Bravida Holding AB (publ) (BRAV) Earnings Call Transcript

Good morning, and hi, everyone, and welcome to this presentation of Bravida's Q3 report. And I think we follow the same procedure as normal. Me -- myself and Åsa will take you through the presentation, and then you have the possibility to ask some questions in the end on this session. And to start with, I think it's worth mentioning that I think this is quite a good quarter. If we look at year-to-date, we have been able to grow the business with 5% and improve the profit with 11% when we pay taxes, et cetera. So I think this is, due to the circumstances -- quarter that -- yes, you can expect from a company like Bravida. And if we start on Slide 3, as I always do, and I think in these circumstances, I think it's even more important to tell you about the business model and the low risk. And I think this is the reason why we can deliver a very stable sales level and profit, et cetera. We have a diversified end market, low capital concentration and small average contract size with a mix of slightly larger projects as well, of course. And I think this is the reason why the growth in our earnings in the quarter and year-to-date is as good as we will present to you later on. And all the time, in this quarter as well in our earlier quarters and quarters ahead of us, we will hire new resources in some geographies, and we will have some other geographies or areas, business units, branches, et cetera, where we need to view layoffs as a tool to adjust our cost base. But I think that's the normal way to handle local changes in the local demand, and that's what we will continue to do as well in Bravida. On the next slide, Slide 4, I will take you through the highlights in the quarter. I think it's -- I'm very happy to be able to present an organic growth in a quarter like this, even if the service business has been impacted in the way it had. It's -- the service business is minus 4%. And still, we have an organic growth with 1%. M&A contributed 4% and then we have some negative currency effect at 3%. All in all, we grew the business with 2% in the quarter. Order momentum and the order backlog is minus 2% year-on-year. And it's divided in 0 organic effect; M&A, 1%; and currency, minus 3%. So if we adjust for the currency, we have actually a positive change compared to last year in the order backlog. The order intake was weak in the quarter compared to last year and minus 20% and we have some currency impact in that. I will elaborate some later on, on the order intake and how we look at that. The EBITA increased by 3% to SEK 284 million, and the margin is unchanged at 6%. Worth notice is that we decided -- the Board decided to pay out a dividend. And as an effect of that, we decided also to pay back the support we have got in Sweden for the temporary layoffs, and that had a negative result effect in the quarter of SEK 8 million. So if we adjust for that, we actually have an improvement in the margin in the quarter, and that's, of course, really strong, I think. The EBITA margin is improved in Sweden and Finland and mainly both -- in both Sweden and Finland, it’s been explained by earlier restructuring actions we have taken. And the margin was slightly -- was lower in Denmark and Norway. Cash flow from operating activities was SEK 10 million compared to SEK 65 million last year. But the cash conversion is still very strong, 167%. Working capital, minus 6.7% of sales which has improved compared to last year, and net debt is SEK 1.2 billion or 0.7x EBITDA on LTM basis. We continue to do acquisitions. The activity on the acquisition side has gone up again. We have earlier said that we have been a bit cautious about the M&A side, but we have done 4 acquisitions in the quarter, and we still see a good pipeline. Turning to the next slide and some bullets about the impact from COVID-19. We see some delays in project planning and investment decisions from the customers. And then this slide says lower demand, but it should be lower service demand, in some geographic areas and price pressures. I think it's like -- it's not that the demand has gone down very much. On the service side, for practical reasons, we have some lower demand, of course. But otherwise, it's more of a price pressure that some would say companies or customers think it's possible to actually buy our services to lower prices. And I think that explains, to some extent, the lower order intake we have had in the quarter because we have a strong order situation, and we will not sell our services to too low prices. Of course, negative impact in the service business due to temporary lower demand and closed sites, but we also see that just a few installation site is closed and not a very big thing in our world today. But again, slightly increased sick leave rates in the end of this quarter, the sick leave has gone up. And of course, the same in Bravida as in the rest of the society. But said that, we still see a good order backlog. We had a visibility in the order backlog also that makes us in the position to adjust the cost base we're having. Because we have low fixed costs and the possibility we have to adjust it, of course, will make us -- give us the possibility to defend the margins coming in the next quarters, and then, of course, uncertain market conditions ahead. But said that, we will always focus on margin over volume. We will defend the margin even if the volume decreases, and we will try to not sell our services or the projects too cheap because that means that we increase our risk profile, and that's nothing we want to do. On the next slide, Slide 6 and the group sales and EBITA development. So far, year-on-year, we have been growing the business with 5% and improved the margin from 5.4% to 5.6%. The sales growth in the quarter was 2%: 4% for M&A, 1% from our organic growth and then we had a negative impact from the currency. The sales increased in Sweden and Denmark and in Finland and we definitely have a total different position in Finland, and we have seen a trend that we are improving our business in Finland and now have a position where we are seen as a more attractive employer and a more attractive supplier. And we are now entering slightly larger project in Finland as well at the same time as we try to improve the service business. Service is still a low part of the Finnish business, but we have seen, with the support of an improved trend in Finland, we think that we are now ready to compete in more complex projects and slightly larger service contract as well. So we think that our position in Finland has improved a lot during 2020. EBITA margin is unchanged. EBITA is up 3% to SEK 284 million. Adjusted for the SEK 8 million, as I mentioned before, we actually improved the margin. And we are actually almost exact on the consensus regarding the EBITA, if we adjust for that cost. I mentioned why we have improved the margin in Finland and Sweden. And in Finland, we have been working for a couple of years by increasing the quality in -- throughout the whole organization. And those measures has actually paid off now, and we are improving the Finnish business every quarter now. And in Sweden, we mainly see the improvement coming from Stockholm and the actions we took in the end of last year. The margin in Denmark and Norway are lower. And in Denmark, it explains by some write-downs but also a quite big drop in the service sales. And in Norway, we have a lot lower service sales as well, which improves the margin in Norway. All in all, sales, plus 2%; and EBITA, plus 3% in the quarter. If we go to the order situation on the next slide. When we look at the -- if we start at the order backlog, it's minus 2% year-on-year, and actually, 3% is currency effect. So if we adjust for the currency, the order backlog compared to last year is improved. When we take the order intake, which is down 20% in the quarter, I will try to explain this. The order intake is actually divided into 2 parts. One is the order backlog that I just mentioned. We think we have order situation on the order backlog is high which gives us a good visibility, and we are not stressed about trying to win new projects just because we have to improve the order backlog because our order situation is good. The other side of the order intake is the running service sales in the quarter. And that has, of course, gone down a lot in the quarter. And that is, to some effect, impacted order intake in the quarter as well. So I think, of course, we are suffering a bit from the pandemic, but I'm not very worried about the order intake because that we have a really strong order backlog. And of course, we have some differences in different geographies. I spoke to -- yes, I've spoken to many branch managers in the last weeks. But one example is that one branch manager say, "Mattias, I have a really strong order situation. And I think the price is too low for the moment in the market. The demand is definitely there, but the prices are too low. And given the order situation I have, I won't -- I don't want to actually participate and try to win these projects on these prices. So I will wait until I can get the right price." Then I spoke to another one in another geography, who say, "I have struggled for a while to win projects, but I have decided to not try to win to too low prices. But now the last weeks, I have actually seen that the price has gone up again. So it seems like the competitors actually have their order books filled with probably slightly lower prices. We don't know." But he said that prices has gone up again. So I think that is very well explaining the strategy we are having, and actually, the strategy we can have because we have a good order situation. Yes, and we have a high order backlog definitely in Sweden and Finland. The order intake decreased by 20%, as you can see, and is mainly explained by lower demand in service and some price pressure in the installation business. Otherwise it’s, as always, mainly small and medium-sized orders we have won. So all in all, minus 2% in the order backlog, and we still have an order backlog at SEK 14.3 billion in our books. Next slide, and acquisitions that contribute with 4% in growth in the quarter. We have, so far, done 15 acquisition in 2020. And out of those 15, 1 is done in the fourth quarter. Those 15 is adding -- are adding SEK 776 million in acquired sales 2020. And actually, we have done 4 acquisitions in the quarter. That adds SEK 129 million. We have done acquisitions in all countries: 2 in Norway, 4 in Denmark, 8 in Sweden and 1 in Finland. And we are now ready to continue to do all acquisitions -- to add new acquisitions in all countries. So this is, of course, a very strong value creator in our business model, and this is something we'll continue to do. And we still see a continued strong pipeline and acquisitions are still at attractive multiples. So said that, we go over to Åsa, and I think we are on Slide 9. So Åsa, please.

Thank you, Mattias. Yes, we're on Slide 9, and we are starting with Sweden. And if we look at the bottom and the top line, you can say that despite the pandemic, we had a 4% growth in total in Sweden, where the organic growth was 1%. And year-to-date, we had an organic growth of 3%, with a total growth of 7%. We also have had an improved EBITA margin, 6.6% versus 6.3%. This is due to, in general, good performance in all our Swedish geographies. And we are, as Mattias said, especially happy that we see a good improvement in our Stockholm division, where we took a lot of actions and some restructurings last year. We had a weaker order intake coming from both service and installation. But we have -- even if the backlog has decreased during the quarter, we come from a high order backlog of plus 5% year-on-year. As Mattias said, we are not too worried about this order intake being a bit lower this quarter. Moving on to Norway. There, we see a sales decrease by 5% in local currency, and organic growth was negative on 6%, and this is very much due to a weak demand in service. Year-to-date, the total growth decreased by 2%. Looking at the EBITA margin, we had a decrease to 5.7%, and this is also explained by lower service sales. We can see that the pandemic has affected Norway and Denmark the most when it comes to a lower service demand. Looking at the order intake, we have actually seen a positive trend in Norway for some time. So the order intake, if you look at it in local currency, it increased with plus 5% with an order backlog decreasing by 7% in Norwegian kroner. But it has been, as I said, positive, and we also see that we have some partnering projects in the pipeline in Norway. Moving on to Denmark. We have had a sales growth of 7%. And this is coming from acquisitions. The organic growth this quarter was negative minus 2%, another decrease in sales from service. Denmark has also been impacted a lot from the weaker service demand, as I said. Year-to-date, we had a growth of 15% with an organic growth of 1%. The EBITA margin was a bit lower, 4.8% compared to 5.0%. And this is, as Mattias said, this is due to, we had a couple of smaller down-writings and -- but very much a lower sales in service. The order intake was minus 28% year-on-year. This is due to a weak service demand, but also that we had high -- a strong comparative figure last year. Order backlog was down 7% year-on-year. Moving on to Finland, which is sticking out a little bit this quarter. We had a sales increase by 29%. This is mainly coming from organic growth. We had a 26% growth organically. And the year-to-date increased by 17%. Also very happy to see that the EBITA margin improved to 3.8% this quarter from 0.5%. And this is explained by all the actions that we have taken to improve the business and installation for some time now. And we can see that we have had a positive trend for the last month quarters, and also the EBITA year-to-date increased to 2.4%. A weaker order intake, minus 41%, but a order backlog that is positive with 8% year-on-year. Moving on to Page 13, looking at our financial situation. We still have a very strong financial position. We had -- as you can see on the left-hand side, we had a cash balance of SEK 1.1 billion. We have had term loans, RCF, commercial paper, some 1 -- using that is SEK 1.5 billion. Of leasing, financing comes to SEK 882 million, and this leads us to a net debt of SEK 1.2 billion. We had an LTM EBITA of SEK 1.7 billion. This means that the net debt LTM EBITDA ratio is 0.7x, so on a low level and very much within our covenants. The operating cash flow, in the middle, is continuing to be very strong. And this is mainly due to a good operation. We have a solid and very strong working capital. On the right-hand side, you can see our financing. And we are drawing on our financing RCF of SEK 1.1 billion. We also have some commercial papers issued of SEK 260 million, and we have this term loan that we started in April of SEK 500 million just -- that was just to secure a financing when the market was a bit uncertain there in the start of the pandemic. Very strong cash conversion, 167%. And then Slide 14, where we have our financial targets. And if we look at our sales targets, we have the target to be above 5% in sales growth. If we look at the year-to-date figures, adjusted for currency, we are on 7%, we have 2% organic growth, 5% acquisition. Then we have a negative currency effect. So the total growth is 5%. The EBITA margin is, if you look at the rolling 12, we have a 6.1% EBITA margin. Unfortunately, we will probably not reach the 7% this year due to the pandemic but we are on our way. Look at -- our cash targets were on hold. We have, as I said, a strong -- we had a cash conversion target of more than 100%, and we are on 167% now. And we have a target payout ratio, a dividend payout ratio, of more than 50%. And as we have said, we just decided to pay out dividend for last year, and that was 52% of net profit. And as I said, a very low net debt/EBITDA ratio of 0.7x, well below our target of less than 2.5x. All in all, not such a bad quarter, Mattias.

Thank you, Åsa. No. And if we look at Slide 15, I think this is a slide I'm very happy to present for you. And the one of you who hasn't -- who haven't followed us for a very long time, I think this is worth spending a few seconds looking at. And I think the development we have had in Bravida in the last years, both on the sales side, but also on the profit side has been very stable and it developed in a very good way. And to the right on this slide, you see the cash conversion as well. It's extremely high for the moment. And of course, over time, it will be -- should be around 100%. So we have been extremely good in managing our cash side in many different ways, both improve invoicing regarding service, payment plans on some projects, et cetera, but also in many other things. So I think this is a slide I all -- shows quite often internally, and this is showing how the business model in Bravida actually what it does with the numbers as well. And normally, when I talk to our management or personnel employees within Bravida, we say that we always work with continuous improvement. And this is what happens when you do that. And I usually say that champions is something you have been and can be again. That's nothing you are. And this is something we are. We shouldn't be satisfied, but we should be very proud of what we have achieved. But said that, we think that we can continue to do this for many, many years ahead, of course. So turning to Slide 16, and some short bullets about the business plan that we started to tell you about last report as well. In short, we will come back to this, but some bullets to give you some information around this is that we will continue to develop our service platform and continue to focus on the service growth, even if we see that, that has been impacted in a negative way during the pandemic. So even stronger service platform within Bravida, combined with the already strong installation platform is, of course, a very good combination, and that will strengthen our company the future as well. And then a digital transformation are both focused on transformation within the company, but also digitalization will, of course, be very important in the coming years. This will require some investment in systems and resources, mainly in 2021. If we should have been really fair to ourselves, we should actually been able to adjust for some costs already this year, but we have chosen not to do it because we want to have as clear a financial presentation as possible. But we will think about how we will present these coming quarters. It's not a very huge investment. But of course, there will be some investment needed to be able to sustain the position we have in the market today. So try to summarize the quarter on Slide 17. Impact from COVID-19 in Q3 has, of course, impacted the order intake. I think you all see uncertain market conditions ahead, and we think the same, of course. But we have shown that our business model, and Bravida as a company, is very stable. The sales increased with 2%, a combination of acquired growth and organic growth with some negative impact from currency. Service sales decreased by 4%, meaning that the installation part grew quite a lot. The installation order backlog was minus 2% from a high level. And actually, 3% was a currency effect, as I mentioned earlier, so plus 1% if you compare adjusting for the currency. And the EBITA margin is unchanged as we reported -- if we should -- if we were to adjust for the provision or for the money we paid back to -- for the support in Sweden, we received it in Q2, and we took it out from the P&L in Q3, then we have had a margin that is actually improved to 6.1%. The EBITA margin was improved in Sweden and Finland. M&A execution is on track. Healthy pipeline. Four acquisitions completed in Q3, 15 total in 2020, where 1 was in Q4. Net debt continued down with -- to 0.7x, yes, EBITDA, and it's well below the financial target of 2.5x. And cash conversion is, I would say, extremely strong at 167%. So said that, I think we can open up the Q&A session. Thank you.

[Operator Instructions] And the first question comes from the line of Carl Ragnerstam from Nordea.

It's Carl here from Nordea. I have a few questions. First of all, you mentioned the price pressure on certain projects. I wonder if you could give some more granularity on that and whether you see more severe price pressure on certain project sizes or project types or end markets perhaps, and also, whether you have experienced worse pricing landscape sequentially or if you're referring to a year-over-year movement in the pricing.

Thank you for that one. And why I say that it's not very easy because, again, we think the demand is -- it's okay, it's good. In some areas, it's really good, but there is a pressure on price. And I think it comes from -- it's a bit of a psychological reason. I think, first, we have some peers that are maybe a bit stressed having a slightly -- or much lower order backlog than we are having. Maybe think they have to fill up orders. I don't know how they are thinking. And maybe they think it's going to be worse and try to fill up the order books. We don't have to do it. We don't want to do it. So we actually just don't get into that. That's one part. Then I think our customers, if you look at the construction companies, the same psychological effect is actually hitting the customers as well. We see more construction companies in the tendering phases competing for their job, their contracts, and then they try to push some extra pressure on the price to us as a subcontractor. And again, we don't want to go there. We don't have to go there. So I think that's the reason. So it's not demand-driven, I think it's more psychological-driven. So let's see what happens. I have heard, as I said in -- this is not the same situation in whole Sweden, for example, or in the whole of Norway, it's different geographies, different markets. I have heard that in some areas, we have so many requests for prices that we actually don't – aren’t able to handle all of them. And in some other areas, they think we have a strong demand, but the prices are too lower. In some other areas, as I mentioned, the prices has gone up again because it seems like the market -- the other actors in the market has actually filled up the order books. So we can start winning projects to a good price level again. So I hope that was an answer to your question.

Okay. That's brilliant. So if I get you right, the prices, in general, is still at -- you still experience quite price pressure at the end of the quarter. Is that correct?

Yes. I think if you should say something about the market, I would say that it's slightly more focused, from my side, on the price pressure than on the demand side. On the other hand, again, we have a strong order situation. So we don't have to go there.

Okay. Perfect. And you also mentioned that the margin in Denmark was negatively impacted by lower, I mean, profitability in some projects. Should we expect it to continue going into Q4 as well? Or is it, yes, just a Q3 matter?

No, no, no, we don't. And we don't have that history in Denmark either, so we don't. And I think also the mix change in Denmark, earlier, we had used subcontractors to some installation projects. And when the demand in service has gone down, we had used service resources to produce installation projects. And then of course, that's a really good way to handle our own employees, but you are changing the mix a bit when you have a slightly higher margin on the service compared to installation. So we have preferred to use the service employees on the service side to making a higher profit instead, of course. But that's nothing we expect to continue.

Okay. Perfect. And a final one from my side, if I may. I mean in your outlook, you are gradually being more cautious. I mean is it based on sort of a fear of new lockdowns or what you read in the paper? Or is it based on that you actually see sequentially lower quotation levels? Or how should we look at sort of your view of the markets?

No. I think it's more about that in the Nordics, countries are taking some different measures, but I think they are going in the same direction, all of them. Again, it's not demand-driven. This is health-driven. And if our customers aren't at work, they are not able to order in the same way they are usually doing. So some of the sales is postponed, some of the sales will probably not happen. But I think that when -- we need our customers at work. And I think that's same for us and in all other industries. So it's depending on that. The government is trying to get people to stay at home. And I think that's why it's not any other things that thinks -- that is the reason behind our more cautious outlook. It's just about the society, what we are doing.

And the next question comes from the line of Stefan Andersson from SEB.

A few questions from me then. Going back to the demand side and the price pressure. I mean I get the impression that you think it's -- you see the slow demand as temporary, you're willing to wait because you think demand is out there. So I mean are you seeing growth in the market for 2021? Or are you seeing flat? Or are you seeing the market down to 2021?

Impossible to answer, I think. But we think that, again, the demand in the market is okay or good. It's not the tricky part for the moment. The tricky part is that the customers, I guess, are a bit uncertain as well about decisions. People are not meeting in the same way. They are not signing new deals. I think it's more practical reasons to that, so let's see. But the demand for our services regarding energy improvements, make sure hospitals, et cetera, is working, infrastructure, make sure you have water in the toilet, lighting at the office or at home, that is -- the demand for our service will always be there, so.

Yes. Okay. That would be -- I'll turn your question a little bit, all right? If you -- going back a few years, we were -- you know how it is with us and the stock market. We're always scared about something. So a few years back, we were scared about new builds in resi. And I know you then said, we don't have any material risk exposure at all to the new build. Now I guess that market is a little bit -- yes, pretty exciting. It's hot at the moment. But we are concerned about hotels, commercial offices, retail space, is that -- that's our new scare. So how would that look, if you just look at the installation rebuild side, what kind of portion of exposure would you have to those areas, just to understand the risk here?

Yes. No, of course, we have had a low exposure to the residential market, as you say. And that's a market that we don't think is best market, of course. But I usually say the market is the only thing we can't have any impact on. If we are building more residences, of course, that is a market for us or at least for our fierce competitors, who think that's a good side for them. We think -- I think it's -- personally, it's not as good because the price model is very transparent. There is no aftermarket at all. And there are, sometimes, very tricky contracts, et cetera. So of course, we will probably see a slightly increase of residential in our orders, but it's not a very high focus. We would rather build logistic holes, continue to support the customers with their sustainability work regarding energy consumption, et cetera. And also the office, I think you are right that it will not be very high investment in the office areas for the moment. But I think all these spaces will need to change the way you are using them in one way or another, and that means renovation. And that's a much better market for us. And that's something I'm really looking forward to. That market is something we want to participate in because that is a less transparent price models. You need more know-how, how to do it, and there is an aftermarket as well. That's more interesting for us. And that will happen in some way or another. When it happens, that's -- the timing around it, it's more difficult to say, I would say, I guess.