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

Welcome, everyone, to this presentation of Nordic Waterproofing Second Quarter 2023. Let me start with pointing out that this meeting is being recorded for everyone and participating names are visible. And with that, let me introduce our CEO, Martin Ellis and ask you to start the presentation.

Yes. Thank you very much, Palle. Welcome, everybody. Very glad to have you listening in. So we have had a very good quarter in Installation Services. We've achieved a further improvement in EBIT, but we had a mixed performance in Product Solutions, which some areas performing very well and other areas having some difficulties, and we'll obviously go into detail on that. Let me also remind you that we had strong comparables. Last year was a record year and the second quarter of '22 was an extremely strong quarter for us. So moving on with here. We had an all-time high sales in the quarter, and we've significantly improved our cash flow. The net sales increase of 3% is due to acquisitions. Where we've made mostly last year, 8% sales increase due to acquisitions. We also had a 4% currency effect from the weak SEK. And we had a negative organic sales development of 9%, where volume is minus 14% and price plus 5%. So we still get a positive effect from our sales price increases basically in the last year. EBITDA decreased accordingly to SEK 186 million compared to SEK 216 million last year. EBIT decreased to SEK 143 million compared to SEK 180 million last year. And cash flow from operating activities was SEK 157 million compared to SEK 38 million last year, so a significant jump. Net debt now stands at SEK 1.13 billion compared to SEK 912 million at the end of last year. As you are aware, the end of year is always a low net debt level. So we basically see a good development of our net debt at the present time. Moving on to some comments. Demand has been impacted by a slight slowdown in commercial new builds. But we have seen renovation holding up quite well. And the residential new build is depressed, as you know, and that is a relatively limited area of exposure for us. In our bitumen-based waterproofing operations, we had a stable quarter in sales, a mid-single-digit drop, a slight drop in volume, which we have compensated by price increases, which are still carried forward. In EPDM products, we had weaker sales. That's 1 of the 2 areas where we have a drop both in sales and operating income. This is driven by increased competition and lower prices. As you might recall, we already had that effect in the last quarter. And there's no significant change, I would say, to the picture compared to the first quarter. In prefab elements, which is the other problem area we have. There we have a high exposure to residential new build, which has had an impact on our sales volume in Denmark and positive developments actually in Norway and especially Finland. We have appointed a new CEO for this business for our Taasinge Elementer, too. Our green infrastructure had another strong quarter. The roofing business in Finland and Norway had slightly lower sales and strong performance in the 2 other countries, Sweden and Denmark, basically. Our order book translation services continues to be strong on par with previously in Finland and Denmark, which are our main markets and slightly weaker in Norway where we have small operations. Moving on to the next page. Operating profit and gross profit, some more color on that. Somewhat lower margins compared to the very strong Q2 '22 in the bitumen-based water proofing businesses. Lower volumes and decreasing margins compared to the historically high levels in the EPDM synthetic rubber waterproofing business. Let me remind you that we had extremely high margins last year, and we are now returning to somewhat more normal also if you put it in the longer-term historical perspective. Lower volumes and operational challenges still remaining in our prefab wood elements business. Installation Services in Finland improved, both gross profit and EBIT, and somewhat lower results in Norway as mentioned. In our Danish franchise network, we actually have seen a record EBIT levels, which is obviously quite remarkable in the current environment. Contingency measures or cost control have been implemented in our operations to mitigate the consequence of the negative volume development. So we think we are up to date in that respect, obviously, ready to reduce further if that was required in the future. A stronger cash flow from operations in the quarter, mainly driven by improved working capital control. We continue to see slightly deflated costs for our input materials and I would guess we would speculate that this trend will continue in the coming 2 quarters. In a high interest environment, obviously, we have sharpened the focus on our debt level and you've seen the cash flow improving. We have adjusted multiples in case we make acquisitions. But obviously, we have a negative effect of high interest rates on our financing costs. And Palle will get into a bit more detail on that. Moving on, Palle, please up to you to give us some more details.

Yes. Thank you very much, Martin. So as we said, net sales increased to almost SEK 1.3 billion, being our single highest sales in the quarter, and as we said, driven by acquisitions, but 8% in currency and price increases of 5%, while volume was down 14%. EBITDA decreased SEK 30 million to SEK 186 million, and the margin decreased to 14.4% versus 17.2%. On a rolling 12 basis, the EBITDA margin now stands at SEK 11.2%. Looking more into the income statement here, we can see that gross margin for the quarter was 27% compared to a very good 30.2% last year, and EBIT margin in the quarter was 11% versus 14.4% a year ago. On a rolling 12 basis, we are now at 7.4%. The increased interest rates had a negative impact of our net finance item, as you can see here. And looking then into the balance sheet. We continue to have a solid balance sheet, and it allows us to do selective acquisitions that we can fund in this environment. The interest-bearing net debt increased to almost SEK 1.1 billion from the beginning of the year, which is logical from our seasonally weaker cash flow in the first half of the year and also that we distributed a dividend of SEK 7 per share in early May here. The equity/asset ratio is unchanged, exactly the same as a year ago. And the net debt/EBITDA is at 2.3x, which is higher than a year ago, but it remains well below our covenants in the financing agreement. ROCE as mentioned, went down to 11.4% versus an all-time high last year of 17.9%. And we have an increase in capital employed, both from higher cost and prices and the weaker SEK, so Swedish krona has some impact and also acquisitions contribute, but mainly the decrease in ROCE is driven by lower operating results. We've seen an improved cash flow from operations up to SEK 437 million in the latest rolling 12 versus SEK 215 million a year ago, and cash conversion up at a good 89% versus 37% a year ago. And yes, the improved cash flow we've seen is mainly driven by the improved changes in working capital, where inventory is 1 component. And we continue to focus on inventory reduction and as well monitoring our receivables in the current environment here. Looking into our 2 segments. In Products & Solutions, we had a net sales of almost exactly SEK 1 billion, down 2% versus last year, where organic development was minus 8%, consisting of price plus 4% and volume minus 12%. This is an area where we haven't done that much acquisition, so they contributed 2% and the impact from currency was 3%. I mean we have the development in the different countries. And maybe apart from the numbers point out that in Denmark, where we have a negative organic development, we can say that our bitumen-based waterproofing membrane business is contributing more than the prefabricated wooden elements that has a higher decrease in Denmark. And in Norway, we can also just note that that's the market where we have the currency against us. So we have a negative currency impact. Otherwise, the weak SEK is helping us in other markets. On a rolling 12 basis, we're almost at SEK 3.3 billion in turnover. EBITDA decreased to SEK 265 million versus SEK 212 million a year ago and operating profit EBIT down to SEK 132 million I think we've been through the reasons earlier in Martin's comments for why we have this decrease. Then moving on to Installation Services, where we had an all-time high sales in the quarter of SEK 350 million, an increase with 20%. Organic development was minus 11%, where price was plus 7% and volume minus 19%. Larger impact from acquisitions here with 24% as well as currency effects of 7%. EBITDA increased to SEK 32 million over SEK 16 million a year ago. And operating profit as well increased to SEK 22 million over SEK 9 million. The EBITDA margin increased to 9.1% over 5.6% a year ago. And for the latest 12 months, the margin now stands at 8.2% over 3.8% a year ago. Our activities in Finland, where we have the largest activity improved both gross profit and EBIT, while we saw a reduced result in our Norwegian Installation Service business. Also, we could note very good result improvement from our Danish franchise network. And with that, I'll pass it back to you, Martin.

Yes. Thank you very much, Palle. So just to sum it up, as you can see from our targets, we have achieved sales growth. You can argue, of course, that in volume terms, we are slightly down. And this is against the backdrop of obviously falling demand in the construction industry in general. And I would reiterate that we believe that with the exception of SealEco, the EPDM business, we have probably slightly gained market share in the majority of our markets so a good situation there. In terms of profitability, we have now dropped below the 13% threshold, so we haven't checked that box. But I would say we're still at a level, which historically we have seen before, and we certainly plan to improve that ratio again in the coming quarters. Capital structure as Palle mentioned, remains strong. We have an acquisition pipeline, I would say, which is a bit less than we had a year ago. We are not in a hurry, obviously, to take on additional debt at current interest rate levels, but if there are strategic opportunities, of course, we will realize those. In terms of the dividend policy, no news. As Palle mentioned, we've distributed a dividend earlier this year of more than 50% of our net profit. And we obviously plan to continue that in the future. So with that, we very much look forward to your questions.

Thank you very much, Martin. Yes. With that, we'll open up for questions. [Operator Instructions] Then we have the first question coming from [ Max Baccu ]. [Operator Instructions]