Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Bravida Q1 Report 2019. Today, I'm pleased to present CEO, Mattias Johansson. [Operator Instructions] Please begin with your meeting, sir.

[Mattias Johansson, CEO & Group President]

Thank you very much, and welcome to the presentation of Bravida's Q1 report of 2019. Today it's myself, Mattias Johansson, CEO, that will lead you through this presentation. And I also have support from IR, Peter Norström, to answer your questions, if needed, today.As usual, I want to take the opportunity to explain our risk profile on Slide 2. First, and important to remember, is that we have a very low customer concentration with more than 55,000 customers. Second, we have diversified end markets with many different types of customers in different markets and in many different locations. And last, we have small average contract size. Around 30% of our order is below SEK 1 million, and in total, around 70% are contracts below SEK 10 million in order value.Turning to Slide 3 and the highlights for the quarter. In the quarter, the net sales grew 10% to SEK 5 billion and we had an organic growth at 5% and M&A contributed with 3%. I'm very happy to say that we had growth in all countries, and service sales is developing in a positive way with 7% growth and installation growth was 12%.We had a very good order backlog at the level at SEK 13.5 billion. Continued good momentum in order intake and the order intake in the quarter was close to SEK 6.5 billion. And we had strong order intake in all countries.EBITA is up 11% to SEK 251 million compared to SEK 226 million last year. And the margin is stable at 5%. The EBITA margin is improved in Sweden, Denmark and Finland. And in Norway, it's lower -- the margin is lower due to write-downs in 2 old Oras projects as we have told you about earlier.The cash flow is strong. And from operating activities, it's SEK 414 million compared to SEK 58 million last year and the cash conversion is 131% and that is with the new IFRS principles. If we compare to the old principle, we are very high as well at 124%, which is something we are really happy about. The working capital is minus SEK 1 billion or 5.3% of sales. And net debt is SEK 2.1 billion or 1.6x adjusted EBITDA. If we exclude IFRS and compare to how we calculated this before, it's actually 0.9x EBITDA. So the debt level is low.On the acquisition side, we had done 5 in Q1 and another 5 so far in Q2, adding in total SEK 625 million in sales, and we think we still have a good pipeline to continue to do M&As.Turning to the market on Slide 4 and the market trends. We still think we have a good market and that service and installation activity is good in Sweden. The main growth drivers are public investments in buildings and infrastructures. The declining production of residentials, mainly in the capital areas, is replaced by projects from other types of facilities. And the construction confidence indicator is at normal level.In Norway, the drivers are mainly public investments and energy efficiency projects. And overall, the service and installation activity is good. And we also can see decreasing activity in residential construction mainly in the Oslo area.In Denmark, there still is a good market. It's supported by public investments and residential construction actually. Health care and education buildings are also driving the volume. And the construction volumes of commercial buildings increases as well as data centers.In Finland, as I said before, we think the market is stable. Refurbishment and public investments is at good level. And we have a stable service and installation market.On Slide 5, I will take you through the sales and EBITA development for the group. The sales growth was 10%, as I mentioned earlier, and 5% of this was organic and 3% was contributed from M&A. We had sales growth in all countries and organic growth in Norway, Denmark and Finland.EBITA is improved with stable margin, and EBITA is up 11% in Q1 to SEK 251 million and the margin is unchanged at 5%. The EBITA margin improvement in Sweden -- we had an EBITA margin improvement in Sweden, Denmark and Finland. And in Norway, it's lower mainly due to write-downs in 2 old Oras projects, as we have mentioned a couple of times before.On the next slide, Slide 6, you can see that our order backlog is at a very good level at SEK 13.4 billion. It's actually up 24% compared year-to-year, and the increase in order backlog in Q1 was close to SEK 1.5 billion. We have an increasing order backlog in Denmark, Norway and Sweden. One -- and usually, we have some example of slightly big projects to mention, but mainly, it's very -- many small and midsized projects in the order backlog. We had 1 large order in Sweden, the Stockholm Bypass Project and a hotel in Copenhagen at the Kastrup airport and 1 large hospital in Stavanger in Norway. I had mentioned it before, but I think it's important to say that the service is not included in our order backlog and that means that half of our sales, 46% of our sales is service and they are not reliable on the order backlog in the same way.Now turn to Slide 7 and the acquisitions. We have done 10 bolt-on acquisitions so far in '19, adding SEK 625 million in sales. Approximately SEK 200 million of these are in Sweden and SEK 430 million in sales is coming from Denmark. We have a continued strong pipeline and we are doing the acquisition at attractive multiples. So no change in the pipeline or in the prices or multiples we are paying for the targets.Turning to Slide 8 and the financial performance for the group. We had a net sales growth, 10%, as I said; organic growth, 5%; EBITA increased by 11%; and the margin is unchanged at 5%. The finance net is minus 24 compared to minus 9. And there are some negative currency effects and some effects from IFRS 16 as well. Earnings per share increased by 6% and it's plus 15% the last 12 months.On Slide 9, I will take you through the performance of the different countries and we'll start with Sweden on 9. In Sweden, sales growth was 3% in the quarter and we had stable activity in both service and installation, and the margin is up to 5.6% and it is explained by improved gross profit margin. The market is still good and the order intake is 39% up year-on-year. And many small and midsized orders in the order backlog and order backlog is up 49%.On the next slide, we have our second-largest market, Norway. And I'm on Slide 10 now. Sales growth 15% in the quarter, very good activity in service and installation. And as I said before, we had some write-downs in 2 low-performing projects in Oras that had a negative effect on EBITA margin and these 2 projects will be closed and finalized in the quarter. So we will have some impact in the second quarter as well. After that, this will be ended and wouldn't have any impact on the Norwegian margin after the second quarter. The EBITA margin stops at 3.5% for the quarter. Existing -- originally, the Norwegian business is at the same level as last year so this is only due to the Oras project I mentioned. We have strong order intake, 26% up year-on-year. And as well -- in Norway as well as in Sweden, we have very many midsized orders and then we have 1 large order in the hospital in Stavanger. The order backlog is down 2% year-on-year but increased in Q1 by SEK 424 million. And as you had learned and seen there, the order intake or order backlog can vary from one quarter to another. Sweden was up in Q4, slightly lower in Q1 and the opposite in Norway. So this is quite natural. We have a seasonality in this as well. The order backlog is at good level in Norway.Turning to the next slide an update on Oras. I mentioned the projects -- the 2 projects we have had some problems with so I think it could be well-spent time to have an update on Oras and how the situation is in that acquisition. Before we bought Oras, they were the largest player within service and installation in heating and plumbing in Norway and we had a very -- actually very weak position in heating and plumbing in Norway. So this was one of the reasons why we wanted to do this. After the acquisition, Bravida has the position one in the market, which is important for us. We can now offer cross-selling in many locations regarding both service and installation. We have synergies from procurement and cost synergies as premises and group functions, of course. And all in all, with these write-downs and the price we paid for Oras and loss carrying forward, we had some taxes, we have paid 0.17x of the sales, and I think this is an extremely good acquisition. And I just wanted to mention that. So we're really looking forward to develop Oras again with the rest of the Bravida team in Norway.Turning to Slide 12 and Denmark. 19% in sales growth. Good activity in both service and installation, EBITA is improved by 24% and the margin is up to 5.2%. And this is very much due to relative lower administration costs. And the order backlog is at strong level. Order intake is plus 24%, and order backlog is up 7% year-on-year. We have many -- as well as in Norway and Sweden, we have very many small and midsized orders. And then I mentioned the hotel at the Kastrup airport in Copenhagen.On Slide 13, we had our smallest market segment, which is Finland. But it had good growth, 34%, explained by both organic growth and the acquisition of Hangö Elektriska. Hangö was acquired in the 1st of October 2018. In total, EBITA was improved to SEK 3 million and the margin was improved to 0.9% in Finland. And on a running basis, the last 12 months margin for Finland is 2.1%. The order intake was up 24%. And again, many small and midsized orders. The order backlog is down 9% in the quarter.Now over to the net debt and the cash flow on Slide 14. Our strong cash flow, as I mentioned before was 131%, has taken down our debt level to 1.6x LTM EBITDA. And this is the calculation with the new rules for IFRS. If we should compare how we had calculated this before, it's actually down to 0.9x LTM EBITDA.To the bottom left, you can see that our operating cash flow was SEK 1.4 billion, which is very good. And there are many numbers that is good in this report, but maybe the cash flow is the best.On Slide 15, we have the financial targets. We have said that we will grow this business 10%, a mix between organic growth and acquisitions. The margin on 7% is another financial target. We make it slightly different for us but we continue to do M&A in the pace we are doing for the moment, but we think that we can, over the time, reach this target for the whole group. The cash conversion and the target for that is 100%. So this quarter is not in line, it's very much above the target. We have said that we want to pay out at least 50% of the net profit. We are slowly getting closer to that target. We have increased the dividend with 29% this year and I think it was 26% on average since we did the IPO. The net debt target is 2.5x the net debt-to-EBITDA and we are below that target for the moment.On the next slide, you can see what we have done the last years. I think it could be great to actually look back what has happened with the company. And we have a business model that creates a lot of cash, and this cash flow can be used to consolidate a very fragmented market through M&A and also pay dividend at the same time as well as we're taking down the debt level. And this is, of course, very good. We have always a focus on margin. Margin is always more important than volume, but we have proved that we can grow our business in a balanced way with improved margin as well. We have doubled the volume the last couple of years and kept the margin, yes, on higher level. We have improved the margin as well as -- at the same time as we have grown the business.On the next slide, I will summarize this presentation. A good increase in sales, 10%. Organic growth was 5%. And the installation order backlog is at record level, SEK 13.5 billion. We have a good -- continued good business momentum for service that will support the organic growth in the future. The EBITA margin is stable at 5% and it is improved in Sweden, Denmark and Finland. Phasing out 2 low-performing projects in Norway in Q2. We have M&A execution on track with a healthy pipeline. We have done 10 acquisitions so far in '19, adding SEK 622 million (sic) [ SEK 625 million ] in sales. And the net debt is 1.6x the EBITDA. And I mentioned the IFRS effect a couple of times now. And the operating cash flow was strong at SEK 1.4 million billion -- SEK 1.4 billion (sic) [ SEK 1.4 million ], sorry. And the cash conversion is above the financial target of 131%.And before I open up for questions, I have learned in this business that it's important to just mention the Easter. And I think you all know this by now, but we are slightly -- we are reliant on the amount of working days, and especially in Norway and the Easter in this year is actually affecting or impacting that second quarter. And we will, of course, see that hit the numbers in Norway. But not more, I presume, than usual. It's just the same as it always is.So thank you very much, and I think we can open up for some questions now.

[Operator]

[Operator Instructions] Our first question comes from Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

Starting with Oras, could you maybe quantify how much in figures the 2 bad projects impact the numbers in Q1? And also how much do you expect them to impact numbers in Q2 when they are completed? And could it be that the figure is higher considering we're approaching completion of those projects?

[Mattias Johansson, CEO & Group President]

I think you can say that the difference in margin from this year compared to last year is actually close to everything is coming from that -- those 2 projects in Oras. And I would say that the impact in Q2 will be the same.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And do you have any more old Oras projects in the backlog now in Norway or is everything behind us? And also what level of profitability is Oras operating on now when it gets new projects?

[Mattias Johansson, CEO & Group President]

Yes. I would say that this is the last project from the old order backlog. And those 2 projects were started quite late as well so that is why it's happened now. One of those projects started actually last summer, so that was very late in the order backlog. Otherwise, we have implemented the same control regarding new tenders in Oras. We have the same tendering meeting the same levels of limits where they are allowed to submit tenders as we have in Bravida. And in some -- 1 branch, we actually have a tendering office where we are steering and signing all tenders, not only slightly big ones, but we are actually controlling and signing all of them. And that's related to that branch that had some issues in this matter now. And we have said before that we think that Oras will be around 2% to 4% in '19. And if we exclude those 2 projects, I see no reason to change that estimate for the future.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And you have been quite acquisitive this year. I mean you bought 10 companies already versus I think it was 12 last year in total. I think also you said in the last conference that you're strengthening your M&A team. Should we expect much more M&A here going forward? What is your reasoning here?

[Mattias Johansson, CEO & Group President]

I think first of all, it's always a process when you do an acquisition. It's 2 sides who need to agree. But as you have said, we have strengthened the M&A team, which means that we want to do more than we have done before. But I would say the 10 so far in this year, it doesn't mean that you take 10 times 4 and then it makes 40. We'll have to do more than we have done before, but it will vary from one quarter to another. But we will continue to do M&As, yes.

[Predrag Savinovic, Analyst of Consumer Goods]

Super. And it's been a while since we talked about pricing and wage inflation. Could you update us a bit on the trends there? And also, considering maybe now that the market isn't growing in the same pace as it did 2 years ago, what kind of effects can we see from those two?

[Mattias Johansson, CEO & Group President]

If we start with the market, I would say that we don't see any differences in the market today as compared to last quarter. The changes that we have seen for a while is that we're -- there are lower demand for residentials in the Stockholm area, which you know is a small segment for us. No change in that. We can also see that those -- that market is replaced by renovation, but our market is -- we usually talk about the macro, but our market is very local. We have 300 addresses or -- yes, 280 different branches, which means that the local market is important for us. But no changes in the market. And now we only have 2 of the big 4 construction company that sits on the Board. But what we can see from those companies' order backlog, they are quite okay or good even in the first quarter. So no changes in the market. Wage inflation, no changes as well. We are in a market where we have the union -- central agreement in unions and everyone gets the same increase regarding the salary side. So no changes, and we think we have been doing the new negotiations on the supplier side in a decent way as well during the spring. So I think this is status quo.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And finally, just on the calendar effect in Q2. It's a normal level, but is it like 1% on sales or so we should expect that...

[Mattias Johansson, CEO & Group President]

In Norway, I would say, that I guess 1 week is off. If you count the working days, I think that's a good way to estimate it actually. And in Sweden -- Finland and Denmark, we don't have the same effect more than you have some red days, of course. In Sweden, you might have the red days plus maybe 1 or 2 days on top of that, but you have a week plus a day off in Norway.

[Operator]

Our next question comes from Lucas Ferhani from Deutsche Bank.

[Lucas Ferhani, Research Analyst]

So my first question would be on the competitive environment in Sweden. Like it was said before, the market, part of it is slowing down a bit. And also I think Caverion might be coming back as more of a competitor. Do you see that response overall in the market? And with the slowdown, do you see an issue in terms of pricing?

[Mattias Johansson, CEO & Group President]

Actually not or no on all questions. I think Caverion is acting quite rational. They are focusing on -- as I see it, I don't have the correct answer, of course, but my feeling is that they are focusing more on margin today than they did a couple of years ago. But the environment, in total I think that's the same. Of course, there are some competitors who have been doing residentials and tried to do other things, but we are quite small in the Stockholm area anyway. So the market is still big enough for us to be able to find the projects in the same way or to the same extent as we have done before.

[Lucas Ferhani, Research Analyst]

Okay. And again, on the leverage, it's at a very low level historically. You accelerated on the bolt-ons. Are you also looking at potentially making a larger deal the size of Oras, for example, something a bit bigger? And also, if that's not the case and you continue to do bolt-ons and the leverage stayed around 1x, would you consider starting a buyback program?

[Mattias Johansson, CEO & Group President]

Yes. First of all, I think that bolt-on acquisition is something we prefer to do. But of course, one reason why we think it's good to take down the leverage is, of course, that we are -- get ourselves into the position to do a slightly larger acquisition if we think it's a good way to develop Bravida as a company. And we are ready to do that if the opportunity comes.A buyback program. We have, of course, discussed with our biggest owners what they want us to -- what they prefer us to do with their cash. And as long as we can buy on those -- buy acquisitions or do acquisitions on the multiples we are doing today, which means that's lower multiples that we actually buy ourselves from. If we buy our own stocks, it's more expensive than buying other companies. So we prefer to invest -- continue to invest in new acquisition before buyback program and then you have the opportunity maybe to get some -- give some extra dividend, but I think that's up to the Board to decide as well. But we think we -- me as CEO, I think it's good to be in a position so we can do a slightly bigger M&A if the opportunity comes as well.

[Lucas Ferhani, Research Analyst]

Okay. And the last one again on Sweden. The organic growth in this quarter was maybe a bit disappointing. Do you expect it to accelerate a bit in the rest of the year? Or should we see pressure continue in 2019?

[Mattias Johansson, CEO & Group President]

Yes. It's always hard to forecast the organic growth, but what we know is that this always varies between -- from one quarter to another depending on how the large project is finalized, executed and produced where -- how the timing is in those projects. But what we can see is that we have a good order backlog in Sweden, so I think that we will have a good performance in Sweden in '19 definitely. If that means 5% organic growth, 0% organic growth or 3%, it's hard to say, but we will have a good year in Sweden in '19. That's something I strongly believe in.

[Operator]

[Operator Instructions] The next question comes from Robin Nyberg from Carnegie.

[Robin Nyberg, Financial Analyst]

A couple of questions from me. First, when do you expect to reach critical mass in Finland? Is it kind of 2- to 3-year journey for you? And what critical mass level do you refer to?

[Mattias Johansson, CEO & Group President]

We have said before that critical mass is somewhere between at least SEK 1.2 billion and SEK 1.5 billion and I think we are in the bottom range of that spend now. Of course, it's getting better and better the closer we get to SEK 1.5 billion or even above SEK 1.5 billion. We have seen the margin development in Denmark, for example. And I think one reason why we have improved the margin the last year is actually because we have actually reached a volume that is around SEK 2 billion instead of below SEK 1.5 billion in local currency. So I think we are in the bottom range. SEK 1.5 billion is definitely better. And then we will reach this in a mix from organic growth and acquisition. And of course, we need to do more acquisitions. We can't grow the business that much organically without taking too high risks, so we want to do acquisitions as well. And when we are ready to do the next acquisitions in Finland, we'll do that. It's very important for us to consolidate and integrate the acquired company that we did last year first, but soon we are ready to take the next step and we're looking forward to it.

[Robin Nyberg, Financial Analyst]

Okay. And then one question related to organic growth. You had quite good development also in Q1 and the backlog is at good level. So should we expect kind of similar level for the full year? I know it's quite difficult for you to forecast that, but will you give us some kind of indication?

[Mattias Johansson, CEO & Group President]

I think first, margin is always more important than the volume and I think you need to balance this because if you focus too much on the growth side, you take risks that actually impact the margin, which is something we don't want to. But I think we will have organic growth definitely. If it's -- as I said earlier, if it's 2%, 3% or 5%, I don't know, but 5% is something we have been delivering the last years, which also is a quite tough target. But we haven't changed the financial target yet. So we are actually positive about the organic growth. And as I said, it's hard to estimate. But if you look at a long-term perspective, we think we can continue to grow the company through both organic growth and acquisitions, of course.

[Operator]

Thank you. There appears to be no further questions. I'll return the conference back to you, sir.

[Mattias Johansson, CEO & Group President]

Okay. Thank you very much, and thank you for listening and thank you for the questions. And I hope you get a beautiful day out there. Thank you very much. Bye-bye.

[Operator]

Thank you. This now concludes today's conference call. Thank you all for attending. You may now disconnect your lines.