Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2022-Q1

[Mattias Johansson, executive]

Good morning, everyone, and welcome to Bravida's presentation of the Q1 report. And as always, it's Asa Neving and myself and I, who will take you through this presentation. And I think we have a really strong report to present to you today. So the agenda is quite normal. We start with our position in the Nordics, going slightly deeper into the Q1 result. Asa will take you through the performance in different countries, and then we will have a summary, and then you will get the opportunity to ask some questions in the end.

So starting with our position in the Nordic market. And I really want to repeat this again. There are some uncertainties in the market, some investors, customers, et cetera, are a bit worried. But I think it's worth explaining and mention once more that we have a very low risk in our business model because we have so many different type of customers in so many different places, different sizes of contracts, so low customer concentration on the end customer side, small average contracts and really, a diversified market overall.

Today, we have 12,000 employees in 300 branches plus. We are in close to 500 different addresses in the Nordics, meaning that we are in many different type of markets. So even if we have a market as you would consider as a strong demand in the market, we always have some places where the demand is slightly lower. And when the market is slightly lower in the perspective of demand, we have places where the demand is really high, of course.

The LTM numbers is SEK 22.5 billion in sales. We have a real strong cash flow and many of our customers is buying from us over and over again. We want to be a partner for our clients from the early design phase, building the installation or doing the installation in the new buildings. And then we want to do the service and renovation throughout the whole life cycle of the property. And we want to do it and we are doing it in a sustainable way. And we want to be the leader on the sustainable offer in this industry in the coming years ahead.

Doing everything within inside and building all installations that you're using, you have probably all used our systems 10 times at least already today. When your alarm clock is ringing, your phone has been charged during the night, that is our system who is actually making that happen. And then you're using the toilet maybe, that is also our systems. And then you are transporting yourself in some way and then you're using an access control system when you're entering the office, et cetera, et cetera.

So this is why I think why Bravida is a really nice place to work at, but also why I think it should be seen as a really good case for investment. Since 2014, we have had 9% CAGR on the net sales. And actually 10%, slightly better on the margin side. So we have been able to grow the bottom line, the profit in Bravida on average with 10% the last 7 years, and I think that is fantastic.

Meanwhile, during this period of time, the market conditions have changed a lot. We have had a pandemic, and now there are some other uncertainties and we are very confident that we can handle that in a good way as well, depending on what will happen.

But as I will mention a couple of times during the day, right now, we see strong demand for our services, and we have a strong order backlog, which gives us a really good position for the future, then something might happen in the society, so let's see what that will be, but we have a really strong and solid business model. That means that we can handle that.

Continuing with how we are transforming our business. Of course, we are here to help and support our customers with their sustainable journey as well. We help customers develop the full potential of their buildings through service and installation. We bring buildings to life, leading the way to sustainable and resilient society, and I think that is important to understand. Increasing energy prices is not good for the society, of course, but that means business for us, that is one example. More demand on sustainable KPIs for all our clients' customers means that we need to help them save energy, which is good for us and the demand in the market.

Going a bit more into the quarterly report and what has happened in the first 3 months in Bravida. First, the market outlook. As I said, still a good demand for both service and installation as we are standing here today. We see a growing demand for sustainable and energy-efficient solutions. Of course, we see a rising raw material prices, but we have known that since last summer, we've been discussing that internally. And we have actually taken that into consideration in all the bids we have made for the last 6 to 9 months. And 50%, as you know, of our net sales is coming from service. And to a very large extent, actually can exclude the material price risk on the service side because it's very often that we are charging the customer for the actual costs we're having on the material side, so the risk on that side is quite limited.

On the installation side, where we have a really strong order backlog today, good position going forward. I argue that we have been discussing that internally for the last year that we need to put in some higher material prices in our offers because we have known for a very long time that this will happen. And so far, we can see that the increased prices we have in our offers is actually in line with the increases we have got from our suppliers. So, so far, so good.

There is a risk for material shortage in the market. But I think as I -- when I read and listened to the construction companies' report, I think they struggle slightly more than we are doing in the installation business. Because so far, we haven't seen any or at least very small effects on this topic. So, so far, so good, and we are following this closely. We are sending out a survey to all our main suppliers every second week to ask them about the situation. So I think, so far, we have this in control, and we don't see this as a very big thing in the coming weeks, months, at least.

Of course, there are some uncertain times regarding interest rates and inflation, and that may lead to some different type of markets. But Bravida and our business model have shown before that we can handle different types of markets. And we know what to do. I have been in this industry and this company since '98. I'm in my -- actually 25th year at the same time as we are celebrating 100 years in Bravida. So we have been working in different types of markets before. So we know what to do to be able to defend the bottom line and the margin going forward. So -- but let's see what happens. There are some things we can actually adjust and do something about. There are some other things we can't. So we are focusing on the things that we actually can do to make sure that we are continue to developing the business in Bravida as a company.

The Q1 highlights is, of course, a top line growth of 11%. Both service and installation is growing. We have had a high sick leave in the beginning of the quarter as everyone else, but that has leveled out, and we are close to back to the normal levels again.

Organic growth at 4%, which is really strong because of the high sick leave in the beginning of the quarter. We see good order intake, plus 30%, and that is good in Norway, Denmark and Finland. A record-high order backlog, which is, of course, a good position to be in. And we have an unchanged margin at 5.1%. And in that margin, we have actually taken some costs for future investment that I will come back to later in this presentation. So saying that, that means that we have actually improved the underlying margin in Q1. Cash flow is strong and cash conversion is going back to old levels again.

The net sales, if we look at the same, but in a bridge, money-wise, organic growth contributes with SEK 229 million, M&A with SEK 243 million, and then we have some currency effect, SEK 100 million plus. Organic growth in all countries, except for Finland. And I think we have said before that last year was an exceptional year in Finland due to the growth -- organic growth perspective because of some large projects. We expect Finland to go back a bit on this KPI, but still a good position. And also, I will tell you later that we still have a really strong margin improvement in Finland.

EBITDA, 5.1%, as I said, and that is an improved margin in Norway and Finland, slightly lower in Denmark and flat in Sweden. The EBITDA, as I said before, is affected by nonrecurring costs for implementing a new digital solutions and systems that we think we need for really realize the business plan going forward, and that is SEK 14 million in Q1.

During the year, we have some digital initiatives, including initiatives for improving the service business that are estimated to SEK 80 million to SEK 100 million in 2022. And that is investment that we -- I think we need to be able to continue the journey, as I described a couple of minutes ago.

But anyway, with those investments, we still have a very stable margin and growth on the profit, which is, of course, really good and something I'm very happy for. If we look slightly more on these in more detail, we have increased recurring costs regarding that we're strengthening the IT platform. We are having a digital development capabilities, but also an increased sustainability focus and improved HR support. We are a people company. We need to be able to present to the markets, to the clients that also improve our own business on the sustainable side. And that means that we have to do some investments of new type of resources, new type of skill sets, et cetera, and that is something that we think will drive our development going ahead.

Then we have initial cost for investments in new business, businesses that is not recurring. And that is for the segment of technical facility management and building automation. We are investing in people, for example, and that type of growth of the organization doesn't contribute -- do not contribute with any profits so far, but it's expected to add positively to the margin in 2023.

So order intake and backlog, a record high order backlog, growing order backlog in all countries in the quarter, except for Finland. It's up, in total, with SEK 815 million. The order backlog is growing 20% year-on-year. And yes, a fantastic situation to be in. We -- as we see it, we think that we have put all the expected material increase prices -- material price increases into the offers.

And then the order intake is up 13% year-on-year as well. And that is very much coming from the growing service business when we open up the society again, we have more allocated hours from the service business. But still, we have high sick leave that maybe impact the service business more than it actually impact the installation business.

Sustainability is high on everyone's agenda as well as ours. We have a declining injury numbers with 22% on group level, which is, of course, a really strong development and something I'm really happy to present because our employees' safety is, of course, our highest priority. We can see a declining lost time injury frequency in Sweden, Finland and Denmark, and Norway is already well below our target of 5.5.

Regarding our own impact on the CO2 emissions, we see a slightly increase with a low 1%, but remember that we have been growing 11%. So in relative terms, we are actually improving that KPI. But I think it will take time before we see the impact of our all-new ordered cars. 57% of all new cars ordered is electrical. And we're talking about 100% electrical, not hybrid cars. But we haven't got them delivered yet. So it will take some time before we actually see that the CO2 emissions will go down.

Acquisitions, we have done 9 so far in '22, adding SEK 600 million plus. We have 3 acquisitions after Q1, adding SEK 400 million, and they are in those SEK 600 million. We still see a strong pipeline. We still see that we can do the acquisition on attractive multiples, and we also see somewhat increased competition. But I think my estimates going forward is that the strong pipeline will mean that we can continue to do M&A. But we also think -- I think that probably the prices will probably go down a bit and maybe the pipeline can grow because first 2 years of pandemic, and then followed by a little bit more shaky market will probably mean that more companies are willing to sell to a safe place to be in. And I think Bravida is a very good home for companies who want to sell. So we, together with the seller, can continue to develop their local business.

So Asa, please take us through the different countries.

[Åsa Neving, executive]

Well, thank you, Mattias. So let's start with Sweden then. And in Sweden, we've had a strong stable quarter where we grow the sales with 5% to SEK 3 billion. The growth was coming both from installation and service. The organic growth was 2%, and we managed to keep the EBITDA margin unchanged at 5.5%. Order intake a bit less, it was minus 6%, but we have a very strong order backlog at plus 6% year-on-year. So that will give us -- so we are in a good position going forward. And the order intake varies also within the country, you can say. So in the northern part, we still have a strong order intake, where we also have had a strong production for some time now. And in other areas, it's a little bit lower. But strong order backlog, which gives us a good position going forward.

Moving on to Norway. Norway had a very strong quarter. You can see they increased the top line with 29% to SEK 1.3 billion. The growth comes from both service and installation. Organic growth was 18%. And in local currency, it was 11%, so very high. And I'm also pleased to see that the margin improved to 4.7%. And this is due to the fact that Norway had very high sick leave rates during the first period of this -- the first part of the quarter had a higher sick leave rates in the company, but still they managed to improve their margin.

Order intake also very strong, plus 18%. It's 11% also in local currency. This order intake comes from both service and installation, mostly smaller projects that got one larger order in this quarter for Skanska with an electric installation in Sandvika. And as you can see, a very strong order backlog now with plus 63% year-on-year.

And then Denmark, also strong growth, strong top line growth, 12% to SEK 1.2 billion, also comes from service and installation. Organic growth is 6%. The EBITDA margin decreased to 4.4%, and this is that there are some project/departments that are not performing really the way we want them to. And they also have had pretty high sick leave rates, so that is the reason for that. But we believe that this will improve going forward.

The order intake is very high, 59%. This is -- comes both from service and installation, so 50-50 or 60-40, mostly smaller projects. But here also, we got some -- a couple of larger ones between SEK 100 million and SEK 200 million and a very strong order backlog on plus 35% year-on-year.

And then Finland, which had also a sales growth, 6%, to SEK 0.4 billion. Here, the growth is mainly in service. We had an organic growth of minus 16%, so a little bit slower, but we should then also note that the service growth is plus 15%, so it's installation that is slowing down. And this is, as Mattias said, last year, we had a large project in Wartsila, which had a strong production during this quarter, and we haven't been managed to compensate for that in this quarter.

EBITDA margin continued to improve to 3.7% compared to last year's 2.6%. So they really are continuing working with improving the business, which gives effect. Order intake, plus 26%, and this is due to the strong service turnover during the quarter. And order backlog, minus 1% year-on-year. So that was our countries.

If you're looking at our financial position. As Mattias said, our operating cash flow is improving in the quarter. Very happy for that. And this is mainly due to the working capital that is improving. The working capital is now back on a good low figure of minus 6.7%. And this means then also that the cash conversion is improving. It was 83% last quarter, now it's 92%, so it's moving up. And the net debt-to-EBITDA ratio is on a very low level on 0.5 -- sorry, 0.4.

And then I'm also happy to tell you that we have added a sustainability link to our RCF. The RCF that we have with 3 banks: SEB, Danske Bank and DnB. And we have added this link to our focus areas. That is climate impact and health and safety. So we have chosen 2 performance -- 2 KPIs that we -- that are then defined into sustainable performance targets. So one is the reduction in the LTIFR, and the other one is number of ordered electrical vehicles. And so depending whether we reach these targets or not, we will get either a bit higher interest rate or a bit lower. But this is really a good way and also gives us another incentive to work with our sustainability targets.

And last, let's take a look at our financial targets. As you know, we have an EBITDA margin target more than 7%. LTM right now is 6.9, then you should remember that last year, we got some -- we got a repayment from -- of some insurance money from AFA, adding to the margin. Cash conversion, as I said, 82% -- sorry, 92%. Sales growth, 11%. And the net debt-to-EBITDA ratio of 0.4; and dividend, we haven't paid out this year yet. So that's what it looks like right now at the end of Q1. Mattias?

[Mattias Johansson, executive]

Thank you. And thank you, Asa. Let's summarize this presentation and the quarter. Organic growth, 4%, despite the fact that we have had a very high sick leave in the beginning of the quarter. We are growing in both service and installation, meaning that both our 2 legs are developing in a very good way. Order intake, up 13%, really good, I would say. And we also, at the same time, we also have a really strong order backlog increased to SEK 17,334 million. Improved margin in Norway and Finland, and at the same time, as we can keep the margin with a good growth at 11%, we also have invested in the business with SEK 14 million with no recurring costs. So -- and I think that means if you calculate that, they're around 25 bps. So underlying business is improving, really strong cash flow and 9 acquisitions so far. I think we have closed 6 deals. We have signed another 3, but 9 acquisitions so far this year, adding SEK 631 million in annual sales.

So by that, I think we can open up for some questions.

[Operator]

[Operator Instructions] We have a first question from Mr. Andersson from SEB.

[Mattias Johansson, executive]

You hear us? We can't hear you. Maybe we should take someone else and go back to Stefan Andersson later.

[Stefan Andersson, analyst]

Sorry. I mean, sorry, I heard something, I heard [ Modia ] and Anderstorm or something. Sorry, I didn't understand it was me. Okay. A couple of questions. First, on the -- just on the financial net. It's a little bit volatile between the quarters, so that -- we've seen that historically as well. So just wondering what is impacting. Normally, you don't have a lot of debt but something is in there, and it's been between [ SEK 9 million and SEK 19 million ] last year per quarter. Now we have [ SEK 7 million ] again. What kind of level should we expect maybe for a full year? And why is it so volatile? Is it currency changes that is impacting?

[Åsa Neving, executive]

Yes. You should expect it on the level that we have now. We did some changes. So there was some currency impact last year.

[Stefan Andersson, analyst]

Sorry, you mean what the -- the quarter level?

[Åsa Neving, executive]

I believe the quarters, yes.

[Stefan Andersson, analyst]

Yes, so around [ SEK 7 million ]. Okay. Perfect. Good. Then on the transaction side or M&A side, I noticed that on the solar energy side, you decided to divest the company you acquired. A little bit curious on [indiscernible] -- a little bit curious on some evaluation on that. I mean what -- how did you get out of it? Was it a breakeven? Or did you lose money on it? Why did you decide it was not a successful acquisition? And then have you changed your view on the solar energy side?

[Mattias Johansson, executive]

Yes, if we try to split this question up a bit, I think solar -- the solar panel, solar energy side is very interesting, of course. I think we were too early into that market, meaning that this company was more focused on the consumer side. And what we saw was that the competition was a bit, how should I say, immature because there were -- the competition at that time didn't use the same type of resources. We thought it was a bit unfair because we paid the right type of salaries, we used safety equipment, which actually meant that we had too high cost to be able to deliver the services to the customers, meaning that we didn't get any profitability out of it.

I think us entering the market meant that the market developed a lot because that we actually made -- increased the focus on that market for unions, et cetera, which is good for the whole industry. And we also see that there are too many companies who -- which I understand, not understand the business model because they want to grow the business without any focus on profitability at all. And we think the bottom line is most important. So we saw for the moment that it was better for us to actually do an exit on that consumer side for now.

But that doesn't mean that we're not doing this type of installation on -- to consumers because meanwhile, the last 2 years, we have been developing our own existing business in the already existing branches. So we are delivering this service on a more local base now. The company we bought and then sold was more focusing on working throughout bigger geography, which meant that we traveled a lot, and that meant too high cost, not efficient service enough. So we decided to divest it. And then, of course, we didn't do this as good as we -- I'm not happy with our own performance in this. But we were too early in the industry. The markets weren't ready to pay what we needed to get a profitability. And I think the competition is a bit unfair due to both the cost side, but also the focus on making money.

Regarding the sales, some impact on the profit and [ L ], I don't think we need to go into those details. But I think we -- actually, we lost some money, we lost during the time of ownership, then it's pretty much okay for us, I would say.

[Stefan Andersson, analyst]

Yes. I don't see any impact on the P&L on -- so that's why I'm asking. So it doesn't seem to be a big number. Okay. Then the last question on transactions. I mean, you have an extremely strong balance sheet, and this is maybe a dual question because I'm putting a little bit pressure but I don't want you to go out and buy crappy companies. But I just noticed you have a very strong balance sheet. You have some competitors out there who is buying -- about half of your size buying twice as much [indiscernible] So I'm a bit curious when you're saying that you hope prices to come down, has price been an issue for you? And is that why you haven't bought more? And given that the other guys are still competing with you, isn't that a risk that prices actually won't come around? Or do you don't see competition in the same way?

[Mattias Johansson, executive]

I think first, I want to say that we have a really -- I have a really strong belief in our model, meaning that we want to integrate the company -- companies we are buying. And I think we are not alone, but close to lone -- be alone on that strategy regarding the M&A sector. And I think, let's see, we will see over time which one, what strategy is the best.

But I would say that the prices will come down. It's more common like we think that we can continue to do M&A and maybe improve it a bit. Remember also in the beginning of the pandemic, we didn't know where the market actually should take off. So we decided quite early that we should take down the M&A activity, mainly because our model is based on meeting people, discuss the future strategy together. And when we couldn't meet people in person, the sellers in person to be able to discuss how we together can develop the acquired entity in the coming years.

We actually said, no, thank you too many because we are not buying companies on teams just because we want to add annual sales and hopefully, a profit. We want to look at the culture and the match with the different cultures to be able to see can 1 plus 1 be more than 2. So -- and also, we have strengthened the M&A team, meaning that we can do more M&As in a very balanced and low risky way. So we won't go out and buy bad companies. We always buy companies that we think we can develop together with the seller. And I think that is important. We want to create the stickiness to our organization, so the sellers and the sellers' personnel thinks Bravida is a good home to be in to make sure that we are not that reliable on -- or dependent on 1 person, the seller. We want to buy companies that we can be quite sure that we have a really long journey ahead together.

Balance sheet, yes. And I said before, we have a strong balance sheet, and I think we can use that even more on the M&A side to do really great acquisitions. And we prefer to use the money, the balance sheet to develop the business. But let's say, every quarter that we actually pass means that we improve the balance sheet. But I also think 2 years of pandemic and then a slightly more different market means that we will have a possibility to do great acquisitions going ahead as well.

[Operator]

We have a next question from Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

Congratulations to your continued solid development. Mattias, just to get a little more extensive color, looking at the uncertainty you are talking about seeing in the construction value chain, have you seen any direction from, say, your own backlog where clients are pushing projects into the future or anything like that at this stage?

[Mattias Johansson, executive]

They are very limited. I would say that when we ask our division heads, they say, close to nothing. There are 1 or 2 example that we have postponed projects, but we don't know the reasons. And I think it's more projects that we haven't signed yet. So I will not exaggerate that yet. I can't say 0, but close to.

[Karl-Johan Bonnevier, analyst]

So basically no change to how it normally looks if you put it like that?

[Mattias Johansson, executive]

Yes. That's another way to say it, actually, because postponed projects always happens depending on certain reasons, yes. So yes.

[Karl-Johan Bonnevier, analyst]

Exactly. And on these digital initiatives that you are highlighting at the SEK 80 million to SEK 100 million for this year, what would the year-on-year comparison been? And how much -- how big is the increase basically compared to what you spent in '21?

[Åsa Neving, executive]

Last year, we spent roughly SEK 40 million during the year of this.

[Karl-Johan Bonnevier, analyst]

So basically doubling, if you're looking at it?

[Åsa Neving, executive]

Yes. Exactly A little bit more, I think.

[Operator]

We have no other questions for the moment. Ladies and gentlemen, as a reminder -- sorry, please go ahead, sir.

[Mattias Johansson, executive]

No. Sorry.

[Operator]

[Operator Instructions]

[Mattias Johansson, executive]

Meanwhile we are waiting if someone else have any questions, maybe that's because we think we have a quite okay report, don't we?

[Åsa Neving, executive]

I think so too. That must be the reason.

[Mattias Johansson, executive]

Yes. It could be. Yes, definitely. And I think we have -- fine to see that we have had the financing connected to the sustainability as well. So...

[Åsa Neving, executive]

Yes. That's a good thing actually. It will help us improve even further.

[Mattias Johansson, executive]

Great. The operator, do we have any more questions?

[Operator]

We have no other questions.

[Mattias Johansson, executive]

Okay. Then I think we end this session. Thank you so much for listening. I hope you will get a great day and weekend. We are now going out to meet some more investors. And I'm really proud to see what all our employees have been able to perform another quarter. If you look back on the history, I think this -- I don't know how many quarters we actually have improved the result, but they are many now, and I think that is proving the -- how solid our business model is and how -- what a great job everyone in Bravida is doing. So thank you very much for listening and hope to see you soon. Bye.