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

Welcome to the Nordic Waterproofing Holding Audiocast and Teleconference Q1 2022. Today, I am pleased to present CEO Martin Ellis and CFO Per-Olof Schrewelius. [Operator Instructions] Speakers, please begin.

Okay, thank you very much. Welcome all to our call. Thanks for participating. Sorry about the glitch. We are ready to start now. So to sum it up. We have had a strong start in the first quarter of this year, but given the geopolitical situation and the very strong inflation we are all seeing, obviously we can't rule out some disturbances throughout the rest of the year. That could take both the shape of some raw material supply chain issues. And it can also take the shape of maybe, further down the road, if inflation continues at a very strong pace to some degree of demand destruction because construction obviously has become much more expensive than it used to be, but there is no immediate signs of this, as we have seen in the quarter. And also, in the short term, we don't see anything of that materializing, but this certainly is a risk out there. Moving on to Page 2, I would like to present our financial performance in the quarter. And sales are up 30% versus last year. 19% is organic growth, so whereof 13% is price increases to reflect our input cost inflation. 6% of the increase comes from acquisitions, and 4% from the SEK currency effects. EBITDA increased 81%, compared to last year, to SEK 91 million. EBIT increased 151% to reach SEK 56 million in the quarter. And cash flow from operating activities was almost balanced, minus SEK 15 million versus minus SEK 88 million last year. And earnings per share are up significantly, of course, at SEK 1.60 per share. Next page, a few comments. Demand, as I mentioned, remains solid. It's historically a relatively high level. And it's stable in the roofing business and in terms of our product sales in all markets basically throughout our geography. In Installation Services, we had a slight decrease. And that is primary attributable to a late spring in Finland compared to the year before, but we continue to have strong order books there. The bitumen-based and the synthetic rubber business showed double-digit growth in the quarter. Prefab elements had a single-digit increase in sales compared to last year, with a strong development in the Danish market. And there are still some COVID-related difficulties in Norway. Our green infrastructure business showed strong positive organic growth in a seasonally relatively small quarter, but again we are confident in the future development of the business given the order books we see. And in Installation Services, we had an organic decrease by 6% mainly weather related. Moving on to the next page, Page 4. We've mentioned the dramatic input cost inflation. It has had obviously a strong effect on both business segments. In products and service -- and solutions, sorry, we have been able to absorb this through a series of sales price increases. In Installation Services, we have also increased our sales prices, but it takes a bit more time. And we still have, [ historic standards, a bit of a ] margin compression in the quarter, but obviously we are continuing to work on catching up. We have continued our acquisition drive. Last year, we had seen 7 acquisitions. And in the quarter, we acquired the U.K. company Gordon Low, which is a leading specialist fabricator and distributor of pond liners and other waterproofing membranes, predominantly EPDM, the synthetic rubber we are producing in Sweden. We also acquired the remaining 33% of the Dutch subsidiary of SealEco synthetic rubber business in line with the initial agreement from 2017. Moving on to the geopolitical situation. The Russian war on Ukraine has had an extremely limited impact on us. Fortunately, we have no subsidiaries or employees in either country. The sales exposure to the area last year was minimal. And we have stopped exporting to the countries. We have discontinued any raw material supplied from Russia. We do expect an acceleration of input cost inflation because of the effects on the oil prices and energy prices. And as I mentioned before, there might ultimately be some softening of demand because of this very strong inflationary effect. We also cannot rule out mid-term impacts on our supply chain. We obviously are very actively looking for solutions, but some of the materials we are using used to be sourced out of Russia. And we are working to make sure that we can substitute them in time. We also continue to have relatively high inventory to make sure that our capability to deliver to our customers is not impaired because of the supply chain issues. We also have supported refugees from Ukraine, and both our employees and the company have made donations. Moving on to Page 6. We see stable demand at high levels. And this is true basically for all of our business segments; and especially obviously for the sustainable solutions, the wood-based prefabricated facade and roof elements and the green infrastructure. The acquisition of Gordon Low, on the next page, a few more items here. Basically what we've done here is again a vertical integration. So Gordon Low used to buy material from us. And we have now the capabilities to get closer [ to the end use ] of our products through this acquisition. They also provide alternative materials butyl and PVC in the U.K. to their customers. What we also would like to do is to implement the pond concept we entered into in Belgium through the acquisition of Distri Pond 2.5 years ago and the acquisition of Gauris in Holland. So Gordon Low, we see as a good platform to copy-paste that business into the U.K., where we also believe there is significant demand for this type of solution. Moving on to Page 8, I pass this on to you, Palle, for some additional information on the financials.

Yes, thank you, Martin. Then we first start with the net sales, as we said, SEK 912 million in the quarter, up 30% from SEK 704 million last year; organic growth of 19%, whereof, price increases, 13%. Acquisitions contributed with 6%, and currency impact 4%. So on a rolling 12 basis, the net sales is now approaching SEK 3.9 billion here. EBITDA increased to SEK 91 million in the quarter from SEK 50 million last year. And operating profit, at SEK 56 million compared to SEK 22 million. The EBITDA margin is at 10% in the quarter compared to 7.1%. And on a rolling 12 basis, we're at 14.4%. And basically the increase in EBITDA explained by the positive development in Products & Solutions, where we've taken a proactive approach to the cost inflation. And from Installation Services, the EBITDA was unchanged. It's also maybe worth noting that actually we had a higher sales in Q1 than we had in Q4 last year for the first time. Normally Q1 is a seasonally weak quarter for us. Moving on to Page 9 and looking at the table of income statement here. We can see that the gross margin for the quarter was basically unchanged from last year, 26%. And on a rolling 12 basis, we have 28.3%. EBIT margin, 6.1% in the quarter, up from 3.1% last year. And on a rolling 12 basis, we're at 10.7%. The net financial items is a fairly low negative value. And our tax increases compared to last year, which is in line with the result. Looking at the balance sheet table on Page 10. We have a net debt-EBITDA ratio on a strong 1.5x compared to 1.1x a year ago. This is in spite of a quarter where [ we see suddenly we have ] a weaker cash flow [ on ]. Interest-bearing net debt, that's SEK 762 million compared to SEK 677 million here. We still have a solid cash position and a balance sheet here, but as you can see, the current assets here has increased due to increased volumes, increased inflation and that we keep inventory to secure our capabilities to deliver. Moving to Slide 11, we can see that ROCE are at an all-time high 17.9%, up 2 percentage points compared to a year ago, driven by the improved operating result. And we also see an increase in capital employed which is due to increased activities and also that we've done several acquisitions here in the last year. Our cash flow from operations on a rolling 12 basis, yes, is lower than a year ago at SEK 292 million compared to SEK 460 million. And then the cash conversion, that's 52% against the strong 97% a year ago. And we have communicated this several times, but we have a decreased cash flow and partly due to accounts receivable because of the increased sales but mainly as well increased inventory to secure our raw material availability and a higher finished goods level to [ ensure ] that we can, I mean, deliver to our customers. Looking at the segment on -- starting with Products & Solutions on Slide 12 here. We had an increase of 37% of sales in the quarter, SEK 773 million versus SEK 563 million and -- a year ago; organic growth 30%, where price increase is 13%. Acquisitions contributed with 4%, and currency another 4%, in the quarter. And as you can see, we basically have a strong growth on all markets, in the table here. It's also worth noting that net sales for the first time in Products & Solutions is about SEK 3 billion on a rolling 12 basis. Good development on EBITDA, SEK 111 million versus SEK 72 million a year ago; and as well on operating profit, the EBIT at SEK 83 million versus SEK 49 million. So EBITDA margin increased to 14.3% in the quarter, and for the latest 12 months, we have 18.4%. Again I will say the good development is driven by having managed the cost inflation in a good and proactive way. Then moving to Installation Services and Slide 13 here. We had net sales of SEK 171 million versus SEK 152 million a year ago, [ increasing ] 12%. [ We had ] organic development minus 6%, where we see a price impact of plus 11%. So the volume development is negative here, caused by a later arrival of spring in Finland. We have a positive impact from acquisitions of 14% and another 4% from currency but because it's a seasonally weak quarter for us. And -- but the EBITDA improved from minus SEK 11 million to minus SEK 7 million. And operating profit, we can say, is basically unchanged in the quarter here, but we saw an EBITDA margin increase in the quarter here, compared to previous year, to minus 4.2% versus minus 7.4%. Then moving to Slide 14 and passing it back to you, Martin.

Yes, thank you very much, Palle. So here we just summarize our -- I would say, our performance standards. And we tick all the boxes. Obviously we have good sales growth, good profitability significantly above the 13% threshold we've defined for ROCE. Capital structure, also solid. And as you know, we'll propose a dividend of SEK 6 to the general assembly in 2 days time. And that makes it a distribution which is in line which is [ about 50-plus ] percent of net income. So now that is our presentation and we very much look forward to your questions.

[Operator Instructions] And we have our first question from Max Bacco from ABG Sundal Collier.

Yes. Can you hear me?

Yes, perfectly.

Yes.

Perfect. Martin and Palle and -- congratulations on the very strong report.

Thank you.

So a few questions for me. First off: I mean, except from Finland, the weather conditions was better this quarter than Q1 2021. Do you have a guess on how much that helped the improved sales year-over-year?

Yes. I think it's difficult to quantify. You have an excellent point. And we believe there was a bit of a tailwind from that side. We haven't obviously been able to quantify it, but I think that the -- well, like we said, the underlying demand remained strong. So I would say it helped in the quarter, but even without it, I think we would have had a reasonable good level of activity.

Okay, fair enough. And as [ you've note ] in your report and said during the presentation, it's likely with additional cost inflation going forward due to the Russian invasion of Ukraine. Do you feel comfortable with [ rising ] prices to customers further than you already have?

Yes. I think, in the short term, we don't see a problem there. As I mentioned, in the medium and long term, it looks like there very well could be some demand disruption down the road, but it's too early to quantify it or to confirm that.

Yes. And is -- have your competitors increased their prices to the same extent that you have?

Yes, yes, to a similar extent, yes.

Yes, okay. And as we spoke about, in conjunction with the Q4 report, regarding the installation service business, the guidance -- or your best guess regarding the full year margin was somewhere around 3% to 4% on EBIT, yes. And following this report and the Q1 being closed, do you still see this as a good level to aim for, 3% to 4% on EBIT margin?

Yes. I will say it's not exactly a forecast. It's maybe a bit more of a target, but we -- yes, we still have the possibility to reach it if things go well, but we are not sort of promising that we are going to hit that level.

Yes, yes, [ fair enough ].

So -- and maybe to give some color. We have a quite good situation in Finland sort of gradually restoring our margins and gradually absorbing the input inflation, but we still have a bit of a special situation in Norway where we have a company which we acquired 1.5 years ago where we had initial difficulties. And we are working with those. And we are confident we are going to improve the situation, but it has been a negative impact also in the first quarter.

Yes, yes, that's [ clear ]. And as we said as well, it's you cannot rule out a decline in the new build and renovation market going ahead, but would you expect this to be, I mean, visible in the numbers in this year already? Or is it more tilted towards next year, 2023?

Yes, it's a difficult call. I would probably opt for the latter. I think that the impacts this year should be quite reduced, but yes, we are probably talking more about '23.

And 2 more short questions. If you can just remind us, how much of sales in the Products & Solutions segment is towards commercial properties versus residential properties? If you have a number on that.

Yes, not really. I think it's -- yes, no. We have sort of a general feel, but commercial is [indiscernible] for us. But we don't have a precise number.

Okay, fair. I mean that's good enough, yes. And finally, as you said as well, yes, potential component shortage going ahead, do you see this as lightly? Or it's just a potential risk that you have identified. And what specific components could become [ a shortage of ]?

Yes. No, we have 2 specific situations. One is bitumen supply where one of our supplier, [ Nynas ], used to buy oil from Russia. And they have discontinued that and they are now substituting it. And there might be a short window where they will not be able to supply us with certain grades. And we obviously work to go around that if it happens and we are reasonably confident we'll be able to do that. The other item is carbon black, which is a material which comes predominantly from Russia historically and which is an ingredient in the synthetic rubber EPDM compound. And there again we don't have a totally guaranteed solution. Again, we are working on it. We are reasonably confident we'll solve it, but it will in all cases lead to a significant price hike, which then we believe we'll be able to pass on to customers. But there will be a bit of a game change situation there.

Yes, okay. That was all for me for now.

So we have another question, from Sofia Sörling from Carnegie.

So my first question is the strong sales volume for the bitumen waterproofing segment. You mentioned you had 2-digit-numbers growth in all 4 Nordic markets. Do you believe your customers now have bought more this quarter to secure their inventory and which will impact your Q2 or Q3? Or can you give us some color about that [ dynamics, please ]?

Yes. It's something which is obviously difficult to measure. And there probably was some degree of [ falling ] in -- with 2 customers, but usually they don't hold huge quantities because it's a fairly fast-moving throughput. They usually order for basically what they need in the coming days, so I don't think it's a huge effect. There's a bit of it.

All right, great. And the solid order books in prefabricated wood elements and then especially this one in Seikat until quarter 3, is it possible for you to protect your margins here as well? Or is it a delicate problem with high order books and increasing cost inflations [indiscernible]...

Yes, yes, that's a good question. And we have now learned to cope with this. And we have changed our contracts to be sure that, if there is dramatic input price increases throughout the life of the agreement, then we have the possibility to increase our prices. So it's something which historically wasn't always very well defined, but we have now learned to do that systematically.

All right, okay. That sounds great. And also this strong order intake in green urban areas during the quarter: So it's a small quarter, but what is driving this demand? Is it renovation or new build or -- and perhaps if you can give some color if it's different between geographic markets.

Yes. It's usually you could call it new build. In a few instances, it's basically cities deciding to create new green areas, so yes, basically new aspects. In terms of the order book and the improvement we've seen, it's really we are clawing back some of the market share we lost last year because of price-aggressive competitors. So we think we are successful in gaining that lost market share back, and that explains part of the increase.

All right, okay. And given that -- these prefabricated wood element and green urban areas increases, should we expect that your taxonomy share of total sales would increase during 2022? I guess you mentioned around 19% of sales was taxonomy eligible in 2021.

Correct, yes, yes. That should be the case, I would say. It's a bit mitigated by the fact that our traditional -- our core business grew quite significantly also, which maybe we didn't expect to that extent, but yes, in the medium term, clearly these 2 segments should grow more than our legacy business.

All right. And perhaps another -- already got a great question from the previous person, but regarding your increase in raw materials, if the opposite happens now when you have a large inventory, is there a risk for you to have a too-high cost in your inventory base and not be able to keep the high prices or not be able to increase the prices to cover for the margins for the actual -- for your current inventory levels...

Yes, yes. In theory, obviously that is where it goes, but in practice we've always seen historically that it takes quite a while for us to reduce prices when our input costs come down. So historically we've had a bit of a windfall period of up to 6 months in that sort of situation. I would say that right now obviously it doesn't look like this inflation will stop, but you are right that [ the road ] next year, for example, especially if there is some demand destruction that's -- that might very well happen -- and that usually is not a bad period for our financial results.

Yes, all right. And then I think I covered all of my questions.

So we have another question, from Johannes Ries from Apus Capital.

Only a very brief follow-on after a very good question from the colleagues, only to give us a feeling about [ there's ] oil price increase, how fast maybe are -- your suppliers increase [ their prices ]. So for how long is the time lag? And how strong is the input of the bitumen prices on your product business percentage-wise, not -- for example, a 10% increase in oil price has an cost effect of X. Have you some of these rules? Or is it too difficult to [indiscernible]?

Yes, yes, yes. Now the -- interesting questions, yes. The first question, the effect is immediate because the bitumen prices are indexed on certain oil indexes. The second figure is basically in our legacy business in the production of waterproofing membranes based on bitumen input. Bitumen represents about 1/3 of the total raw material costs, the other 2 ingredients being SBS, the [ plastifier ]; and the carrier, the polyester sheet or glass sheet.

Okay. So for -- we can easily say, if the oil price would increase 10%, [ it will mean it's a 1/3 shared increase. And you have a 3% ] increase in prices or something like this.

Correct, correct, yes, yes. That's correct. And obviously there is a bit of a correlation with the other materials also. So SBS, yes, is oil-based; is not directly correlated to the oil price, but there is a positive correlation there too.

So we have no further questions [ incoming ].

Okay, well, thank you all very much for dialing in. And it's been a pleasure to present our quarterly results.