Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the Bravida Q2 Report 2018 Call. Today, I'm pleased to present CEO, Mattias Johansson; and CFO, Nils-Johan Andersson. [Operator Instructions] Speakers, please begin.

[Mattias Johansson, CEO & Group President]

Thank you. And good morning, everyone, and welcome to this presentation of Bravida's Q2 report 2018. As always, it is myself, together with Nils-Johan, who will present this report for you. And we start, as we normally do, with a recap about Bravida on Slide 3.Bravida is the premier multi-technical service provider in the Nordics. We are also represented in around 155 different locations, and we have more than 50,000 customers. On LTM basis, we have for the moment slightly above SEK 18 billion in sales, SEK 1,119,000,000 in EBITDA and we are around 11,000 employees. And this altogether gives a low risk in Bravida's business model, because of: first, diversified end markets; two, low customer concentration; and third, small average contract size.Now the key highlights for the quarter on next slide, Slide 4. We can summarize yet another good quarter. Net sales grew 11% to SEK 4,790,000,000, organic growth was 4% and M&A contributed with 5%. We had growth in all countries. And I'm very glad that our service business continues to develop in a very good way, with a growth at 11%.Order backlog is at a record-high level, SEK 11.1 billion, and is up 6% year-on-year despite the strong quarter last year. We have a good order intake -- especially good order intake in Norway in the quarter as well. Regarding the EBITA, EBITA is up 10% to SEK 280 million, and margin is unchanged at 5.9%. EBITA margin is improved in Norway and unchanged in Sweden. Finland is, in the quarter, loss-making due to write-downs in projects, and we will come back to that later.Regarding the cash flow, cash flow from operating activities improved a lot to SEK 319 million from SEK 150 million, and cash conversion is at 94%. Working capital is minus SEK 939 million, or 5.2% of our sales, which is a very good level. Net debt, SEK 1.9 billion roughly, and it gives 1.7x adjusted EBITDA. We continue to do acquisitions due to the plan and due to our strategy. We have completed 3 acquisitions in Q2, adding SEK 68 million; and another 2 acquisitions in July, adding SEK 80 million. The integration of Oras is going according to plan and is actually making money in the quarter again, which is, of course, something we are very happy about.On Slide 5, we present our view on the market. And in Sweden, we still have a good market regarding both service and installation, and the activity is good. The industry confidence indicator are at high level. Main growth drivers are public investments in buildings and infrastructure as well as residential buildings as we see it. We have a decline in production in residential construction that will be replaced by projects from other types of facilities in the coming quarters.In Norway, we have a good market as well, driven by public investments and energy efficiency projects. Overall, the service and installation activity is good. Market drivers are public investments and, to some extent, energy efficiency projects. And I would -- I think that Norway is a bit ahead of the other countries regarding this, and this will also affect the rest of the countries further on or later on in '19 and '20. That's my estimate. We have a decreasing activity in dwelling construction, as everyone knows.In Denmark, good market supported by public investments and residential construction. Health care, education and buildings are driving -- and education buildings are driving the volumes. Construction volumes on commercial buildings increased as well. And the confidence -- construction confidence indicator is still somewhat below average in Denmark. And that's a bit strange, but I think that's how it has been for many, many years since the crisis in 2009. So we -- I think we have a lack of confidence in the Danish market. But as we see it, the Danish market will -- is strong and will remain strong.In Finland, we have a stable market, where the construction market is improving. We have sales increase for the construction companies, and we have stable service and installation market, and an improved industry confidence indicator.On the next slide, you can see some charts of the sales and EBITA development for the Bravida group. As I said earlier, sales growth is 11%, of which 4% is organic and 5% come from M&A. We have growth in all countries. The reported EBITA is plus 10% in the quarter to SEK 280 million compared to SEK 255 million last year, and an unchanged margin.Regarding Oras, we're still following our plan and they are profitable in Q2. And we now will see an improved performance in H2, as I see it, because now some of the cost synergies is taken out, et cetera. We also have an EBITA improvement in Norway, Sweden and Denmark, but negative in Finland. And earnings per share is up 14% in the quarter.On Slide 7, you can see that the order backlog is up 6% year-on-year to SEK 11.1 billion. And this is, again, a new record level and this will support the growth the coming quarters, of course. We have a growth between the quarters with SEK 315 million, and it is mainly many small and midsized projects in the quarter. We had some tough comps compared to Q2 last year, where we won a couple of large projects. But this time, we have improved the order backlog by winning smaller projects, and the risk profile in those projects are lower. And we can, in many cases, see that the prices is slightly high as well. So we are very happy with that development in the order backlog in this quarter.We have one large share order in Norway, a multi-installation project to the food industry, and this is our first multi-installation project in Norway. Bravida's knowledge in electrical, combined with Oras' expertise in plumbing and ventilation, gave us the position to win this project. Well, hopefully, we can see more of this in the future.Turning to the next slide, Slide 8. I think you all are familiar with this chart. The red line shows the good and healthy development in our service business. And the gap between the blue line representing the order backlog and the green showing the installation phase, that gap increases in the quarter, and this gap will support the organic growth in the future. So we think with the market situation, our own order situation, we think that we will have a good position to continue to grow this business, both organically but also through M&A the coming quarters.And now over to Nils-Johan and the financial part of this presentation.

[Nils-Johan Andersson]

Thank you, Mattias. And we start to -- with Page 9, start to look a little bit deeper into the figures. And as Mattias mentioned earlier, we had a top line growth of 11% this quarter. Organic growth contributed with 4% and M&A with 5%. We also have a positive impact from currency. This came from the weaker Swedish kroner, and we have currency effects in all 3 countries, but it's highest in Denmark, the impact was 2% this quarter.If we look at the bottom and looking for the earnings per share, we see that earnings per share is up 14%. It's higher compared with the EBITDA improvement of 10%. And the main reason for this is that we continue to see an improvement in the financial net. We have lower debt compared to a year ago. We have improved the margin. And this quarter, also, we have a positive currency effect in the financial net.I would like to highlight one thing in that we have a higher cost this quarter for our long-term incentive program with SEK 5 million, and this is -- the main reason for this is that we have higher associate cost. The share price went up from SEK 58, SEK 60 to SEK 70. And when we delivered the shares to the participants and we have to pay associate costs on the higher value. So this is the reason why we have this, so to say, extra cost this quarter.We go for next slide and we start to talk about the different countries. Sweden, our biggest market, continue with a solid development. We had a top line growth with 4%, and this is mainly organic growth. EBITA was -- EBITA margin was unchanged with 6.5%. If we give a comment about the order intake, that was minus 10% in the quarter. Please remember that last year, in the second quarter in Sweden, we reported a couple of large projects like a big hospital, we also have schools coming in and we also have a big order to the mining industry. So the comps are tough for -- in Sweden for the order intake. And also, as you know, we have -- the order intake will jump up and down in a specific country from one quarter to another. If we look at the order backlog, it's minus 2% compared to a year ago, but it's up with SEK 116 million compared to the end of Q1.We go to Norway and look for next slide. And we also have a good development, a good growth in Norway this quarter. Top line was up with 10%. And Mattias talked about Oras earlier, but you know that we -- when we -- the year before, we bought Oras, it was a loss-making business. And in '17, we reported a breakeven result. And now both in Q1 and Q2 this year, we had a profit. But at the same time, we continued to improve the quality of the business and phasing out poor-performing projects. And we have had this Oras now for a year, so this, of course, having that negative impact on the organic growth. We also closed 2 branches that has been underperforming for a quite long period, so it was quite easy for us to take that decision. And most likely, you will see that this will have a negative impact on the organic growth through '18. We hope that we have -- phasing out all this project and the impact from the closing branches will end this year, not impact '19. So in the quarter, we had a small or negative organic growth in Norway. The positive thing when we've taken this action that is that we see an improvement in the margin. The margin improved in Norway this quarter from 5.5% up to 6.2%. And Oras, of course, was one reason. But also, if we look into the underlying business, the older Bravida so to say, the margin increased from 6.4% to 7.6%. So an excellent development in the business in Norway.We also, if we look into the future, we see that the order intake is up with 83% this quarter. And there is one large order coming from the food industry. The order book's backlog is up on year-on-year basis, up with 21%.So going to Denmark, next slide. And then, as we said, both in the Q4 report and the Q1 report, that we expect that Denmark will have a good development. We see now that the top line is up with 25% in this quarter in Denmark, and it's mainly organic growth. We have had a couple of larger product, mainly hospital product, that we have had a slow start. This product is now in production and we are -- of course, this is that the -- one of the main reason why we have such a nice growth in Denmark.As normally, in this larger product, we used to be -- we are slightly conservative in the beginning of the product, not to having negative impact in the end of the project. So we see that the margin coming down from 5.4 -- 5.0% to 4.7% in the quarter. But anyhow, the EBITA is up with 18% in the quarter if we look for the EBITA margin.Order backlog, in line with last year. It increased with SEK 54 million in -- compared to Q1. And we expect that the development in Denmark will continue to be good, and we have also a good market position in Denmark.Looking for Finland, next slide. Also, in Finland, we had a good growth this quarter. The top line was up with 56%. And the main reason for this is the acquisition we did in January, Adison, but we also have a good organic growth this quarter.If we look at the EBITA and EBITA margin, we reported last year in second quarter a small profit. This quarter, we have a loss of SEK 2 million. And the new Division Manager, Marko Holopainen, have done a review of the project portfolio and looked through them and have taken more conservative approach that have -- and adjust the full cost in the product, and this has had a negative impact on the profit this quarter.If we look into the order intake, it's minus 13%, 1-3. But the order backlog is up with 25% year-on-year. And if we look at the volume, the growth we have had is 56%. Of course, we are coming closer and closer to the critical mass we have talked about earlier. But -- so we start to -- should be able to deliver profit in the near future.If we look for next slide and give comments to the acquisition activity we have. We have -- so far this year, we have finalized 8 acquisition, 6 in the first 6 months. And we also completed 2 acquisition now in July, adding another SEK 85 million on these 2.So -- and if we look for the activity level going on today, I think we have never seen such a high activity level as we see today. And there is discussion going on in all countries -- negotiation and discussion going on in all countries except Norway, because, still, we want that the Norwegian organization focusing on integrate Oras in a good way. So as Mattias said earlier, we wish -- we are convinced that we should be able to continue to grow through M&A in the coming periods.Next slide, some comments about the net debt and the cash flow. We had a strong cash flow in the second quarter, taking down the net debt to SEK 1,896,000,000. And the net debt compared to the EBITDA is down to SEK 1.7 billion compared with SEK 2.2 billion a year ago. If we look at the bottom, we see the operating cash flow. And we are -- the last 12 months, we have generated close to SEK 900 million in operating cash flow and, more or less, the same figure 12 months before this period. But if we look at the -- this operating cash flow also include tax payment. And if we look at the last 12-month period that ended June this year, we have paid SEK 196 million compared with SEK 124 million the 12-month period earlier. So if we adjust for this and look into the core operating cash flow, we have an operating cash flow for the last 12 months of SEK 1,080,000,000. And this is -- as you see, the cash conversion increased also in the second quarter, and now we are close to the financial target. We are up to 94% in cash conversion. So a continuous strong cash generation in Bravida.Just a few comments on the financial target. Top line growth, we are committed to drive this with 10%. It's a combination of organic growth and M&A. EBITA margin, we would like to take the business to a margin of over 7%. Cash conversion, as I said earlier, it should be about 100%. And we like to pay out, over time, 50% of the net profit. And the -- looking at the balance sheet, the target for the leverage is that we should have it around 2.5.So I hand over to Mattias to summarize.

[Mattias Johansson, CEO & Group President]

Yes, thank you. And I think we can be quite happy with this quarter. There are some things I want to highlight. And of course, the service grew at 11%. It's something we are really happy about, that will create some business for the future as well. The installation order backlog -- and remember that this is only installation that includes this order backlog, the service business that we will do is not included. But we had order backlog at SEK 11.1 billion. The M&A execution is on track, with a healthy pipeline. And the activity, as Nils-Johan said, is higher than ever. We have added SEK 300 million in 2018. And we have a stable -- as we see, it's good market conditions to continue.On top of this, sale increased 11%. The EBITA margin unchanged at 5.9%. Net debt at 1.7x EBITDA. And we have a strong operating cash flow at SEK 418 million, and cash conversion close to the target at 94%.So overall, a quarter where we think that the business develops as a -- yes, due to the plan, and we have a quite positive view on the coming quarters as well.So I think as I said that, we can open up for some questions as well.

[Operator]

[Operator Instructions] And our first question comes from the line of Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

A question on the LTIP costs. Is this something that will continue for other quarters as well? Or is this actually toQ2 alone? And do you have any other extraordinary costs in this quarter?

[Nils-Johan Andersson]

Yes. No, the LTIP is -- we normally don't comment this, but we have this extra SEK 5 million this quarter. And normally, we take the cost every month for this. We have 3 program running now, and so it's not. But as we have the share price went up from SEK 58 or SEK 60 up to SEK 70, we have to recalculate associate costs. And -- because when we deliver these shares to the employees, to the participants, we have to take the cost this quarter. So normally, this is in the figures that we have. So there. And you can say -- and we have extra cost -- of course, there is things going on in a group like us. We have always some projects where we have some challenges in, but there's nothing we really would like to highlight.

[Predrag Savinovic, Analyst of Consumer Goods]

All right. And on the order intake in Sweden, now it seems down and the range was [ as ] in Q4. Is there any timing here? Or which particular segments are slowing? And what do you expect here going forward?

[Nils-Johan Andersson]

I think we saw that the order backlog increased in the second quarter compared with the end of Q1. But as I said earlier that the -- why we see 10% in Q2 is -- the minus 10% is that we have a good order intake in the beginning of last year, and specific in Q2, where we reported a couple of large orders. We don't see that a specific segment and we don't see that really that the -- many people talk about the residential, of course, it's slowing down. But as we said, we see also -- as you'd see from other company who has to report about the renovation is picking up. And as we said earlier, we expect the renovation will take the new-build residential market. And again, please remember that our exposure to the new-build residential is limited, and it's still only around this 1% in Norway -- in Oslo and Stockholm.

[Predrag Savinovic, Analyst of Consumer Goods]

And you're closing some branches now in Norway which had negative profitability. What are the margin implications here? And do you have other ones like these in Norway or in the other countries that you can close as well?

[Mattias Johansson, CEO & Group President]

Yes. I don't think we want to answer the margin effect or impact of that. But this is what our model is all about, the decentralized organization, where we need to close down branches where we don't have the right market support or the right management or -- yes, are not good enough to deliver what we actually -- yes, in line with our ambitions. But on the same time, we opened up a couple of branches in other places. So this is very much what our model is all about. So yes, that just shows us that the management in the line is doing their job.

[Predrag Savinovic, Analyst of Consumer Goods]

Very good. And on Finland. I mean, without adding scale to new M&A in Finland, what is an achievable margin for you in this region?

[Mattias Johansson, CEO & Group President]

Yes. I think it's quite early to say a specific target on that one, but that we can do much better in Finland. We know that one of our biggest competitors or peers is doing very well in Finland. And I think that's -- at least tells me that we can do the same. But of course, we need a slightly bigger scale. We did one acquisition in the beginning of this year, taking us to around SEK 1 billion in sales. And I had earlier said that we need to at least be at around SEK 1.2 billion to -- yes, to have a start on using our scale. And SEK 1.5 billion is probably the -- an even better level, of course. But we need to be slightly bigger to reach the full potential regarding the margin. But that we can improve the margin in Finland, that's definitely sure. And we have said that we should have a better second half of '18 than the first half, of course, and that's something we are quite confident to deliver as well.

[Operator]

[Operator Instructions] And the next question comes from the line of Lucas Ferhani from Deutsche Bank.

[Thomas Richard Sykes]

Yes. Actually, sorry, it's Tom Sykes calling. I just wondered if, in your major markets, you can go through what the difference between the order intake in the public and private sector is. And maybe in your growth, what the difference between the public and private sector is, please. And then sort of just go through perhaps what some of the wage and raw material pressures are for you and how you're trying to mitigate those, please.

[Nils-Johan Andersson]

Yes, if we look for the prices and -- on material and on the wages salary, of course, we in -- we have, in Sweden today, a weak Swedish kroner, and that's of course creating some pressure on the material prices, mainly that are based on raw material. And we -- of course, the supplier would like to increase the price. So we are -- we try to push this back. And we also know that -- so we don't -- we see there is a pressure on this, but we are fighting with this, and we don't see that this is really an issue for us. On the salary level or wages where we -- the good thing is that everyone belongs to the union. So compared with -- if we -- with our competitors, more or less, everyone has the same increase. So -- and we -- of course, short term, that could be a pressure on the margin. And on short term, I'm talking for a couple of months when we have a fixed price contract. But overall, we are quite good in passing on this to our customer. So it's not really -- that's nothing we really talk that much about internally.

[Thomas Richard Sykes]

And the raw material costs, there must be a percentage of your contracts where you can just pass that through rather than it being, obviously, a fixed-price contract. And presumably, that is contributing to your growth now as well as volumes.

[Nils-Johan Andersson]

Yes. We -- of course, there is a component of the organic growth. It's a -- the organic growth is a -- it's 2 parts: it's volume and it's inflation. And -- but -- and it's really hard. We have done so many products, done so many components, so it's really hard. It's just impossible for us to calculate what the price component is. But it's -- of course, it's a combination and it's a smaller part is inflation and we have also some volume.

[Thomas Richard Sykes]

So the inflation you're seeing, you're basically saying that's not margin negative now, in that it's helping the top line.

[Mattias Johansson, CEO & Group President]

Usually -- Mattias speaking here. I usually say like this, we don't think that our margin expansion will come from price increases to our customers, because that's something we need to fight some of the increases we get regarding raw material, et cetera. But in fact, if we work like this, when we had the tendering meetings, we discuss each different project and what time, the timing of the project, and then we calculate salary increases and raw material increases in that project as well. And of course, in one part of the portfolio, we also have index clauses in the contract. So it's quite tough to answer that question specifically. But we are discussing a project that will last for the next 9 months or the next 15 months, how much impact will we have in increases in different factors, and that we price that to the customers.

[Thomas Richard Sykes]

Okay. And is it possible to give a view on public sector versus the private sector growth and whether it will strengthen the client base? Because obviously -- so the smaller contracts, it's a little bit difficult to tell where the strengths by kind of end markets might be. So maybe you could give us a view as to what verticals are particularly strong for you, particularly in the smaller contracts area, please.

[Nils-Johan Andersson]

Yes, yes. If we look for the public sector, it's -- I think it's strong in all countries we are in. We have -- and we are -- we see it in good growth in Norway coming from the public sector, both from hospitals, from infrastructure projects. In Denmark, the public sector have been the main driver for a longer period now, both from -- we have been -- had done a couple of hospitals in Denmark. We know there is infrastructure. But now in Denmark, we see also that the residential market is picking up and will also start to be a driver for the demand. In Sweden, I think we have, overall, a good demand situation. We know that the residential is coming down. The new-build residential is coming down. But there is both, from the public sector, a large demand on schools, hospitals, infrastructure projects, et cetera. So...

[Thomas Richard Sykes]

But if you look specifically then at the Swedish -- Sweden breakdown, it's in this set of numbers, is your private sector business up or down year-on-year?

[Nils-Johan Andersson]

I think we tried to do this calculation on a yearly basis, so I don't have the updated figures for Q2 specific, actually. So sorry for this.

[Operator]

As there are no further questions, I now hand back to the speakers.

[Mattias Johansson, CEO & Group President]

Okay. If we don't have any more questions, then we just want to thank you all for calling in and listening. And I hope you will get a great day. Thank you very much.

[Nils-Johan Andersson]

Thank you so much.

[Operator]

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