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

So there it's 10 o'clock. So let's start this Webex. Let me first say welcome to everyone to this earnings conference call after the Nordic Waterproofing fourth quarter. Let me remind everyone that this meeting is being recorded and then take the opportunity to introduce Martin Ellis, our President and CEO. I'll let you take off in the presentation here, Martin.

Okay. Thank you very much, Palle, and a warm welcome to all. Thanks for participating. So the headline of the quarter is a strong cash flow despite an early winter, pretty harsh weather conditions, which obviously, in our business, slowed down the business. Moving on to the details. We have flat sales, basically a 3% impact from acquisition, positive -- 2% positive from the weaker SEK and all in all, a minus 5% organic development, mainly volume and a bit of a price, a very small price effect also. EBITDA consequently decreased to SEK 89 million versus SEK 114 million last year. And operating profit EBIT decreased even more from SEK 66 million last year to SEK 47 million. But what I'm going to show you is that the sort of normalized EBIT without exceptional elements actually increased. So we had a SEK 9.5 million charge related to Kingspan's mandatory bid. Our banks, obviously, are helping the company deal with the situation. And a negative year-on-year impact from our Finnish solar panel installation business of SEK 17.4 million. And this business is right now in the turnaround situation. And obviously, we expect significantly better results this year. So excluding these 2 items, we're actually progressing, which is a reasonable performance in light of the difficult weather conditions. Cash flow from operating activities was very strong at SEK 256 million -- SEK 255 million versus SEK 93 million last year. And net debt consequently stands at SEK 749 million versus SEK 912 million at the end of last year. So a very strong balance sheet, which obviously will allow us to continue our acquisition strategy. Moving on to some additional comments. Demand, pretty much unchanged, I would say, compared to the last quarter, impacted by some slowdown in commercial new build, not very significant, renovation being stable, and residential new build being depressed continued. So we don't see an uptick in that area yet. Bitumen-based waterproofing operations are stable in the quarter. Sales are basically flat despite the early winter and some little variations from one country to the next. The weaker sales of EPDM products of -- I would say, a certain part of our EPDM products continues. The decrease is now obviously slowing down with comparables. And the reason for this decrease is the increased low price competition from Saudi Arabia. But we now believe that we are in a situation where that will stabilize. We don't believe we can claw back all this market share, but we think we are not going to lose any significant additional volumes. In prefab wood-based elements, which has a high exposure to residential new build, we had a flat development in sales, driven by the Danish market and in Norway, had a negative development. Profitability obviously remains to be improved. But again, you can see that residential new build being down, it's reasonable good performance to have a flat sales position in this market, and it really is due to the continued tailwind from demand for wood-based sustainable construction. In the Green infrastructure business, we had a decrease in sales due to less roof park projects. But we have been able to improve margins. In Installation Services, we have a mixed picture. Roofing in Finland is flat, which, again, is quite an achievement given the early snow and winter. Some lower margins due to inefficiency, of course, linked to that. But we had, in our solar panel installation business, significant operational challenges, basically having a huge volume of demand and activity, which we had trouble coping with basically, internally. And we also have continued challenges in Byggpartner, the Norwegian roofing contracting business, but we have now a new management. We are confident '24 will see an improvement there. Flooring for cruise ships showed an excellent performance again in the quarter. Order books for Insulation Services, all in all, continued to be on par with previous year. In Finland and Denmark, holding up really well and slightly weaker in Norway. Moving on. As you know, we've implemented contingency measures in operations to mitigate the consequence of negative volume development, especially in the EPDM business, and that has proven effective. We continuously flat or slightly, in some cases, significantly deflated cost for our input materials. So that's a trend, we think, will continue in '24. Cash flow from operations was very strong, especially due to reduced inventory levels and improved working capital. In the high-interest environment, we still are in -- we have sharpened the focus on our debt level. We adjusted multiples in case we make acquisitions. And obviously, we watch the solvability of our customers very closely. As you probably know, Kingspan Group has made a mandatory offer for all of our shares at a price of SEK 160. The acceptance period has been extended to the end of March. And the Board this morning made -- issued a recommendation that the shareholders would not accept their offers at that price level. Moving on. I'll pass it over to you, Palle, for some additional detail on the figures.

Yes. Thank you very much, Martin. So as we stated, net sales slightly up in the quarter, SEK 3 million, to SEK 1.48 billion; organic development, minus 5%; a slight price decrease; and volumes, minus 4%. Acquisitions contributed with 3% and currency on 2%. And we also already mentioned on the EBITDA decreased from SEK 114 million to SEK 89 million. And in line with that, operating profit EBIT went down from SEK 66 million to SEK 47 million. We -- as Martin explained, we have 2 exceptional items here with the advisory cost related to the mentioned offer as well as a year-over-year negative impact from the Playgreen operation in Finland with solar panel installation of minus SEK 17 million. Our rolling 12, the EBITDA margin currently stands at 10.4% here. Moving on. Looking deeper into the income statement, we can see that the gross margin for the quarter was 24.6% versus 24.1% a year ago. It's actually the first quarter in more or less 2 years where we see an improved margin in a quarter year-over-year. So that's a positive development for us here. EBIT margin in the quarter, 4.5%, and on a rolling 12 basis, we are now at 6.6% EBIT margin. And the net financial items is SEK 1 million positive, and that's related to the revaluation of debt for outstanding shares in subsidiaries where we hold a majority and we have options to acquire the minorities later on. Into the balance sheet where, as we said, we had a very good cash flow in the quarter, and we have a solid balance sheet, allowing us to do selective acquisitions going forward. The interest-bearing net debt is significantly below where we started the year, now at SEK 724 million versus SEK 844 million, and the equity/asset ratio is 48.9%. So it's up almost 2% since the beginning of the year. And the net debt-to-EBITDA ratio at 1.6x is one of our covenants for the financing agreement, and we have a significant headroom in that one. ROCE stands currently at 10.2%, below where we started the year at 16.1%, obviously driven a lot by the lower operating results. However, we can see that now the capital employed has flattened out in recent quarters due to, among other things, reduced inventory here. And the cash flow from operations for the full year stands at SEK 503 million versus SEK 360 million last year. And the cash conversion at 108% is not a sustainable level. Even though it's a good performance for 2023, we're more likely to be somewhere in the 70s percent long term on that KPI. Considering the situation we are in the business cycle, we, of course, as always and even more now more closely monitor our operating receivables. Looking a little bit further into the different segments here. Products & Solutions, down 5% in invoicing in the quarter; organic development, minus 7%; and a slight decrease on prices; and volume, minus 6%. And no acquisitions here, and impacts from currency, 2%. And then we have some mixed pictures on the different markets here in the quarter. On a rolling 12 basis, we are close to SEK 3.3 billion now for this segment. EBITDA increased from SEK 72 million to SEK 78 million, and the operating profit increased from SEK 35 million to SEK 47 million. We can also say that this is also a segment where we saw an increased gross profit in the quarter for the first quarter for quite a while. And we can see in the graph here that the EBITDA has flattened out in recent quarters as well. So -- but for the latest 12 months or for 2023, the margin is at 13.1%. And then looking at Installation Services, where we saw a sales increase of 12%; and organic development basically flat, you could say; and the impact from acquisitions, 9%; and currency, 4%. Here, we saw a decrease in the EBITDA from SEK 45 million to SEK 25 million. And as explained before, I mean we have 2 operations, mainly 1 in Finland, solar panel installations and the Installation Services in Norway, where we have some operational challenges and there are programs to turn around these 2 entities. Apart of that, the roofing activity in Finland saw a somewhat reduced level of gross profit due to operational inefficiencies from the early winter. And we could also say that we saw a continued good level on the result from the Danish franchise network. Yes. And with that, I'll stop and pass it back to you, Martin.

Yes. Thank you very much, Palle. So our financial targets, which you are well familiar with, are achieved, except the profitability, the ROCE. Obviously, we're below the 13% threshold we like to achieve. But the capital structure, as you've seen, is strong. Sales growth is still overall achieved. And the dividend policy will be obviously respected, and we'll probably, if the General Assembly agrees with the Board proposal, distribute SEK 5 per share dividend, which is about 58% of the net profit. Yes. So that is our presentation. Thank you very much for listening and looking forward to your questions.

Yes. Thank you very much, Martin. Then we open up for questions here. [Operator Instructions] Yes, I'll -- just a second. So if I take the first one. So Adrian from ABG, I've unmuted you, so I think you need to unmute yourself to be able to ask your question.

Yes. Hello, can you hear me okay?

Yes, perfect. Thanks.

Okay. Perfect. I guess, first of all, with the recommendation to reject Kingspan's bid, obviously, it's more of a Board question than a management question, but perhaps you can still talk a bit about the rationale behind that decision.

Yes. I think it's really like stated by the Board. We asked Bank of America to make an opinion on the fairness in financial terms of this offer and of the price level, and Bank of America concluded that the offered price was not fair compared to the financial environment of Nordic Waterproofing and the markets.

Okay. And then moving on to the more operational parts. First, on the volumes, you previously, I believe, said that you expect that the biggest volume drop is behind you but that you also expect it to be slightly down in 2024. Is that sort of still your best guess? Or has anything changed on that front?

Yes. I think that's still our best guess. And as you probably realized, we had a pretty tough weather situation also in January. So we had relatively slow sales, which means that the first quarter might not be that strong. So yes, that's still the situation. We have -- with our customers, we see they have strong order books, and there might be a bit of a concern for the second half of the year in terms of new orders coming on. But right now, they are still strong, and they have always been a bit concerned about the longer-term perspective. So they might be too pessimistic also, which -- with regards to second half '24.

Okay. I understand. And then specifically on Installation Services, you mentioned that the area struggling here is specifically the solar panel business. Can you give us some sort of outlook as to whether that's getting better in Q1 or, if not, when you expect it to improve?

Yes. That's clearly the case. Basically, as I mentioned, we had sort of an onrush of orders, and we basically didn't have the discipline or the time to make sure that all of these orders were properly planned and properly priced. So we've put, obviously, into place procedures to ensure that in the future, that will be improved. So we clearly see a potential impact from that going forward. We might see, obviously, a bit less activity level, but that's really fine where we are. We see strong demand, and we are focusing on the bottom line.

Okay. So the negative result really wasn't at all an impact of weaker demand for solar panels? It's just the pricing and inefficiency.

The opposite actually. That was [ through ] the deal with them, yes.

Okay. I understand. And then I guess on the cash flow, you had, I mean, a very strong working capital effect now in Q4, and you're roughly back in line with working capital levels at the end of 2021 in absolute numbers. Is there more you can release ahead? Or are we back to normalized levels now?

Yes, we're definitely back to normalized levels. And yes, we should see an expansion. If sales increase, obviously, we can see a slight move up in the future.

Okay. And then just rounding off with a housekeeping question. The one-off is to financial advisers related to the bid in Q4. Will there be any more fees of this nature booked in Q1? Or have you taken all of that in Q4?

Yes. I think -- I mean, Palle, you have more detail, but I would expect some costs to come on in Q1.

Yes, you're right, Martin. You can basically assume the same number as a fixed fee for the first quarter here. That can be expected. Thank you very much, Adrian. And then I pass it over to Sofia Sörling at Carnegie. You're unmuted, so please come in and ask your question.

All right. Sofia here from Carnegie. So my first question is about this EPDM products. You mentioned this competitor from Saudi Arabia that is put some pressure on prices. But do you also do not expect that this to continue or get worse? Could you please elaborate a little bit on why you expect this not to be any worse than as per Q4? And also in what regions you especially see this competitive prices from this particular competitor? That's my first question.

Yes, absolutely. So that's a really important question. And geographically, the main impact is in Benelux, where EPDM is strong, where we used to have a strong market positions. And the segment in which we see this competition is the large area, what we call American-type EPDM, which is basically a much larger roll. And the second segment where we don't see this competition is the European type, which is narrower rolls but that are easier to prefabricate for complicated roofs. So that area hasn't been touched by the Saudi competition. The reason why we see a stabilization is really that the price level now has dropped, and we don't see any further drop there in our current situation. And the volume drop, we believe, has also been mostly consumed in terms of they have gained a significant market share in the segment they are active in. So that's really the reason why we don't see any significant further drop in that area. One additional reason but which is a bit forward-looking is that we obviously try to trends, form some of the American-type product demand into the European-type. So we are developing our product offering, of course, to give us the possibility to compete in the American-type segment with our European-type products. But that requires some marketing, some training, of course, of installers and some production tweaking on our part. So the impact of that might be further down the road.

Okay. And all right, I will continue on prefabricated building elements. You mentioned that you need to improve profitability here in 2024. Could you give us some more details on how you are planning to improve profitability in this specific segment? And also, if you can remind us how big this prefab net sale is to -- of total sales?

Yes. So we're talking about the 10 -- yes, roughly -- maybe Palle, you have -- do you have a precise number?

No. But you're right. It's somewhere in the range, 10%, 11%, 12%.

Yes, yes. So we're talking probably a bit less than 10% of sales. And the actions we have are basically twofold. We have a new management. We've had new management now for about 9 months, but 2 strategic changes we are making. One is to make the products, the project design, which we propose our customers, much more production-friendly, more standardized. Basically, the culture Taasinge, it used to be that we do everything the customer asks for precisely. So we've come up with a complicated design. We just basically send that to production. So that has changed already. And what we now do is we produce a design, which allows us to use standardized production processes. And that has a significant impact, of course, in terms of production efficiency. The other main area of improvement is to improve lean production practices. And again, Taasinge was very much marketing-focused, and the production was sort of in the back seat. And now we are promoting lean management principles into our production. So both of these obviously takes some time. You need in terms of the design of what we sell, we need to train our people, and there's a bit of a change of mindset. But that's well underway, I would say. And the lean manufacturing, we now have new working Chairman, who has a significant experience in that area. So we believe that will happen in '24.

All right. And some more questions. How do you view your ability to increase prices in general during 2024 or your own price development? Maybe if you could see it in other like the first half of 2024 and the second half of 2024, if you could give us some view on that?

Yes. I think in general, we will see flat prices, and that would actually be quite a good outcome since our input costs continue to deflate. And we've also seen that, obviously, in '23 where we've been able more or less to hold our prices, with already a start in lower raw material costs. So it might well be that if raw materials drop further and significantly, we see some price pressure for our customers, and we have seen in some segments, price pressure already in '23. But all in all, I think we might still be able to achieve flat pricing. But I don't think it's realistic to see any overall price increase in this year.

Okay. And my last question here. So how do you view having Kingspan as main shareholder? Do you see any -- what synergies do you see or beneficial -- or benefits of having an industrial owner as Kingspan?

Yes. I think there are significant synergies down the road basically because we now can offer the whole shell of the building. So that makes it attract because customers continue to look for one-stop shopping opportunities. We ourselves try to exploit that. So I think synergies are obviously going to come from that. It's difficult to time them, and it will take some, obviously, marketing efforts and some internal training to achieve them. But if you look at the medium term, there is no doubt there will be good synergies. Kingspan has a management philosophy which seems quite similar to ours, a decentralized way of operating. So again, I think that's clearly a positive.

Thank you very much, Sofia. And with that, I open up for questions for Mr. Bertrand Dardenne. You're unmuted on my side, so please unmute yourself and welcome in to ask your questions.

Sure. Can you hear me correctly?

Yes.

Brilliant. This is Bertrand Dardenne from Candriam. I've got a quick question for you. So this morning, you do unveil the fact that Bank of America has come up with a valuation that is basically above the offer price from Kingspan. My question is, are we going to see more details around this report? And to what extent was the fair valuation from Bank of America above the offer price?

Yes. I think it's fair to say we probably won't see much more detail. And in terms of the sort of the magnitude of the margin compared to the SEK 160, I think it's really -- it's not going to be published. I would suspect that in any case, if that was the case, it's a Board decision. So I can't really help you, Bertrand.

Okay. So thank you very much for that. [Operator Instructions] It seems there are no further questions. So -- sorry, that was -- I was too fast there. So [ Abhishek Agarwal ], well, come in to ask your question. I unmuted you. Yes. [ Abhishek ], sorry, you raised your hand, so you want to ask a question? Okay. So yes, I think -- [ Abhishek ], if you want to ask your question, I think you need to unmute the microphone on your side as well.

Sorry about that. Can you hear me now?

Yes, perfect. Thank you very much.

Sorry about that. Yes. So just wanted to ask, compared to 2023, could you give any color on the margin evolution for 2024? What are the puts and takes?

Yes. I think we will probably see stable margins in most of our businesses. And then we, obviously, hope for an improvement in overall profitability through the turnaround situations we have. As you are aware, we have the solar panel business in Finland. We have the contracting business in Norway, which also is in a turnaround situation. And we have Taasinge, the wood-based elements, where we clearly are looking for improved profitability. So I think that's really the main potential for profit improvement this year.

Right. So quantitatively, are we talking 1% or 2% improvement year-on-year? Or is that too much to ask for?

Yes. I mean, actually, that's what we're shooting for, yes.

Okay. Thank you very much, [ Abhishek ]. Any more questions from either here, and I'll just check my mailbox while we check that. Okay. It seems there are no further questions. So Martin, I'll pass it over to you to round off this.

Yes. Thank you very much, Palle, and thank you all for listening in and very good questions. So look forward to see you in 3 months' time. Thank you all very much.