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

Hi, and good morning, everyone. I am Mattias Johansson, CEO of Bravida. And I will take you through this presentation of the second quarter 2024 for Bravida together with?

With myself. And I am Asa Neving, CFO of Bravida.

Great. Welcome again. And we kick off immediately. And we will tell you of the experience when it just works. Some things in life we just expect to work. You expect the light to turn on when you press the switch, for water to flow from the tap and to be able to trust the security systems in a building. Bravida provides technical solutions for everyday life and the future in a way that care for properties, people and the environment. Bravida in numbers figures. We are present in 190 different locations. We are close to 14,000 employees. And last 12 months, we have had sales at close to SEK 30 billion. We have more than 80,000 customers, more -- a lot more than 300 branches and we are approximately 40 regions in 4 countries. Bravida helps create a resilient society today and beyond. I don't know if you hear the sound or the noise, but if you do, that is something happenings in this building. And I think that just shows you all how important installations are in buildings that we are servicing and maintaining. We will serve and we have plenty of opportunities in the market going forward. Automation that provides energy efficient buildings, energy saving measures in buildings. We're working with hospital buildings with operational certainty, energy efficient technology solutions for industrial customers, future infrastructure projects and reliable secured systems. On top of that, you can also add defense, properties, investments depending on Sweden, Finland joining NATO, Norway expand that budget as well going forward. So why is Bravida an investment case for you? First of all, stable and profitable growth with strong cash flows. In recent years, Bravida has delivered stable growth with maintaining EBITA margins and strong cash conversions. And if we look back for the last 10 years, we have been able to deliver a cash conversion above 100% as an average for the last 10 years, which I think is very, very good. We are leader in our industry in the Nordic region. With our size and broad competence, we are well-positioned to grow in a market with excellent opportunities. Well-positioned for the future as well. Energy efficient buildings are high on customers' wish lists. With our offering, we contribute to increased automation and energy efficiency. And going forward, I think this is even more exciting, because the new rules from EU, the EPBD, energy performance, energy directive will force or motivate the owners of different buildings to invest in buildings to make sure that the energy consumption is going down. Stable sales with good risk diversification, 80,000 employee -- more than 80,000 customers, 14,000 employees in many, many different places creates a portfolio effect. We have a very high diversification in our customer portfolio in different segments, et cetera. The high sales stability enabled through many recurring assignments, low dependence on individual customers and large service revenue share. And we also finally have got good opportunity for growth through acquisitions. We have done more than 150 acquisitions over the past 10 years, which have added SEK 11 billion all financed by our strong cash flow that I started to mention on this slide on the top. The highlights for this quarter then. Despite expected challenges in the market of Finland and in south Sweden, as we have communicated in the last quarter, we are able to present an organic growth at 1%, total growth at 5%, and we have a sales growth -- service sales growth at 8% with some -- including some organic components. Plus, continued high order books that gives us visibility as well as comfort to offset some regional challenges going forward as well. 4% of the growth comes from acquisitions and the FX effect in the quarter is 0. Order intake increased slightly, driven by Sweden and Norway. And that is even if we haven't received any large orders in the quarter. And I think that is also a sign of our ability to be in many places, high competence. We have been able to be attractive to many different customers in different segments. Order backlog remains at high SEK 17.6 billion, one of the highest order backlogs ever actually. The EBITA margin is the thing in this report that we are not happy with, of course. But as expected, it's going down, 4.5% compared to 5.6%. And it's primarily affected by operational challenges in 3 regions in Denmark and weak market in south Sweden, which we all have told you about earlier. On the other hand, Norway are on the same level as last year, even if we have done the strategic acquisition of Thunestvedt, which dilutes the margin. So adjusted for the acquisition, the Norwegian business is improving and very happy to see that they are organically growing 10%. And the acquisition of Thunestvedt is also delivering due to our plan. So everything all good in Norway. And then in Finland improved as well, which is impressive -- impressing by -- depending on the tough market they are facing. The best KPI maybe in the quarter is cash conversion or strong operating cash flow. SEK 548 million will be -- shall be compared to SEK 134 million last year. Cash conversion improving in the quarter to 112%, and the injuries is going down with 19%. Then we have really strong KPIs for the moment regarding the ESG, which is very, very good. The bridge regarding the net sales. Last year, we had a SEK 7.3 billion. This quarter, we are adding SEK 45 million in organic growth coming from service as well as some installation in some parts of the company. M&A adding SEK 319 million and you have some currency effect adding SEK 24 million and that brings us to SEK 7 billion in sales for the second quarter this year. Again, organic growth 1% in this environment is really, really strong. Regarding the EBITA margin, 4.5%, as I said, compared to 5.6%. The margin is improved in Finland and Norway if we exclude for the acquisition I just told you about. As expected, we have continued operational excellence in 3 Danish regions and weak market in the south part of Sweden that brought down the group margin as well. In Denmark, we can see that we are definitely ahead of the transformation if we look at the organization. We have some projects we need to finalize. But I will tell you that if we look at medium term target, Denmark will be a strong part of the company going forward. It will take some time, but our communicated plan from last quarter where we see tough margins in Q3 and normal margins again Q4 is still what we are chasing and are expecting. Of course, continued implementation of cost reduction initiatives to improve the margin is carried out where we think it's needed. Order intake and the backlog in the quarter. As you can see to the left, we have a quite positive development of the order intake over the quarters since mid-'21. There are seasonality in the order intake, so you can look at the line, quite solid and good improvement of the order intake. To the right you have the order backlog, which only contains the installation projects. It's one of the highest, as I said. It's decreasing only SEK 276 million in this quarter. I think that is good due to the selectiveness we are using on the project selling side, as well as a tough demand or tough market conditions we are seeing in some areas. Order intake increased slightly year-on-year and increased in Sweden and Norway. When we come to the sustainability or ESG, today 33% of all our vehicles are electrical driven. We can actually see some quite some impact in the KPIs regarding sustainability today. The CO2 emissions from vehicles is down 11%. If we compare -- that is not on the slide. But if we compare to the emissions we had in 2020 and adjust for the sales, we have actually lowered the CO2 emissions from our car fleet with more than 30%. LTIFR on group level is down 19%, and we're getting closer to our group target at 5.5%, which is really good. We have lower LTIFR in Sweden, Norway and Denmark. And Norway and Sweden are already today below the target. And as previously reported, we have dealt with the incident of over invoicing in a specific branch in Sweden decisively. And no other such issues have been identified as part of the reviews we have conducted. Meanwhile, since this happened in April, we have been asked to do some audits with customers. Around 30 customers have been doing an audit together with us in Bravida, and we have no -- not find any signs of the same issue that we had in one branch in Malmo that we also filed to the police in the spring. And that is, of course, good. The inflow from customers who wants to do audits has decreased a lot. We are seen as a very strong, reliable and good supplier for most of our customers, and I think that is really good to see. We also have presented some new contracts the last weeks from public customers, which is the sign of that we have a big trust in the market, which is good. With that said, we have to deal with this certain matter in one branch of south Sweden. We have done it and we will continue to do it. Regarding acquisitions in 2024, 8 acquisitions is completed in so far this year, adding around SEK 400 million in sales. We continue to see a good pipeline or opportunities regarding acquisitions. The pipeline is strong of potential candidates, and that will give us the opportunity to continue the strategy of selective M&A growth. With that, I hand over to Asa, who will take you through the different segments. Here you are.

Thank you, Mattias. And then as always, let's start with Sweden, which is our largest country, where we had -- the top line grew marginally to SEK 3.7 billion and the organic growth was negative with minus 2%, compensated by growth from acquisitions of plus 2%. We have a really strong production in the installation business in Sweden and also service declining a bit in the southern part. So that means that the service part was 48% of the total sales compared to 50% last year. The EBITA was SEK 221 million compared to SEK 248 million last year, and that is a margin of 6% compared to 6.7% last year. So the margin is declining a bit and that is, as Mattias said, because of the very weak market that we see in the southern part of Sweden. That also has an effect on the margin. We have been taking actions there to adjust to the market conditions, and we will continue to do that. Order intake, plus 17%, and the main part of that is coming from installation. We have a large activity in installation projects in Sweden now from infrastructure and industrial projects. So backlog increased plus 15% year-on-year and also increased in the quarter. Then let's move on to Norway. Norway did a very good quarter, this second quarter. The growth in sales was high 22%. So the top line was SEK 1.6 billion compared to SEK 1.3 billion last year. And the growth came both from acquisitions and from organic, so 10% from each. The Thunestvedt, the acquisition -- the larger acquisition that we did last year is included in these figures, and it's adding about SEK 600 million yearly. And year-to-date, it was almost SEK 300 million that are in the books. So EBITA was SEK 92 million compared to SEK 75 million last year, and that is an EBITA margin unchanged of 5.7%. And if you would have excluded Thunestvedt that is diluting the margin, it would have been 6%. But -- so we are improving in Norway. The Thunestvedt is going according to plan, and that is -- we plan that it will be a 0 margin in this year, and they are on a black 0. So that is all as planned. The order intake was 25%. That is mostly coming from service. Service grew a lot in Norway this quarter, I should say. And the service part of the sales was 54% compared to 52%. And if you look at the order intake, most of the order intake came from service, but it was also an almost double-digit coming from the installation side. Order backlog, minus 17% year-on-year, also decreasing in the quarter, but we see that there are many interesting projects in early phases in Norway that we hope will be going into our order books later on. Then moving on to Denmark, where we have a new division manager started 1st of May, Christian Also. And in Denmark, we had an unchanged top line on SEK 1.7 billion. And the service part actually grew a lot. So installation went down and service -- the service part is 45% compared to 38% last year. And this is according to plan. We are taking down installation in these regions that we have some challenges in and we're being very selective on taking on new projects. Organic growth was 0 and also the growth from acquisition was 0. If you look at the EBITA, it was SEK 2 million in the quarter compared to SEK 71 million last quarter. So that is, of course, a big change. EBITA margin was just a black 0, 0.1% compared to 4%. And this is, as Mattias said and as we have communicated before, due to these challenges we have in 3 regions in Denmark. The others are performing very well. And we are taking actions, and it is going according to plan, but we -- and we still believe that we will go back to normal margins in the second quarter or in the fourth quarter, sorry. It takes some time for these projects that are now running with a low or 0 margin to get out of the order book. So order intake was SEK 1.6 billion, and that is down 32%, and the order backlog is plus 7% year-on-year. And the order intake is down in the installation business, and that is also according to plan where we are being very selective in taking on new projects. But as we said, we expect us to be back on normal margins in Denmark by the last quarter end of the year. So moving to Finland, which had a good quarter and a growth in sales of 17%, and this growth is coming from acquisitions. So the net sales was SEK 647 million compared to SEK 553 million last year. Also the EBITA improved SEK 30 million compared to SEK 16 million last year and the margin improved to 4.7%. And they have -- even though Finland is a very weak market now with a low demand, they managed to improve the margin and improve the profitability in the installation business. So order intake decreased by 11% and this is due to a decrease in installation. And the order backlog was minus 7% year-on-year. So then let's look at our financing and cash flow. If you look at the chart in the middle, you can see that we have improved the cash flow a lot this quarter to SEK 548 million compared to SEK 134 million, and that means that year-to-date we are on SEK 947 compared to SEK 193 million. And this improvement is mainly driven by the working capital where we have had a big focus on. And a lot of the improvement is coming from Denmark, which we are very happy to see. Cash conversion also improved to 112%. Quarter-to-quarter, it was 90% the last quarter and last year it was 69%. And this good strong cash flow means that the net debt on the left hand side remains low and that is providing capacity for us to continue to do profitable M&As and continue to distribute dividend to our shareholders. We -- yes, so the net debt to EBITA level is -- the net debt is SEK 2.5 million and the net debt to EBITA ratio is 1.1x. We still have 3 large payment receivables that we have talked about earlier and that is one in Norway and 2 in Denmark. And the one in Norway, the Stavanger sykehus, the hospital, is expected to be -- we hope that we can solve it before. But probably it will be solved in arbitration at the end of next year. The 2 Danish ones, one is also a hospital, and that was supposed to go to arbitration next year. That has been postponed and will not be resolved until 2027 is the latest that we have heard about that. Very unfortunate. The other one, the university, Niels Bohr, we expect that to be solved end of next year also. So it will take some time before we get that money into our books, but we believe that this will have a -- it will not have any effect on the P&L, but it will have a strong cash flow -- positive cash flow effect. So our financing. We have an RCF of SEK 2.5 billion. It matures in 2027. It has an option of 1 plus 1 year. We also have a commercial paper program of SEK 1.1 billion and EUR 50 million. And on top of that, we have a 3 year term loan on SEK 600 million mature -- that is maturing in August 2025. And by that and with a strong cash flow, I'm happy to hand over to you, Mattias.

Thank you, Asa. Let's talk about the market and the outlook for the market. That is always a question you have. Overall, we see stable demand for service activities. There are, of course, some challenges in installation that will continue, and there is a big variation between different geographies. In many places, we have a lot of investment in industry, infrastructure, transformation of the society, electrification, et cetera. In the areas where we don't have these investments, for example, in the south part of Sweden, the challenges are quite big. But on the other hand it's also fantastic that we have the ability to offset those changes in the market with the new type of segments due to the fact that we are in many places and have a very high competence in the company. Infrastructure, industry, defense facilities and civil engineering will provide business opportunities for us going forward. We will, of course, maintain our project selective strategy with continued focus on cost control across all projects and margin over volume is important. And we continue to see an attractive pipeline of acquisition opportunities. And next slide is our financial targets. You know we have a target to reach above 7% margin. Today, we are a bit away from that target. More than 100% cash conversion is presented to be above that today. And on average, we -- the last 10 years, we have been able to provide numbers exceeding this target as well. Net debt, as also I just told you about, is well below 2.5x. That will gives us a fantastic opportunity to continue to develop Bravida going forward. Sales growth, above 5%, which we also present in this quarter despite the fact that we have some challenges in the market. And the one of you who have been shareholders for a while, you know that we have for -- ever since the IPO in 2015 increased our dividend every year and we paid out more than 50% of the net profit this spring as well. So if we should summarize the quarter, the second quarter of 2024, we do it with an increased sales at 5%, 8% coming from service, which is very, very good. Organic growth 1% in a challenging market. That shows us all resilience in the business model in Bravida as a company in a tough market. Growth from acquisition is plus 4%. And as expected, the margin is affected by challenges as we have earlier communicated in both Denmark and south part of Sweden. So when we bounce back in both Denmark and the south part of Sweden, the margins will recover, of course. We see good performance in Norway and Finland, strong order backlog, improved cash flow and cash conversion and the ESG KPIs are improving, both regarding the injuries and the safety for our employees as well as emissions from our business. So with that, we open up for some questions.

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A couple of questions from my side. Looking into the margin in Denmark it sequentially worsened a bit. I mean, is it just quarterly volatility or do you see any type of hiccups? Or was it big write-downs in this quarter compared to Q1? Or what's the reason behind it? And also secondly, has it changed your conviction in sort of the Q4 5% margin guidance at all?

No specific reasons. No, we haven't changed our guidance. No, it's not that we see it's more difficult.

Okay. That was very clear. But could you also help me a little bit accounting wise with the margin…

No, but I think it's when it comes to project execution there is a timing in the projects in the first place. Then when it comes to how much you are producing in different projects affect the overall average margin. We have a new management in place who has to learn to understand all the KPIs and learn to know the organization. So I think there is more -- no really some facts you can point at. I think it's just in line with what we have said that we expect low margins in Denmark in the second -- first, second, third quarter and back to what we say normal margins again in Q4. So we haven't changed anything. It's more a timing effect of different things, of course. So we are still very confident that Denmark will come back to good margins and this is isolated to 3 regions. What we can see is that we have been able to win new projects with better margins, with better contract terms the last 6 months than we ever had done before. So this is just a matter of time. If you look at the medium term target, I will expect that Denmark will be one of the best divisions in Bravida. That's something I'm quite confident about, if nothing dramatic happens in the market, of course. But if we look at the situation we have today, we are very confident with Denmark going forward, expect (sic) for the Q3 next quarter.

Yes. Sounds very encouraging. And accounting wise, I mean, obviously, given your implied margin guidance in Q4, this will also be implied that the problem projects will be fully delivered upon in Q3. Have you taken sufficient write-downs? I mean, you have done write-downs for quite a while in Denmark. But how is the POC looking for the 3 problematic units? I.e., will Q3 be weaker than Q2 as projects will be fully delivered upon? And you also, perhaps depending on the POC facing a risk of over vacuuming the revenue recognition? Or how is the finalization of these projects looking from an accounting point of view?

Normally, that's not number we are disclosing. I don't know, I'm sure we have the 100% fact either. But the POC in Denmark as such is improving. And in these certain projects, of course, when we're doing write-downs, adjustment in the projects, they are going the same direction. I don't have that numbers. But the POC in Denmark is improving. Do you have anything to add Asa?

No. It is improving and we are seeing that we're getting -- the new projects that we are getting into our portfolio has good payment plans also. And we -- yes, as I said, most of the projects are like 9 to 1 years long. So they will go out from the order books soon. So if -- not all, of course, in Q3, there are some in Q4 also. But we believe that Q3 will be also a weak or weaker and then it will improve in Q4.

Yes. And I also think if we take some more color on Denmark from another perspective is that, as you know, Carl, I spent some months in Denmark to learn to know -- to try to steer the Danish organization. What I learned when I was there was that we have very, very skilled people. Today, with the leadership of Christian Also, you also see that we are -- we have done some changes in the organization. We have a very motivated management team in Denmark, a skilled team. And we also see that we are very attractive to new people who want to be part of the Bravida journey in Denmark going forward. We are attracting a lot of talents, which is also a good foundation for the journey going forward. So it's not only that we are cleaning up the business, we are preparing the organization and improving the organization week by week as well.

Okay. Very helpful. And also in Sweden, we discussed the pricing situation quite a while now. Any updates there, sequentially, better, worsening? And also, looking at your order intake in Sweden was up 17% year-over-year, as you said, driven by small midsized projects. If I recall, Sweden is basically the 1/3 of the Swedish or the southern part is the 1/3 of your Swedish business. Could you update us a little bit by the order intake by region and whether you've been sort of more prudent in southern parts given the pricing and maybe more forward leaning in the northern parts or how is it looking or…

No, but Sweden is -- you take a -- draw a line between, yes, Stockholm and Gothenburg and going south, the market is challenging, maybe a bit north of that as well. But the further north you get, the better the market is. As you said, south is slightly more than 1/3 of Sweden. The market condition is tough. It isn't worsening for the moment. It is -- I think it has bottomed out a bit. We hear some few positive things, but I think it's too early yet. We will have a challenging 2 quarters at least ahead of us in the south part of Sweden. But on the other hand, the rest of Sweden is doing well. So when the market conditions comes back in south part of Sweden, we expect Sweden as a segment to go back as well. And let's see what happens with interest rates, et cetera due to the news this morning. So there are some months, quarters before it starts to improve, I think. But we are closer and closer to that point.

And on the order intake side, the 17%, is it driven primarily then by the northern parts given that you might be more prudent in southern? Or how is the order intake looking in southern parts then?

No, but I think that reflects what we have said. The order intake is better than in north.

It's -- the order intake is very good up in the north actually. And then the more south you come, the worse it gets. And that goes for services also lower in the southern part. So -- but as Mattias said, we see some signs of it sort of bottoming out so that we can -- maybe it will improve a bit now.

Okay. It's good to hear that you're prudent then in the south.

Thanks.

[Operator Instructions] The next question comes from Karl-Johan Bonnevier from DNB Markets.