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

Welcome to the Nordic Waterproofing Holding Audio Cast for Teleconference Q3 2021. And today, I am pleased to present the CEO, Martin Ellis; and CFO, Per-Olof Schrewelius. [Operator Instructions] Speakers, please begin.

Okay. Thank you very much. A very warm welcome to all of you. Thanks for participating. So it's a pleasure to present Q3 result. You might have seen already, we have a stable return, stable profitability in spite of pretty strong headwinds from input price inflation and also job site delays where on job sites some components are missing like insulation material or metal parts, et cetera. And that's been going on now for a few weeks or month, I would say. And it's still continuing at the time now, so it's difficult to predict when this situation is going to end potentially. So that's the general situation. I'm moving to Page 2 of our presentation. Sales have increased 10% over last year. And basically, all of that is from acquisitions. In the organic growth, we also have a significant component of 5% of sales price increases, which we've carried through to absorb the cost inflation. So organic volume growth is actually slightly negative compared to last year. Then again, last year was a strong quarter. EBITDA increased to SEK 176 million, up 7%. Operating profit up 5%. Cash flow from operating activity was significantly lower than in the last year's third quarter. We'll go into some detail on that. But the short situation there is that last year's quarter was exceptionally strong, and this year's quarter is exceptionally weak because of working capital moves, which are due, again, linked to job site delays where we have built the inventory of finished products, which customers haven't been able to receive. That is especially the case in our Prefab Elements business, but also a conscious buildup of raw material inventory in our legacy business where we want to avoid that any shortage of raw materials would prevent us from producing normally. So we we've built up a safety inventory in that respect. Earnings per share of SEK 3.56 versus SEK 4.07 last year. Moving on to Page 3. Underlying demand remains strong. And obviously, it's important to emphasize that. This is the case for basically all of our segments. Installation Services has temporarily decreased because of this job site component shortage issues, but we don't see any drop-off in the underlying demand. So we're quite optimistic that demand levels will remain at relatively high levels we've seen over the last 2 years. SealEco had sales on par with last year with the exception of Distripond, which is the business we acquired in Belgium a couple of years ago, where you see the picture on the right. And there, we received material from a U.S. supplier who has a shortage of availability. So that has kept our Distripond business a bit below previous figures. In Prefab Elements, Denmark, Norway, we had a strong increase in sales and also an improvement of our EBIT due to the profit improvement program, which we launched 2 years ago. In green infrastructure, Veg Tech and Urban Green in Sweden mainly, we had reduced sales. And that is mainly part to -- due to competitive pressure from low-priced competition. Again, the underlying growth we see as confirmed. So we think we're going to take back market share there. And we believe also we'll improve our volume in sales in the future. So we've had an impact, but we remain confident we're going to successfully fight back there. The EBITDA in the quarter was ahead of last year by about SEK 12 million, and the EBITDA margin remains at a very solid level. Moving on to Page 4. We have a bit of an analysis of where our operating result improvement comes from, and it's basically coming all from the Prefab Element turnaround. We've had as well as margin compression in the Products & Solutions segment. Basically, we think we will ultimately catch up with the impact of the raw material price effect, but it takes time. And the raw material price inflation is still going on, so we'll still see price increases in some categories of what we buy. In the Installation Service segment, we believe that the margin compression could remain there for a bit of a longer time. Installation Services is a market where competition sometime goes to aggressive pricing more than in our product and service (sic) [ Products & Solutions ] business. And we believe that this business, obviously, is pressured by the input inflation very significantly. And we believe that we might see another 6 to 12 months of that situation going on. So as we said, negative impact on both business segments with some light at the end of the tunnel, almost slightly different between the manufacturing cost and steel, the Installation Services part. We have, as you've probably noted, continued our acquisition drive. We acquired a company in Finland during the quarter, which makes metal profiling for the roof applications. We're very happy about that. And we continue to have a certain amount of targets, which really we try to finalize in our pattern. Page 5 basically recalls what I said. We expect demand to remain -- underlying demand to remain stable at the high level. And we continue to see a strong growth in Prefab Elements throughout [indiscernible] same goes for green infrastructure. With that, I pass it on to you, Palle, for some more details on the figures.

Sorry. Thank you very much, Martin. Yes, if I then start with the net sales here, that exceeds another quarter where we've been SEK 1 billion, now, as I said, up 10% with an organic growth of 1%. And as mentioned, we have a positive price increase and maybe 4% to 5%. So the volume growth is actually negative underlying. We also have acquisitions having contributed to 9% and a slight negative currency impact. EBITDA increased up to SEK 176 million compared to SEK 164 million a year ago. And operating profit as well improved to SEK 140 million over SEK 133 million. EBITDA margin decreased slightly in the quarter then to 17.5%, still on a good level. And on a rolling 12 basis, we're at 14.4% EBITDA. Mainly EBITDA is being kept up by good cost management and, as mentioned, the property improvement we have seen in the Prefabricated Elements business. When we look into the Products & Solutions area, where sales is up at SEK 746 million, up 7% over last year, with an organic growth of 4% and acquisitions contributing with 4%. We see development in Finland, mainly driven by acquisitions at 24%. The Denmark continues with a strong development at 8%, particularly good in the prefabricated wooden elements. And Sweden, the best development in the quarter organically with 20% up. Norway, organically, basically flat. And other Europe where we had a minus 1% development. Again, looking at EBITDA in Products & Solution, we see an increase up to SEK 155 million from SEK 145 million a year ago and operating profit up to SEK 128 million. EBITDA margin remained stable at a good level at 20.8% here. On a rolling 12, 17.8%. As you can see in the graph to the right being historically for the most recent years at a very good level. Moving on to Installation and Services on Slide 8 then, where we can see that net sales of SEK 281 million in the quarter compared to SEK 249 million last year, an increase to 13%, driven by acquisitions being 23% up, whereas organic development is minus 8% compared to last year. The decrease mainly caused by delays on job site due component shortages and also that we kept a disciplined approach towards not accepting lower-margin business. EBITDA decreased to SEK 28 million compared to SEK 38 million a year ago. And operating profit decreased to SEK 20 million versus SEK 34 million. The EBITDA margin in the quarter went below 10% at 9.7% compared to 15.3% a year ago. On a rolling 12 basis, we're now at 6.5%. We could also say that we've seen the decrease in EBITDA -- I mean, in our Finnish operations due to delays on job sites, but we also see slightly lower profit from our share in the Danish associated companies. Then if I look at the income statement, as we said, sales in the quarter above SEK 1 billion. But also worth noting that on the latest rolling 12 now, we have -- we're about SEK 3.5 billion. So I'm on Slide 9. Gross margin for the quarter was 29.8%, just below 30%, slightly below last year. I think expenses, we can just say managed in a good way. And EBITDA remains on a good level at 17.5%. Here, it's just also worth noting that we have a negative development of the financial items, and that is explained by updates on earn-outs and valuations for the options to buy outstanding shares in not wholly-owned subsidiaries currently. Since this is based on as a multiple of EBITDA, you could, in some way, say that it's positive that these companies grow very well. If I then move to Slide 10 and the balance sheet, the total assets increased a bit more than SEK 200 million compared to last year, driven by the acquisitions we have done. Our ROCE continues to be on a good level at 17.1%, well above our threshold of 13%. And we continue to have a strong balance sheet with a net debt-to-EBITDA ratio at 1.5. And then if I move to Slide 11 and our cash flow where we can say that compared to a very strong third quarter last year, we are at SEK 101 million in cash flow from operating activities this quarter versus SEK 250 million last year. And the main difference here is the cash flow from -- or changes in operating capital where we, last year, had very good development on all parameters. And this year, we can see, as Martin mentioned before, we have increased our inventories. And also, the delays in job sites caused some increase in inventories. And with that, I'll move to Slide 12 and back to you, Martin.

Yes. Thank you very much, Palle. So just a very quick reminder of our financial targets, and you can see that we obviously tick all the boxes here. So now we are looking forward to your questions, please.

[Operator Instructions] Our first question comes from the line of Max Bacco from ABG.

Yes. Martin and Olof, a few questions from me. I think you mentioned on this in the beginning. But the situation in Finland with delays and job site execution due to component shortage, how has the situation developed as of recently?

Yes. So I think that there is no big change compared to what we've seen over the last 6 months, basically. So we have some shortages. It does delay jobs. And obviously, it's very difficult to predict when that's going to start. I mean the wild guess would be maybe another 6 months of this sort of situation, but very difficult to put a number there. And again, I think you understand that the underlying demand is not coming down. And maybe you could say that compared to our business 3 months ago regarding the Finnish demand picture, we are maybe slightly more optimistic on the underlying demand.

Okay. Perfect. And the next one, you explained in the report that you have experienced dramatic increases input prices and that the segment Products & Solutions, you are in the process of absorbing this for a serial of sales price increases like with a time lag of several weeks. So the question then is when price increases catches up on cost deflation, what will be the impact on margins would you say?

Yes. So I think there will be a historically good margin level because we are historically at a really high level, which is driven by demand basically being strong. Then there's a bit of a game, obviously, where customers right now, except the price increases relatively easily because their main concern is the availability of the material to be able to do their work on the job site. And when eventually the risk of shortage of material goes away, then customers might focus again a bit more on the price level. So we could see sort of the optimal situation where once we're able to deliver, we might have a bit of a hit to our top line again with customers becoming more price conscious. But I think we don't have -- as I said, we are on a historically high level. We basically see that continuing even after there's a better balance between cost prices and sales prices.

Okay. And the last one, you mentioned that you have successfully turned around the Prefabricated Element business. And just trying to understand here how much has that contributed to the margin. If you look at 2019 and compared to 2019, if Prefabricated Elements would have been on the same level as now, how much higher would the margin for the group has been?

Yes. I think -- I mean we don't go into sort of the detailed description of our profitability there. But basically, all of the improvements we've seen in EBIT versus last quarter can be attributed to Prefab Element and slightly more. So I hope that gives a good enough picture on how much we can improve there.

Our next question comes from the line of Sofia Sörling from Carnegie.

And let's start the organic growth for Products & Solutions was mainly driven by price increases. Would you say the price increase affected sales volumes or demand negatively during the quarter? And second my question is, you touched upon this earlier, but could you comment something on the net effect of fleet cost increases and price increases, these will be more negative in Q4 compared to Q3.

Yes. I had a bit of a bad reception. Palle, did you get the questions and can answer them?

Sorry, the first -- could you please repeat them again? Sorry, because I also -- you broke up on an instant there.

Yes. Sure, of course. So this organic growth in the Products & Solutions division, was that -- and that was mainly driven by price increases. But would you say that, that has affected the demand during this quarter in sales volumes negatively, only driven by price increases? And also the net effect of cost increases and price increases, would that be the same in Q4 as in Q3? Would you say it's more positive in Q4?

Yes. And maybe I'll answer the second question first. Obviously, it's not so easy to predict, but the key driver is cost inflation. So if we have a cost inflation acceleration again in Q4, which we can't exclude, then, obviously, we will still have this margin compression because it takes some time to pass it on to customers. If price inflation stops, then obviously, we might catch up most of the gap with continued sales price increases, which we've announced, for example, 1st of October. The first question, I'm not totally sure I got it. But let me just say that the increase in sales value has been entirely due to price increases, even a bit more. So we do have a slight negative volume effect. Does that answer your question?

Yes. And next question is regarding your acquisitions. You have done 7 acquisitions year-to-date. Is there something that we can expect will continue as more of a normal level of a number of acquisitions? I think 2017, you have acquired around 14 companies, so it's quite accelerating during this fiscal year.

Yes. Yes. Obviously, that's difficult to predict. But I think it's -- we can say the drive remains there. The number of acquisitions depends also on the size. If we make a significantly big acquisition, obviously, that might have reducing effect on the number. But I think we basically continue. This year, we probably got a bit lucky in terms of the number of acquisitions. But we will certainly continue our drive. And we do have a pipeline of deals that might happen in the future.

Okay. And for Products & Solutions division in Sweden was much stronger than the other Nordic countries, and could you give us any flavor on the why is that? And is it more because of the underlying market? Or is it the different thing you're offering in each market would you say?

Yes. I think it's quite clearly a gain of market share, which -- where we have been particularly successful in Sweden versus the other countries. Underlying demand was strong, but so it is in the other countries.

Okay. And can you also give us some outlook on this green urban environment businesses -- I should say, Veg Tech and Urban Green. And they hold roughly altogether more of a modest part of total sales at the moment. But what can we expect? What is your outlook in, for example, 5 years, 10 years?

Yes. I think we will continue to see some organic growth there. We certainly want to take market share. But again, we lost some market share because of aggressive price competition. And we obviously plan to take that back, and that's the focus right now. So once we've succeeded in doing that, we'll look again more aggressively into geographic expansion in that business. And obviously, Northern Europe is a large market, and there might be opportunities there.

[Operator Instructions] We currently have no further audio questions. I hand back to the speakers for any further questions from other sources.

No questions on the web either. So if there are no further questions, I think we can round this off, Martin.

Yes. Okay. Well, thank you all very much for participating, and we very much look forward to seeing you in 3 months' time again at the latest. Thank you all very much. Bye-bye.