, everyone. Thank you very much for participating. I'm happy to report a good second quarter for Nordic Waterproofing. We have exceeded SEK 1 billion in sales for the first time and also increased profitability year-on-year; basically, again, a record quarter. Moving to Page 2. You can see that we have net sales of SEK 1.067 billion against SEK 949 million last year, a 13% increase. 8% of that is organic, 7% from acquisitions and a slight negative currency effect. EBITDA is up 16% year-over-year, and operating profit hit SEK 160 million, 17% up compared to last year. Cash flow is on par with last year. Earnings per share at SEK 4.80 against SEK 4.51. And as we've reported previously, we didn't have any significant pandemic effect. So we got lucky, but we obviously also did a lot generally to protect our employees and customers and suppliers. On Page 3, we have a few comments. Demand remains strong in the roofing business in all our geography, basically. We've had a slight decrease in Installation Services in Finland, where we have had slightly weaker demand than last year, but we are confident in the present level. And we think that we will be able to hold the present level in the coming months. SealEco, synthetic rubber business, had a strong development, double-digit growth. Prefab elements have extremely strong demand and sales, significant double-digit increase. And we also have been able to turn around the profitability of the business significantly. Green infrastructure, we had also slightly reduced sales compared to last year. And as we've reported before, we still see some competitive pricing in the market, some margin compression from that. But also in that business where we see a stable situation, we don't see any further reduction in profitability right now. EBIT, as we mentioned, significantly improved. Volume has contributed to some extent. But especially, operational improvements and cost management have contributed to the EBIT improvements. Moving to Page 4. We've seen continued cost inflation, and we've been able to increase our prices to basically try to set that off. Obviously, if cost inflation accelerates again, which we don't really see right now but we can't include it, then we might have some margin compression in the rest of the year. But again, we don't foresee any dramatic impact of that at this point. There is a general risk, which is increasing right now for some materials not being available, especially some installation materials, which means that job site execution gets slowed down. Obviously, that doesn't impact the underlying demand situation, which we see as positive. But it might be a timing issue and put some projects back until next year. We have, as you know, a strong focus on sustainability, especially in our acquisition strategy. And we've now established a new position, a Chief Sustainability Officer. And Susanne Højholt, who is our group R&D Manager, has taken that position. She is obviously well positioned to look into all the technicalities of what is required in the future on top of the strategic direction. We have continued an active acquisition drive. We have now made 6 acquisitions this year. The latest one are in the prefabricated wood element sector, Seikat in Finland, which we have mentioned in our last report because it happened in April. We have acquired liquid floor coating company in Finland, Voutilainen, to add-on to our existing offer in that field. And we've entered a new area with the acquisition of Ripatti in Finland, which is metallic construction, metal profiling and machining and pre-made eaves systems with integrated fall protection. So we obviously hope to make that a success and maybe expand it to other countries as and when we feel it's the right time. Moving to Page 5. Market demand is at a high level, but we see it as stable right now. So that's the flat roofing market in the Nordics. Finland has been a bit slower than the other countries, but we don't really see a drop from the present level. We see actually a good stability from where we are right now. We see continued very strong demand in the prefab facade and roof elements business in the countries we serve, Denmark, Norway and Finland. And we also see good demand continuing in green infrastructure with the price pressure we've mentioned before. I pass it on to you, Palle, for some more details on the financial performance.

Yes. Thank you, Martin. Then we're moving to Slide 6. And there, we can see the -- as we stated in the headline here that for the first time in the quarter, we exceeded SEK 1 billion in turnover at SEK 1.067 billion, up 13% from last year -- corresponding quarter last year. On a rolling 12 basis, we are now at SEK 3.455 billion, so slowly approaching the SEK 3.5 billion on a 12-month basis. Organically, we were up 8% with a good activity in the roofing in general, I mean, particularly in SealEco and prefabricated wooden elements as we have structural effects from acquisitions with 7% and currency had a negative impact of minus 3%. Our EBITDA increased to SEK 192 million in the quarter compared to SEK 166 million a year ago. EBITDA margin was 18.0%, nothing else, compared to 17.4% last year and on a rolling 12 basis is 14.4%. Again, the increase in EBITDA is mainly explained by growth, good cost management and, in particular, the profit improvements in the prefabricated elements. And as stated before, we really don't see any material impacts from COVID-19 pandemic in our numbers. Then I move to Slide 7, where we see the Products & Solutions that had also a record quarter with SEK 850 million in turnover, up 13% versus last year, where organic growth was 12% and acquisitions contributed with 3%. Basically, we see a strong development on all markets, as you can see in the bullet points here. EBITDA increased to SEK 190 million compared to SEK 148 million last year. And the EBITDA margin in the quarter was 22.3% and then -- and compared to last year, 19.7%. On a rolling 12 basis, we are at 17.8% on EBITDA, again, explained by good growth, good cost management and the profit improvement in prefabricated elements. Then moving to Slide 8 on the Installation Services, where we came in on SEK 246 million in the quarter in net sales compared to SEK 228 million last year, an increase of 8%, where the organic development was minus 6%, mainly then caused by the lower demand from the market in Finland. Impact from acquisitions was plus 18%, and currency effects were negative with minus 4%. EBITDA decreased somewhat to SEK 17 million and partly because of the weaker market in Finland but also a lower profit from the Danish associated companies. There was also some recent acquisitions contributing with a lower result as well. The EBITDA margin in the quarter was 7%, and on a rolling 12 basis, we are at 8.0% in this area. Moving then down to Slide 9, looking at the income statement. I think you've seen the numbers here, but the gross margin for the quarter exceeded 30%, at 30.6% compared to 29.7% same quarter last year. EBITDA margin slightly was up 0.6 percentage point to 18.0. The acquisition-related amortization has gone up naturally since we've done some acquisitions, so for this year SEK 9 million compared to SEK 5 million a year ago. Moving then to Slide 10 and looking at the balance sheet here. We can generally just say that we continue to have a strong balance sheet in spite of having distributed SEK 239 million during the second quarter and having done and paid for 5 acquisitions so far this year until our numbers. We are above the long-term threshold for ROCE of 13% mainly due to the strong operating profit we have in the last 12 months. Our interest-bearing net debt here was at SEK 662 million. So yes, we continue to have a strong good cash position. Moving to Slide 11. You can see that our cash flow from operating activities on a rolling 12 basis for the last 3 years now are up at SEK 461 million. We have good cash conversion at 92% compared to 76% and 75% for the 2 previous years. And our cash flow from operating activities in the second quarter were actually exactly the same as a year ago, SEK 114 million. Then moving over to Slide 12, and back to you, Martin.

Yes. Thank you very much, Palle. So that's our key financial targets. They haven't changed. And basically, we've ticked all the boxes in terms of sales growth, profitability and the capital structure of the balance sheet. So we still have a lot of firepower in terms of being able to make acquisitions in the rest of the year. And we maintain our policy of focusing on sustainable construction solutions and also on discipline in terms of what multiples we are prepared to pay. So that is our presentation. And we very much look forward to your questions.

[Operator Instructions] Our first question comes from the line of Erik Cassel at ABG Sundal Collier.

So first off, obviously, it's another terrific quarter for Products & Solutions. As you mentioned that prefab elements had a significant turnaround, so I'm wondering what this turnaround means in terms of margin improvement for the segment as a whole in relation to last year.

Yes. I would say -- and then Palle, please supplement. But the big picture there is that it explains a significant part of the improvement but not all of it. So the other businesses have also contributed significantly to the overall margin improvement.

So you're seeing an improvement in the bitumen-based products as well?

Correct.

Okay. Perfect. And then also on the prefab order books for 2021, as you say. Does the orders in here support this sort of margins going forward as well, considering increases in raw materials with lumber increasing a lot, obviously? And then also, are you seeing good momentum in order intake for 2022, I guess?

Yes. First of all, the lumber price picture, that's obviously a big factor. And the increased price level will remain with us for a while, obviously, in the second half. But we have also seen that lumber prices in the U.S. have dropped sharply and basically are back to where they were a year ago. So we would expect some price decreases also in outsourcing. In terms of the order perspective, we continue to have a good order intake level at the moment also.

Okay. But no reason for seeing a margin downtick in the prefab business in H2?

Not as far as we can see. Where we've had some -- maybe some exceptionally profitable orders in the first half. So those won't necessarily come back. But it's not a huge part of our P&L. So yes, we could see pretty stable profitability going forward.

Okay. Perfect. And then also on margins. Are there any short-term effects relating to sort of the dynamics of input cost increases in relation to your price increases? And would you be able to quantify that in any way, if that's the case?

I think we see right now a stable situation. So we don't see any additional acceleration at this point, but we can't exclude it. The picture has been quite volatile obviously in the last 12 months. And we also have a slight effect potentially from bitumen, where we have had a hedge for the first 6 months, which is now over. And if there was a significant rise in bitumen prices, obviously, that would contribute to margin compression. We don't see that at this time. As you know, oil has actually come down in the last days but there might be inversion again in the future. So that's one element, where there could be some volatility but also positive volatility as far as we're concerned.

Okay. Perfect. And then you talked about raw material shortages, which may slow down activity and push demand out in time. But is this something that you've already seen now in the first week of Q3? Or is it just a risk you're seeing?

I think we've seen very few instances. There have been instances, and they are mainly linked to stonewall installation material. So it's more risk right now but certainly something which could gain a bit of momentum in the second half. But also, I can add that, internally, we haven't seen any supply issues where our input material would not have been supplied. Again, it's something which we can't exclude in the second half, but we haven't seen it so far.

Okay. Very good. And then I'd like to ask about the organic growth. Obviously, very strong at 8% with the tough comps you have. But could you shed some light on the mix between price and volume components that goes into this number?

Yes. I think without giving a precise figure, but obviously, price increases have been a significant part of it. So yes, it's difficult to give a precise number. But let's say, the 2 components, volume and price have played a significant role.

Okay. And then last question from my end. So Finland continues to be sort of a weak spot in an otherwise strong Nordic market. But would you say this is due to a weak overall market in Finland? Or are you losing market shares in any way?

No. It's clearly the general picture, and it's not really a weak market, let's say, because historically we're still at pretty good levels. It's just by comparison with the other countries who have been very strong. And I would say in Finland, we probably haven't gained any market share recently, whereas clearly in Sweden, Denmark and Norway, basically 3 other big countries where we do believe we've gained market share.

Our next question comes from the line of Kenneth Toll of Carnegie.

So yes, a lot of good questions have been answered, but one question. You warned a little bit in the report that if raw material prices continued to increase, there might be some pressure on margins in the second half. But is there anything that points to that it will be harder to raise your own prices in the second half than what it was in the first half? Are there anything in sort of contracts or anything that makes that harder?

Yes. That's an excellent question. And I would say, short answer is no. I mean there's no reason why we shouldn't be able ultimately to pass on any input cost inflation. It's just a situation where our prices have increased significantly already. And you might take the wallet at some point in terms of what our customers are willing to accept. But right now, specifically, there is no such phenomenon. Basically, our customers continue to be mostly interested in whether we can deliver or not. And the fact that we can deliver obviously is a big plus in their eyes. So it's a bit of a theoretical caution, which we have that In theory, there might be -- somewhere out there, there might be a point where we might not be able to pass on everything we suffer ourselves. But there's no concrete sign for that at this point in time.

Okay. Yes. Some of the companies that have reported have also complained a lot about logistics cost and challenges. I guess that a lot of that comes from shipment of products from Asia and such things that you are not really exposed to. But do you also see higher logistics costs and harder to get availability for logistics, capacity and so on. And how are you handling that?

Answer, yes, absolutely. We've seen that, and it's something which might again increase also in the next coming 6 months. We have experienced that. Obviously, it has increased our cost basis. And we have been able to get the supply we need in terms of the quantities we require from alternative suppliers. So in one example -- SBS, for example, we have basically 4 suppliers, and one of them has stopped deliveries. So we've seen the fact that there are some availability issues. But we have to -- have been lucky enough to be able to supply those quantities from the 3 other suppliers. So that sort of thing has happened and probably will continue to happen for some time.

Okay. Yes. It's probably what happens if you have a strong business cycle.

Exactly. I mean overall, you can say, obviously, it's a good problem to have. But in the short time, obviously, it poses challenge -- significant challenges.

Yes. Then I was wondering, on the Veg Tech side, where you, as you said -- I mean you've talked about some more competitive pressure and also that you're trying to improve and change the business a bit. But I'm thinking that it's also quite a seasonal business. I mean you need to grow what you sell and you do that in the season. So how much can you change in the very short term? What I'm after is a little bit that maybe we have to wait until next year before we see some kind of improvements there.

Yes. I think most of our issues are really price level related. So we've been exposed to more aggressive competition from that point of view. And that's something which we expect to continue, basically. But we're just optimizing our internal organization and our cost structure and also trying to do additional marketing work to make our products more attractive for customers so that we might ultimately, again, get a price premium, which we used to have within Veg Tech. So in terms of the quantities, where -- there's no major concern. And as you say, it's really the capacity constraint we have. That's the main driver for our sales volumes.

Okay. And then I'm wondering, you've finalized 6 acquisitions this year. That is really a lot. So how do you take care of them and sort of make sure that they find a new home within your company and -- yes, so that's something doesn't go wrong or anything. How do you integrate those?

Yes. I think -- we haven't made any change in our model in the sense that it's very decentralized and local business unit managers basically take on these companies on top of what they've done. And we have been, so far, able to do that because our management potential is quite significant. So we have people who have a lot of experience in the industry and who can easily grow without getting overstretched. But also, as you know, we haven't had all these success stories in that respect, and we've had a number of challenges. We have a challenge right now with the contract -- the roofing contract that we acquired in Norway, which explains part of the reduction in profitability we've seen in the first half. But I would say, on the plus side, we also have a number of successful turnaround stories. We had the Norwegian business, which was not doing that well 2 to 3 years ago, which we've turned around very successfully now. We've had the Finnish installation business, which historically has had very low profitability, which we've increased quite nicely over the last 2 years. And we have the prefab elements, where we also are in the process of a good turnaround, which we've seen results this quarter and the first quarter also. So obviously, there are challenges when you make an acquisition. You have to cope with, sometimes, key people leaving the company for some reason and getting to know the business model and optimizing it. But historically, as I said, we've been able to so far cope with these challenges.

Our next question comes from [ Bobby Sash ], individual analyst.

Congrats on a great quarter. First, can you comment on the acquisition pipeline? You did make a lot of acquisitions recently. Does it look as strong going forward for the next couple of quarters? Or we would be quieter most likely on the acquisition front?

Yes. I think right now, the pipeline is not huge, so it might well become a bit quieter in the second half. But in terms of what we're looking for, we are active looking for targets. But I would probably expect a slightly quiet second half.

Okay. As for the size of the acquisitions that you did recently, would you say that they are on the lower end of your target size? And if you could elaborate a little bit more on the culture aspect and the sustainability of the -- where you do acquisitions? So can you go to like 50 or 60 units? Do you see, at some point, hitting a ceiling in terms of scalability of doing these perhaps smaller acquisitions? And conversely, are you looking at some bigger items, looking at some bigger acquisition targets going forward?

Yes. Thank you very much. No, I think in terms of size, where we're talking about the usual type of target, the reasons being that we get better multiples and it's somewhat easier to integrate this acquisition, especially if something goes slightly wrong. So I don't see a big change there. The bigger targets are obviously fewer. And when they come along, obviously, we'll look at them. But they tend to have slightly higher multiples, too. So I think from a size perspective, we want to do more the same. In terms of what we are able to digest, I think we are still in a comfort zone. Clearly, we think we can successfully digest what we require and continue at a similar rhythm in the future.

Okay. And switching gears a little bit, if you can make a big picture comment. You've been easily beating your growth target, which is rather conservative. So you've been growing in a much more exciting manner during the last 5 years. I know you're beating your targets, and I'm not looking for guidance. But could you please comment what would make you happy 3 or 5 years down the road in terms of growth personally? What would be the personal ambitions that would make you happy, just on a personal level?

Yes. Yes. Yes. I think what we've seen since the IPO, which is exactly 5 years now, is we've doubled the sales, basically. And we would certainly want to do that again in the next 5 years, which means that obviously in absolute figures, would be a much bigger increase. And I think that would be reasonably satisfactory level.

And as there are no further questions from the phones at this time, I'll hand back to our speakers for the closing comments.

Okay. Thank you all very much for calling in. It's a pleasure. And also, thank you very much for very interesting questions, and look forward to see you again in 3 months.