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

So welcome, everyone, to this Nordic Waterproofing Earnings Conference Call after our second quarter 2024. May I remind everybody that this webinar is being recorded and also that the participant names are disclosed on the screen here. With that, may I introduce our President and CEO, Martin Ellis. And Martin, I hand over to you for starting the presentation here.

Yes. Thank you very much, Palle. Welcome all. Thank you for participating. So let's jump right into it. The second quarter was in line with expectations in the sense that we've seen a continuation of the demand trends of the most recent previous quarters. And we have a mixed bag in terms of demand and performance, strong performance in Denmark and Sweden but continued very weak demand in Finland, which, as you know, is our biggest country. So that explains the results you're going to see in a second. Moving on to the next page, we can see that we've had a decrease in net sales from SEK 1,292 million to SEK 1,196 million. No significant impact from acquisitions, just 1%, no currency effects either and an 8% organic reduction. EBITDA also decreased slightly from SEK 186 million to SEK 168 million EBITDA. So EBIT decreased from SEK 143 million to SEK 131 million. And cash flow from operating activities was also slightly lower from SEK 157 million last year to SEK 126 million this year due to different inventory moves between the 2 quarters. Net debt stands at SEK 881 million, down from the same period of last year and slightly up compared to the year-end, obviously, because of seasonal inventory positions. Moving on, a few comments. The demand is impacted by a slowdown in commercial new build, which we have seen in the previous quarters. Renovation continues stable and residential new build continues depressed. And at this point, it's too early to see any uptake, as you know, that's very much related to the level of interest rates, and they haven't moved that much yet. Bitumen-based waterproofing operations, our legacy business are stable in Sweden and Denmark and continue, as I mentioned, challenging in Finland and also, to some extent, in Norway. Our EPDM synthetic rubber products are slightly below last year, but we believe that we have seen the bottom here in terms of demand, and we have been able to improve margins somewhat over the same quarter last year. Prefab elements has a high exposure to the new build and has been hit by the low demand. Nevertheless, we had a positive development in sales on the Danish market. But negative development in Norway. Profitability levels are still unsatisfactory, and we are executing restructuring growth programs both in Denmark and Norway. In Finland, the same business is doing quite well. The Green infrastructure business had decreased sales, especially due to less roof park projects, but improved profitability over last year. Installation Services had lower sales. Obviously, there, we have the biggest impact from a very low demand in Finland and margins also slightly decreased. The order books for Installation Services continued to be on par with the previous year in Finland and Denmark, slightly weaker in Norway. And especially in Finland, we are working on a number of large offers we're making currently. Obviously, it's too soon to say that this is going to translate into firm orders. But definitely, a lot of requests right now we are working on. Moving on to the next page. Contingency measures are being continued to be implemented in most operations to adjust [ on ] to the lower demand level, and we've seen some effect on margins, a positive effect on margin, especially in the EPDM area. We continue to see flat or slightly deflated cost development for our input materials. So right now, pretty stable situation. We have continued focus on our debt level. As you've seen, we've been able to keep it at a relatively low level. And we do expect opportunities to emerge to further expand the Group in accordance with our strategic plan through acquisitions. Moving on, I'll pass it over to you, Palle.

Yes. Thank you very much, Martin. Then looking a bit more into the numbers because as we saw net sales decreased close to SEK 100 million. 7% in the quarter versus same quarter last year. Currently, on a rolling 12 basis, we were just below SEK 4.3 billion. Acquisitions limited impact as currency as well. EBITDA slight decreased to SEK 168 million and EBIT the same to SEK 131 million. The EBITDA margin down a few points here, 14.0% versus 14.4% and on a rolling 12 basis, EBITDA margin now stands at 10.2%. Moving to the next slide, looking at more of the numbers in the income statement. Looking at gross margin for the quarter, it was 28.2%. So versus 27% for the same quarter last year. So we're improving margins. And as you will see, that's coming from areas within Products & Solutions. Net financial items in the quarter, minus SEK 16 million versus minus SEK 9 million last year. Most of this is interest costs, and then there's also an impact from revaluation of debt for outstanding shares in subsidiaries. EBIT margin for the quarter, basically the same as last year, 10.9% versus 11.0% and on a rolling 12 basis, we are at 6.4%. Moving on to the balance sheet, and we can just -- overall, looking at it, we continue to have a solid balance sheet that allows us to do selective acquisitions in the fields here. Interest-bearing net debt at SEK 854 million. And as Martin said, this is seasonally moving between the quarters, and we started as SEK 724 million but it's worth noting that a year ago, we were at almost SEK 1.1 billion in interest-bearing net debt. We continue to have a solid asset ratio at 46.5%, and our net debt-over-EBITDA ratio, that's also one of our covenants is at 2.0, and it's well below the threshold in our financing agreement. Then moving on to next slide, with ROCE now stands at 9.7% versus 10.0% as it was last quarter and 10.2% at the beginning of the year. What we can see here is that capital employed is flattening out and even decreasing actually in recent quarters here. But the decline is in ROCE is driven by the somewhat lower operating result. Cash flow from Operations continued to be on a good level at SEK 447 million for the latest 12 months versus basically the same number for a year ago. Cash conversion continues to be high, now at 103% versus 108% last year. So we have good cash flow from operations in the quarter. And then we have a seasonal increase in inventories in the second quarter where inventories increased this year versus last year when we didn't have the same seasonal impact due to we started the year with a high inventory and then reduced it from there. And then, we, of course, in the current business climate continue to closely monitor our operating receivables in all markets, I would say. Moving on to -- looking into our 2 segments, Products & Solutions. We saw a decrease in sales with 7% and as you can see, the second quarter is typically our highest quarter during the year here. All development is organic, no impact from currency or acquisitions in this quarter. Sales in Sweden and Denmark, basically on par with last year, while the development in Norway and Finland was negative. And on a rolling 12 basis, the Products & Solutions segment is just above SEK 3.1 billion in turnover here. EBITDA decreased a few million here from SEK 165 million to SEK 158 million, but however, the EBITDA margin increased 0.5 percentage point from 16.5% to 17%. EBIT followed the same development as EBITDA. Generally, looking at the different business units within this Products & Solutions, we see maintain or improve margins. However, we continue to see unsatisfactory profitability for our prefabricated elements group Taasinge and there are several restructuring initiatives being implemented in both Denmark and Norway to take care of that. For the latest 12 months, EBITDA margin is at 13.8%, which is about 1 percentage point higher than a year ago. Then moving on to Installation Services, where we see that net sales decreased by 10% organically, 12% and the acquisitions have an impact of plus 2 percentage points. It's a little bit different here, where you see that the second quarter is not the strongest one in the year, but it's actually the third and the fourth quarter. That is typically the highest sales quarters during the year. EBITDA decreased from SEK 32 million to SEK 20 million and EBIT followed the same pattern with SEK 22 million to SEK 12 million. The majority of the decrease we see here is coming from Finland, obviously, where we have the largest operation. For the latest 12 months, the margin is currently at 4.4% for this area versus 8.2% a year ago. We can also say that apart from Finland, we also have an operation in Norwegian that somewhat improved the result versus last year, but also here is still at an unsatisfactory level. And our contribution from the Danish franchise network continued to be strong, almost on level with last year. Then moving on to financial targets and handing back to you, Martin.

Yes. Thank you very much, Palle. So this -- our traditional targets, sales growth. I think it's fair to say that we have been in line with the market with, again, probably taking market share in the legacy business, especially in Sweden. Profitability, obviously, we're not happy with the present level. We are below the 13% ROCE threshold but in terms of capital structure, as Palle explained, we are in a solid position in terms of our balance sheet and the different ratios our banks are looking at and of course, we will continue to follow our dividend policy of distributing at least 50% of net profit when the time comes. So that's our presentation. Thank you very much, and looking forward to your questions.

Yes. Thank you very much, Martin. And with that, I open up for questions. [Operator Instructions] And the first question we have here is coming from Adrian Gilani of ABG.

I would like to start off with a question on the outlook statement. You're right that you expect improvements in all main markets in 2025 except for Finland. So just a follow-up, what's the special dynamic there? How come Finland is not expected to get better in 2025?

Yes. That's a tricky one. I'm not sure we have the answer. Finland has been an impact that maybe to some extent by the Ukraine-Russian situation. And that might maybe explain why it's behaving slightly different from the rest of Scandinavia. But that's about all I think we know for sure.

Okay, sure. And also, I mean, you typically talk about there being a lead time of roughly 2 to 3 quarters between a new build process starting and then that hitting your P&L. So just to sort of understand the outlook statement better, would you say that you are expecting more new build starts from the beginning of '25 and that, that will hit your P&L around mid-'25 or is that a fair way to look at it?

Yes, absolutely. Absolutely. I think again, it's a bit a little to say this demand situation is really changing because it very much depends on our view on the Central Bank interest rate policy. But in all likelihood, yes, there will be a reduction in these rates, which then should give the dynamic which you just described.

But just to be clear, you can already today say with fairly high certainty that beginning '25 is not going to be a significant uplift for you?

Yes, that's probably fair to say.

Okay. And then on the cost savings side, you've talked now for several quarters about cost savings programs. But frankly, looking at the numbers, you're flat on operating costs year-on-year and even up slightly on a rolling 12-month basis. Can you talk a bit about the measures you've taken so far and what you can do from here to bring down costs?

Yes. I think what we've done is we've tried to adapt to the present demand level but we haven't cut more than that. So we're not in a situation where we are anticipating further downturns and sort of trying to anticipate those in our cost structure. We don't want to hurt our core business capability to that extent. So -- but it doesn't mean like you say that we have accepted somewhat lower profitability to maintain critical resources in our teams. That's been the policy, and it has a certain cost.

But you did say that some of them are still ongoing. So I guess, how much more is left? How much more ground can you gain from the cost cutting ahead?

I think it's fairly limited if we continue the policy I just described. But we do have these pockets of loss-making businesses, especially in the Prefab elements, Denmark and Norway, and that's really where we focus our efforts and where we have recently made some -- again, some changes to reduce our cost position.

Okay. I understand. And the final one for me, a bit of a housekeeping question. Can you split out the price and volume and the organic growth number, so minus 8% total, how much of that was price and volume?