Fasadgruppen Group AB (publ) (FG) Earnings Call Transcript

Thank you very much, and welcome to this presentation, Fasadgruppen Second Quarter 2022. And my name is Pål Warolin. I'm the CEO of Fasadgruppen and together with our CFO, Casper Tamm, who will guide you through this presentation. Next slide, please. Let's start, as usual, with Fasadgruppen in brief. We are the market leader in Scandinavia within façade work. And façade work is a highly specialized and local market with a high level of craftmanship. By façade work, we mean almost everything related to the shell of the building. So the service offering consists, for example, of masonry, plastering, installation and renovation of balconies, installation and renovation of windows, roofs, glazing, almost everything you need a scaffolding to do. Fasadgruppen is focused on midsized projects in the range of SEK 1 million to SEK 100 million, with an average project size of SEK 3 million to SEK 4 million. At least 75% of projects relate to renovation. We have a very active M&A agenda, with the aim to consolidate the highly fragmented Nordic façade industry. The group currently comprises 51 businesses across Sweden, Denmark, Norway and Finland in a very decentralized structure and has about 1,900 employees. Next slide, please. Take a look at the key financials, last 12 months. First of all, the net sales is more than SEK 3.5 billion. And the adjusted EBITA, SEK 366 million, which gives us an adjusted EBITA margin above our financial target, close to 10.5%. I'm also very satisfied with the order backlog, more than SEK 3.1 billion. Next slide, please. The second quarter in brief. The second quarter was a very strong second quarter, both in terms of net sales and profitability. We have very high activity, a lot of projects ongoing. We also won a lot of new orders in the quarter on all our markets. Of course, we have had some challenge with the price increases on the material. But overall, we've been very successful in maintaining project margins. Both -- if you take a look at the -- we've been good at negotiate with both suppliers and our customers. And we have also bought more than used earlier for stock to keep the old price. The net sales is up 79.3% compared to same period last year, which 4.3% was organic. The adjusted EBITA margin, 10.2%. And the order backlog, we have very strong growth in the order backlog. The order backlog is up 85.6%, of which 26.6% is organic. And continued favorable M&A conditions: 7 new acquisitions in the second quarter and 18 so far this year. Next slide, please. Let me take a look at our acquisition overview. Our highly fragmented market continues to favor M&A activity. As I just mentioned, 18 businesses acquired in 2022 with an assessed annual sales of almost SEK 1.2 billion, and it's pretty much the same as the full year last year. Actually, it's a little more businesses this year than last year. Our pipeline is still looking good going forward. We have -- after the end of the second quarter, we have added Finland as a new market with an untapped potential, very interesting opportunity. And we have grown a lot in recent years, but we are still a very small market leader. And there's still plenty to do. And we're going to continue the way we started. We're going to be a selective approach with focus on quality companies, as always. Next slide, please. We take a closer look to some of the acquisitions in the second quarter. And all of these acquisitions are good examples of how we acquire companies. They are all internal tips from our subsidiaries. We are really proud that we managed to acquire those companies with really great people behind. First of all, the Danish company, Kjær Knudsen, and they have a real long history, founded in 1931, strong position within façades, roofs and windows in the Copenhagen area. Customers serving tenant-owners association, construction companies, municipalities, and it's really strengthen our Fasadgruppen's position in Denmark and Copenhagen area. Next one, a Swedish company, GAJ Stålkonstruktioner. They also have a very long history founded in 1935, third-generation family business. They offer steel construction and forging and, in one way, a new area for Fasadgruppen. I mean Fasadgruppen has had this offer before. Then we have used subcontractors. We have an old subsidiary. So we are very happy and proud with this acquisition. The third one is Stenklint, also a Danish company, a quite young company compared to the other ones. That's a very innovative company founded in 2009, specializing in façade renovation and windows. They really have some specific solutions, so we can learn from each other there, especially the Danish company there, very interesting. So it's also strengthened the Fasadgruppen's position in the Copenhagen area. The last one here is Norwegian, Chem-Con and founded in 1982, and they are active in Stavanger and surrounding areas that are focused on masonry and plastering, including building integrated solar panels. And they are also strengthened Fasadgruppen's position in the Western Norway. Actually, they have already moved to the same office as one of other subsidiaries at RSM Fasade. So a start -- a great start there together. Next slide, please. Then we have a quick case study from the second quarter, a very common project in Fasadgruppen, renovation of million program housing. In this specific case, the subsidiary, Johns Bygg & Fasad, is carrying out an extensive renovation of 15 multifamily residential properties for Balder. The work includes new façade panels, reclustering of cables and window replacement, renovation of balconies. In addition, one thing that is very interesting is that the balconies will be glazed by Alnova Balkongsystem, another subsidiary of Fasadgruppen. So it's, once again, a nice and great cooperation between 2 of our subsidiaries. And we can still see a great demand for innovation of the million program. Next slide, please. And then we are ready for some financials. So I will leave it over to Casper.

Thank you, Pål, and I will take you through some highlights in the quarter 2 financials. So next slide, please. We saw strong order intake and profitable growth in line with financial goals, which characterized the second quarter. Revenues, with a strong development, reached SEK 1.2 billion, with an organic growth of 4.3%. Here, we still had 28 companies that were comparable for the period out of the total of approximately 55. Adjusted EBITA reached SEK 123 million, with a margin of 10.2%. So a margin well in line with our financial goal. And as Pål already mentioned, a very strong development for the order backlog, which is up SEK 1.2 billion since year-end, now reaching SEK 3.1 billion at the end of the quarter. Profit for the period was nearly SEK 77 million. And per share, it was SEK 1.58. The operating cash flow was slightly negative due to weak net working capital development for the quarter. I will return to this later on in the presentation. Next slide, please. Looking on net sales and order backlog for second quarter. As already mentioned, the strong development for the net sales, up 80% on a year-on-year basis, with a split on organic, 4.3% and acquired growth of nearly 76%. And as already mentioned from Pål here, we have approximately 15 new acquisitions in the first half of 2022. We saw some price surges on materials. The group has over -- on an overall basis, been successful in maintaining project margins. Looking on the organic growth here, we had the exchange rates effect had a positive impact of 1 percentage point, and the organic growth besides the exchange rate effect is partly made up of the effects from cost inflation on materials. Looking on the order backlog. As already said, a very strong development. The organic growth was nearly 27%, with a very strong order intake for the second quarter. And a new acquisition amounted to approximately SEK 0.6 billion out of a total increase of SEK 1.2 billion since year-end, very strong development. Next slide, please. Adjusted EBITA in the second quarter. We saw an impact of higher raw material prices in the economy that had a certain negative effect on the profitability during second quarter. The war in Ukraine had a limited impact on the group's material deliveries and also personnel situation. This is due to the fact that we operate in only Sweden, Norway and Denmark, with a very limited amount of personnel and material that come from the warring countries. Nonrecurring items in the period reached SEK 7 million. That was mainly made up of mergers and acquisition costs. And we can go to the next slide, please. Some comments on the P&Ls -- not the P&Ls, the P&L. Looking on the other revenues, you will find effects from positive revaluations of earnouts, Further below in the P&L, you have depreciation and amortization. This is made up partly of depreciation on acquired intangible assets, which is approximately SEK 6 million to SEK 7 million per quarter. And for other operating expenses, it is further below in the P&L. Here, we find nonrecurring items as we mentioned mergers and acquisition costs and also negative effects from revaluation of earnouts. And looking on the financial net because we have the cost on external debt, which was SEK 4.7 million in second quarter and SEK 6.5 million in first half 2022. So this is approximately 50% of the financial net then, which is interest cost. Next slide, please. So balance sheet. Reached a total of SEK 4.4 billion. And on the asset side, we can see increases mainly in brand and goodwill. And this is, of course, due to the accretive acquisition agenda, and we have no depreciation from this part of the balance sheet. On the equity side, the increase between the periods is mainly due to the targeted new share issue in March, which added SEK 410 million. On top of this, we also had offset share issues in acquisitions, which added a further SEK 42 million. We have paid dividend with SEK 58 million during the quarter. Looking on the leverage. On the right-hand side here, you can see that we have a total interest-bearing net debt of approximately SEK 1 billion. And if you break it down interest-bearing debt from finance institutions make up SEK 1.3 billion. The net debt to adjusted EBITDA was 2.3x for the quarter. And here, we could also mention that looking on this key indicator, on a pro forma basis, it was 2.0x. So next slide, please. And as already mentioned earlier in the presentation, the net working capital development for the quarter was weak, especially in contrast to first quarter when we had the opposite situation with a very strong cash flow for 2022. And the main reason for the negative operating cash flow and cost-cash conversion, of course, in the second quarter here, while we had the operating cash flow of SEK 8.2 million negative and, with this, follows, of course, a negative cash conversion. Just some effects on the net working capital, which is the main case for the development here. So the weak working capital development is mainly due to the fact that we have actively worked to ensure prices for the projects through earlier purchases of material. And this has created a delay in the relation to when invoicing to the customer can take place. There are some other factors as well, and this is the project start-up phase that normally occurs primarily in the second and partly first quarter of the year and as well as, of course, a more extensive project activity due to the strong order intake for the first half of 2022 and also companies added between the periods here. So all this makes up for the slightly weaker operating capital development. It should also be mentioned that many of the projects are then completely primarily during the fourth quarter in the seasonal cycle, which usually has a positive effect on the working capital for Fasadgruppen. So then next slide, please, and then I leave it over to Pål here to make a short summary.

Thank you very much, Casper. And we go to the next slide, concluding remarks. We really had a great order intake this quarter. So we have a really strong order backlog. We're going to continue to focus on project margins. So we can be -- I believe that we've been pretty successful so far. But -- and I also think that we have the worst behind us. We also have a solid M&A pipeline in all our markets, and Finland is added after the second quarter, another market with untapped potential. And it's a very stable underlying renovation demand. With the market drivers still very good, we are very optimistic when we look ahead. Thank you very much. That was all from our presentation. We are ready for some Q&A, please.

[Operator Instructions] The first question is from Carl Ragnerstam from Nordea.

It's Carl from Nordea. Firstly, a question. If you could shed some light on the raw material impact on the EBITA margin in the quarter. If it's -- I'm not sure if it's possible to do that, but if you could shed some light on it. And secondly is if you expect sort of the raw material effect on earnings to be tougher when we're entering Q3, given that you mentioned that the inflation is sort of picking up for a few of your materials.

Hello, Carl. I mean the effect on the margin. First of all, our business is a lot of projects. So it can, of course, change from year to year. I mean we have a financial target over 10%. But of course, it has had some effect so far on the margin, we believe. But it's also -- I mean it's also -- as I mentioned here in the presentation, I believe that the worst part is behind us because in this second quarter, we had some projects that we weren't able to move the cost 100% to the customer. But in the third quarter and in the fourth, we have a lot of projects which start, and then we have, let's say, the new prices in our calculation. So I believe that we're going to improve the margin a little bit over the year, even though it's going to be hard to reach -- perhaps to reach the margin that we had for the full year last year. But I believe they're going to get closer.

Okay. That's very good. And also in terms of your order backlog growth, organic close to 27%, could you comment if it's driven by any specific market or geography? And also, I guess, a problem in the construction industry historically has been that organic growth or gain the market shares tend to come with lower margins. So my question is also how certain you are that you've taken the project to sort of the right margin and also taking the inflation into account.

Yes. In a general way of speaking, first of all, I'm very, very comfortable with the order backlog. The fact that this increased almost 27% organic, it's both that it's -- I mean it's a lot of activity at our market. It's -- we have a lot of inquiries incoming all the time. But of course, it's also an effect of the inflation. As mentioned here in the earlier question here, a lot of projects will start up here in the third quarter and in the fourth quarter. We have won those projects with the new prices. So therefore, I'm very comfortable with the project we have in our order backlog. And actually, some of the projects, I really believe that we have also won the project with new prices, high prices. And then we have some -- actually, we have some materials, which the price is going down. So perhaps we can have some -- a little bit of a positive effect there in the end of this year.

Okay. Very good. And also, I mean, could you comment if you have seen any fluctuations or variations in the order trend during the quarter and also during July and so far in August? I mean have you seen any market starting to become more muted, I guess, partly in the sense of your -- the small new construction exposure or anything, if you have seen?

No. I mean, as we also mentioned here, we are very positive. Of course, we are -- I mean we have to listen carefully and follow it up carefully. But right now, we cannot see any kind of bad signs of things happening in the market. Of course, we -- I also can hear the news, and I can also see what they say about the construction companies, but I mean we have today so much for the renovation instead of the construction companies. And our subsidiaries are a little bit more focused on infrastructure. And they have a really good order backlog in a long way in next year. So therefore, once again, I'm -- it's very hard to see any bad sign right now. But of course, we have to follow it up closely. But inquiries are still in coming after the vacation. And I mean, we have also won a lot of interesting orders in -- actually in July. So I'm very positive and optimistic from what I can see with that.

Okay. And that's very good. Could you also find just -- give us a split between volume and price on the organic backlog growth?

The volume and price on the order backlog?