Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to the Bravida Q2 2020 Report. [Operator Instructions] I must advise you, this conference is being recorded today, Friday, the 17th of July 2020. And I would now like to hand the conference over to your first speaker today, Mattias Johansson. Thank you, sir. Please go ahead.

[Mattias Johansson, CEO & Group President]

Thank you very much. Hi, and welcome, everyone. As you heard, this is the presentation of Bravida's Q2 report in 2020. And here in Stockholm, Ossa Neving will do the presentation together with myself.And I think we start immediately on Slide 3. And I think, this quarter, we have really been able to show what we have meant before when we have said that we are -- Bravida has a low-risk in our business model. We have a good visibility in our order backlog, and we saw and communicated already to you, before Christmas of last year, that we were entering a growth phase during Q2 this year. And this has also been achieved despite the COVID-19. And I think this is sort of proof of the strength, both Bravida as a company, but also the business model we have. We are the premium multi-technical provider in the Nordics with a strong local market position or a lot of many strong local market positions. I think that's the better way to say it. We have many customers in many different segments. And we have a good mix between service and installation or another way to say is, both small and large contract size. And this has meant that we have been able to improve the earnings this quarter as well. And for the last 12 months, we have now sales slightly above SEK 21 billion. We have an LTM EBITA close to SEK 1.3 billion, and we are close to 12,000 FTEs. Turning to the next slide and the highlights of the quarter. And as I said, this quarter is really a strong quarter, and I'm really pleased with our performance, or as we said, say, in Bravida, we should be proud, but not satisfied. Net sales grew 6% to SEK 5.382 billion. We had an organic growth at 3% and an M&A contributed with 6% in the quarter. We had organic growth in Sweden and Finland. And even if we had 3% organic growth, we had some issues from the servicing side, as you can understand, depending on the pandemic. Servicing sales growth was negative at minus 4%. On the other hand, the installation growth was 14% up. And despite having a negative growth on the service side, we were able to have an organic growth at 3%, which is, of course, very strong. The order backlog are at high level, close to SEK 15 billion. It's up 8% year-on-year. We have stable order intake, SEK 5.346 billion, but weak order intake from servicing. And this is due to negative servicing growth in the quarter and some currency effect as well. Order intake was increased in local currency in Sweden and Norway, which are our biggest markets, as you know. Now there is many talks about better EBITA than consensus. But actually, we have been able to improve our EBITA in the quarter with 16%, up to SEK 317 million, and the margin is improved to 5.9%. The EBITA margin is improved in Norway, Denmark and Finland, and it's flat in Sweden. Cash flow from operating activities was improved to SEK 728 million and cash conversions were at 149%. Working capital, minus SEK 1.7 billion or minus 8.1% of sales. Net debt at SEK 1.185 billion or 0.7x EBITDA. On the acquisition side, we have done 6 acquisitions in the quarter, adding SEK 363 million, and we still see a good pipeline. On next slide, Slide 5, we have a summary of the COVID-19 impact so far. We have a milder impact from COVID-19 in the quarter. It's milder than expected. And Bravida has received limited support from government. Negative impact in the servicing business, and we just had a few installation sites that has been closed during the quarter. Of course, we have had some high sickness absence in the beginning of the quarter, but it has been improving throughout the quarter, and in May and June, it is at normal level again. Having said that, of course, we have rather preferred to have the resources on-site delivering the services to the customers instead of being home with symptoms or closed out because quarantine, et cetera. We think that the demand has been high enough to be able to support this. We expect, in general, a stable installation market and successively a normalization of the servicing market going forward. But of course, the market conditions are a bit uncertain. But again, we have a good business model. We have a visibility in our order backlog. And as you see, further down, we have low fixed cost, which gives us the possibility to adjust the cost base if needed. The order backlog is good and the visibility is high in the installation business. And we, as always, will focus on margin over volume. And we will extend the margin even if the volume decreases. And I think this quarter is evidence of that, even if we have had some trouble on the servicing side, we have been able to improve the margin. On the next slide that shows the sales and EBITA development. Again, sales growth up 6%, 6% coming from M&A and organic growth was 3%. And we are up 7% year-to-date. We had sales increase in Sweden, Denmark and Finland. The EBITA margin was improved and up 16%. The EBITA was up 16% to SEK 317 million, and the margin was improved to 5.9%, which is 50 basis points higher than last year and 30 basis points higher year-to-date. EBITA margin was improved in Norway, Denmark and Finland. And we also have had some costs for reduction of personnel and changes of personnel in the quarter at SEK 12 million, which is also in the numbers and is impacting the results in the quarter, of course. And this is done to strengthen Bravida for the future and the coming years. All in all, sales is up 6%, and EBITA is up 16%. And then on the next slide, you can see that the order backlog is up 8%. And it seems like -- I can repeat myself for the last report we have done and spoken to you, we have improved the order backlog. It seems like we have said that we have a record high level on the order backlog every quarter. This time, it's actually SEK 30 million lower than the last quarter. But year-on-year, it's up 8%. The order backlog decreased SEK 30 million in the quarter, but we have a high order backlog and only lowering the order backlog with SEK 33 million is close to nothing in a quarter like this, where there have been some difficulties to actually meet customers, do the negotiations and close deals. So I'm very happy with the order backlog and it is on really high level that -- if you follow the numbers a couple of years back, you understand that the order backlog we are having is really high. And that's, of course, very good having that. We can see that the order backlog is increasing year-on-year in Sweden, Denmark and Finland. Order intake declined by 2%, and this is explained by lower orders from the servicing business and currency effects. All in all, a strong position when it comes to the order momentum. Looking on the next slide and the acquisitions. We have done 13 acquisitions so far in 2020, adding SEK 725 million on an annual basis so far. We have done acquisitions in all countries. We can see a continued strong pipeline. And we are acquiring at attractive multiples. The same multiples that we have done for the last couple of years, I would say. The COVID-19 pandemic will, of course, have some impact on the acquisitions pace, but the possibilities for the future are many, and we will continue to do acquisitions even if we will see some delays in acquisitions in the coming months. That's, at least, what I estimate. On the other hand, I said that the last time we met as well and since then, we have done, I think, 6 acquisitions. So -- but the activity is high, and the pipeline is strong, that's for sure. We also have a strong balance sheet that gives us the opportunity to continue to create great shareholder value through future acquisitions. On Slide 9, we have 2 examples of projects that we, together with our customers in close partnerships, have delivered -- in which we have delivered our services. To the left, you can see a project in Finland, where we are doing electrical and HVAC installation in a new smart technology center through Wärtsilä. Bravida has been commissioned to carry out the installation of all electrical and HVAC systems in the new buildings, covering 73,000 square meters. And to the right, you can see a photo of the roof of Norsk Kylling, in Trondheim. We are doing all the installation in this energy-efficient production facility. Bravida has been tasked to deliver a comprehensive installation package comprising, heating and plumbing, HVAC and electrical. And when I'm talking about plumbing, HVAC and electrical, I also mean sprinkler, building control systems, fire alarms and access control systems. So we have all systems related to the building. And this facility is due to completion by autumn 2021. And as you can see on the roof, there is a solar array to cover the energy requirements to the owner of the building. And this is getting more and more as a new-normal in all the installations we are having. The sustainability profile of the project and servicing business is increasing. And as you probably have seen, we have done 2 acquisitions, one in Sweden and one in Finland that are working with the solar panels. And I think this is -- that is the reason behind that. On the next slide, I think, Ossa will take you through the financials. Please, Ossa?

[Åsa Neving, Chief Financial Officer]

Thank you, Mattias. Now we are on Slide or Page #10, and we'll start with Sweden. And starting with the top line, where sales have increased by 10%, both organically and by acquisitions. The organic growth in Sweden was 5%. And in Sweden, we have had growth also in the service business in this quarter. The EBITA was SEK 190 million, compared to SEK 176 million last year. And this leads to a stable margin of 6.4%. It's a little bit lower than last year, but, in this quarter, we're also taking some costs for layoffs, as Mattias mentioned. The order intake was plus 9%, and this is mostly coming from installations. We had an order backlog increased by 14% year-on-year, and we also had an increase in the backlog for the quarter, compared to last -- to Q1, and that was an increase of SEK 135 million. And as Mattias said, in Q2, we acquired a solar cell installation company that we believe fits very well with our strategy to be a more sustainable company in the future. Moving on to Slide 11 and Norway. In Norway, we had a decrease in sales by 13%. And this is mainly due to a weaker Norwegian kroner. In local currency, the decrease was only 1%. The organic growth was minus 2%. And the decrease in sales comes from services, while the sales from installation actually increased. The EBITA margin increased to 6.4%, and this is compared to last year's second quarter, where we had a margin of 4%. And as you may remember, we had 2 big write-downs in Norway, last year. So that explains some of the difference. The order intake in Norway was minus 11% year-on-year, but it increased in local currency by 4%. The order backlog decreased by 25% year-on-year. And in local currency, a little bit less by minus 10%. But we had an increase in the backlog in the quarter versus quarter 1. Moving to the next page, which is Denmark. In Denmark, the top line grew with -- or by 13%, and the growth came from acquisitions. And sales from servicing was decreasing here. The EBITA margin improved to 5% from 4.2% last year. And the EBITA improved from DKK 39 million to DKK 53 million. The order intake was minus 14% year-on-year. It was less in local currency, and it was minus 1%. And also in Denmark the servicing, demand was weak. The order backlog was 9% year-on-year. And then moving to Finland, on Page 13. And here, we are happy to present that both sales and EBITA improved this quarter. Sales increased by 19%, both organically and by acquisition. The increase is mainly from installation, but there is also some growth from servicing here. The organic growth was 12%, and the EBITA margin improved to 3% from 1.5% last year's second quarter. The order intake decreased minus 26%. This is mainly installation, but it also has had a currency effect here. In local currency, the decrease was 11%. And the order backlog was strong. It increased by 55% year-on-year, and it also increased in the quarter. That was the countries. If you move to the next slide, we have the financial position. And as you can see, we have a very strong financial position. We have a strong cash balance, and we have amortized on our loans, and this leads us to net debt of SEK 1.2 billion, and it also leads us to a net debt/EBITDA ratio of 0.7. That is a record low. We also -- we have a very strong operating cash flow. And if you look at the operating cash flow here on a rolling 12 basis, you can see that there is a strong improvement. Part of it is IFRS 16 effects, roughly SEK 200 million, but then it's mostly working capital. That explains the improvement in working capital expense, the difference. And here, we have a one-off effect because we have postponed tax payments in Denmark and Norway due to COVID-19, and that will be paid in Q3, and that is SEK 277 million. Also cash conversion is on a record high level, 149%, compared to 98% last year. Here, we also had an effect of these postponed tax payments. And if you exclude this from the cash conversion measure, it would be 127%. So it's still on a very strong and high level. Next slide, Page 15, shows our financial targets. And as you may know, we have a sales growth target of more than 5%. And right now, we are at 7% year-to-date. We have an EBITDA target of more than 7%. We are year-to-date now on 5.5%, and we have a rolling 12 of 6.1%. So there is a little bit a way to go there. Our cash conversion, as I said, is very high, 149%. And so far, we haven't paid out any dividends this year. And the net debt and ratio -- the net debt/EBITDA ratio is record low on 0.7%, and our target point is less than 2.5x the ratio. So, so far, so good, Mattias.

[Mattias Johansson, CEO & Group President]

Thank you, Ossa. And if you take a look at Slide 16, you can see the -- our historical performance. And as you can see on this slide, we have, for the last 5 to 6 years, had a continuous growth regarding sales and EBITDA. And I think, personally, that we can continue to create shareholder value in the coming years and to do the same, continue the great development in Bravida. And why do I think this? We have a strong market position, both from a natural perspective and in the local markets in many places. We have a good, solid mix between servicing and installation. And we had a strong cash flow that will support us to continue to grow the business throughout continued M&As. And adding SEK 12 billion in sales in '14 going up to above SEK 21 billion, we've improved EBITA throughout the period. It's really -- it's a proven strategy and this is something we will continue to do, of course. And the cash conversion to the right is another way of showing the strength, and that will support the ongoing journey for the coming years as well. So turning to the next slide, and the future, we are now working with the new business plan from 2021, 3 years ahead. And this is a way to secure that we will have a future development as well and to make sure that we are continuing to create value for you as shareholders. And we are now working on the new business plan. And just to give you some heads up, the plan will focus, of course, on the servicing to try to grow the servicing business. It will have some digitalization that will support both servicing and the installation part of the business. And this will, of course, require some investment, both regarding systems, but also new resources in the organization. And that will be coming into the P&L the coming quarters. We think that we have a demand for our services that will be quite stable, but we need to do some investments. The size of this is not extreme, but neither they are negligible. And I think this is -- should be seen as a sign of our ambition to continue to grow the profit and develop Bravida, as a company for the coming years as well. There will be no cost for this in Q3 and see this as an information, and then we'll come back to this when our business plan for the coming years is finalized. But I can guarantee that we will do everything in our power to make sure that we are an even stronger company in 2021, compared to 2020 and so on. Moving on to the next slide and the summary of the quarter. As you have seen, we have limited impact from COVID-19 in the -- in Q2, but there are some uncertainties in the market conditions ahead. We think we have a strong position. We have a good visibility, strong order backlog and a good mix between service and installation. And growing the business with 6% in the quarter despite the fact that we have been closed out for some servicing business, I think, that's a really strong proof of the business model. The sales increased 6%, it's above financial target. We have a mix between acquisition, acquired growth and organic growth. Servicing sales is down 5%, due to impact from COVID-19. Installation order backlog are at stable high level, close to SEK 15 billion. The EBITA margin is improved to 5.9%. We have improved margin in Norway, Denmark and Finland. M&A execution is on track with a healthy pipeline. 6 acquisitions completed in the quarter and 13 in total so far in 2020. Net debt 0.7x EBITDA, well below our financial target. And we have a strong operating cash flow at SEK 728 million. There were some one-offs in that numbers, but still a very strong number. Cash conversion LTM well above financial target at 149%. So with that, I think, we can open up for some questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from the line of Lucas Ferhani of Deutsche Bank.

[Lucas Ferhani, Research Analyst]

So my first question was on the service side of the business. Can you just remind us how the contracts work? Is it a monthly or quarterly service? And once business reopens, do you expect some pent-up demand, maybe more kind of servicing needed, because it wasn't serviced for an extended period of time as things go back to normal? And also how quickly do you think things are getting back to normal, especially in Norway, Denmark, where you had the bigger lockdowns? Are you already going back to clients? Or is it still tough to service clients?

[Mattias Johansson, CEO & Group President]

Yes. I think, first, I think, it's important to remember that the downturn in -- on the servicing side is not demand-driven, it's health-driven. Customers and our own personnel has been, in some cases, forced to stay at home because of the quarantine, the lockdown in society, especially in Denmark and Norway, as you said. So the demand is still there. I think when it comes to the different types of the servicing agreements, monthly, weekly or yearly, it depends. But very often, it is actually service that is needed to make sure that the installations is working. We are fixing things that has been broken. So servicing that were not carried out in Q2, most likely, those servicing, I can say, issues or working orders, they will be carried out in the coming months. And we have already now seen that it's getting back to normal levels again. And I think that's because it's not demand-driven, it's health-driven. So we -- I expect that we are during Q3 at normal levels on the servicing side, again, as it looks today. The Danish and Norwegian society is opening up more and more. And more and more people, as I said, are coming back to work. And we have got some -- as Ossa said, some supply from the governments. But I don't think that's a gift. I had preferred to have the blue collars working on the field instead because we are not getting money from the governments. We are losing sales, and we are losing profit in that perspective. So demand for servicing will come and it's close to normal already now, I would say.

[Lucas Ferhani, Research Analyst]

Okay. And the next one was just on the Stockholm Bypass project. Can you remind us when is that supposed to start? And do you hear anything from the government in terms of that returning to the normal kind of time line?

[Mattias Johansson, CEO & Group President]

Yes. First of all, this is a long project. We are in a design phase now. And in that phase, we are actually ahead of the plan. We have delivered the documents the customer asked for very early. So we are following the -- we are actually ahead of the plan so far. The production won't start until 2023. We will have some FATs carried out in the end of this year. That is actually meaning that we are doing some smaller installation to make sure that the systems are working, and that will be taking place late this year. But the real production won't start until a 2023. And until then, it's a lot of designing engineering time. So the big part of the production starts in a couple of years from now. Then there have been some discussion about delays on -- in the project. But there is not anything decided yet. We have received a suggestion for -- from the customers to change the time plan in some ways. And that is something that we are looking into now to make sure or give our thoughts about that suggestion. And we're actually getting paid to do that work. And we are going to present the impact on our scope of work due to the suggestions we have received for the customers so far.

[Operator]

[Operator Instructions] And your next question comes from the line of KJ Bonnevier of Deutsche Bank -- sorry, of DNB Markets.

[Karl-Johan Bonnevier]

Just coming back, Mattias, to the great report, by the way, a fantastic show looking at, as you say, your business model paying off, but when you look at service revenues and the earlier answer to the question you got in the previous question, can we say that the decrease you saw in the quarter was really related to the first part of this quarter and coming up to the end of the quarter, you are basically back to normal levels? Or how should we see it?

[Mattias Johansson, CEO & Group President]

I think that is hard to answer. I think we have -- we can see a 4% decrease of the service business. And of course, most of it were in the beginning of the quarter, definitely. But then in some local places, look at Sweden, for example, where we had the virus spread quite early in the Stockholm area. Then it actually took 1 month or maybe 1.5 months before it's actually -- we're seeing it on the country side. So I think it can be quite well spread over the quarter, depending on where in the geography you are, actually. Yes. I don't know if that was the answer on your question. But if we are calculating on the minus 4% on the service side, that's close to SEK 100 million in sales. And yes, if we look at the slightly higher margin of the service, that's a 7% margin. And then we are actually losing SEK 7 million in EBITA.

[Karl-Johan Bonnevier]

Exactly because that's coming back to my second follow-up question on that. Looking at the margin development on group level in the quarter, obviously, very strong, being able to expand margins in this kind of market environment. And then as you say, the mix really should suggest that, that should have been, say, a margin headwind for you, rather. So what is climbing? Is there some extra components in there?

[Mattias Johansson, CEO & Group President]

At first, we -- in Sweden, we are flat margin-wise, even if we have taken some costs for changes of personnel to strengthen the organization. I think -- so if we adjust the profit in Sweden, we actually improved the margin in Sweden as well, I would say. In Norway, we are -- we can now see that we are improving the margin that Oras is delivering that we are -- the project I mentioned, Norsk Kylling, in Norway, that's a project that we haven't been able to win before we did the Oras acquisition, for example. So Oras has strengthened us in many ways. And now the margin is coming up in Norway as well. And then we have improved the margin in both Finland and Denmark as well. So I think this is -- even if we have a mix that is not that good because the servicing is going down, I would say that we have improved the installation side, and that's a good sign, of course. So I think you're right. The mix is not perfect this quarter. On the other hand, we have improved the margin of the installation business.

[Karl-Johan Bonnevier]

Because I also saw and looking through your details numbers that you increased the provisions with something like SEK 30 million in the quarter, which obviously also should be a hampering effect on the reporting number.

[Mattias Johansson, CEO & Group President]

Yes. And I think that we have been able to -- yes, I think, this quarter is more conservative from that perspective. So you're right, definitely.

[Karl-Johan Bonnevier]

And on the positive side, you are not benefiting from a lot of, say, end of project kind of write-backs or anything like that or, say, extra earnings from those type of things?

[Mattias Johansson, CEO & Group President]

No. So it's a...

[Karl-Johan Bonnevier]

A usual quarter basically.

[Mattias Johansson, CEO & Group President]

Yes, exactly.

[Karl-Johan Bonnevier]

Excellent. And also, I just heard you mention when you talked about the dividend that that hasn't been decided so far. How is the Board thinking about, say, maybe, reinstating the dividend that they pulled and these kind of things?

[Åsa Neving, Chief Financial Officer]

That is yet to be seen. But there will be a discussion in the Board meeting in the fall, and then it's -- yes, so then the decision will be taken later on.

[Karl-Johan Bonnevier]

But do you think it's more natural for you to come back, have an extraordinary meeting and deciding a dividend this year or maybe rather looking for an extraordinary dividend next year?

[Åsa Neving, Chief Financial Officer]

We will -- there will be a meeting on this deciding on this, this year.

[Mattias Johansson, CEO & Group President]

Yes, to be honest, we didn't discuss that on the Board meeting this morning. We actually -- when we postponed the decision about -- or when the Board postponed the decision about dividend, they decided at the same time, let's take a new discussion during the fall about this and see -- look at the market conditions, the situation in the market, what has happened with the cash flow and the debt level. And of course, the debt and the cash flow is -- hasn't become, at least, weaker since they said that. So -- but the decision was, let's take a new discussion during the autumn, and that's still the decision. So let's see.

[Karl-Johan Bonnevier]

Excellent. You're at least coming towards this with a -- from a position of financial strength. And just on that, do you see any acquisitions of the size that could mean that you would come through -- come up towards the, say, the limitation you're putting yourself on the balance sheet of 2.5x net debt to EBITDA?

[Mattias Johansson, CEO & Group President]

Of course, there are some targets. And of course, the strong cash flow, the loan debt, of course, makes the discussions we are having internally slightly differently. That's, of course, quite natural. And as I said a couple of times in my -- during the presentation, we want -- I want to develop Bravida as a company and to make sure that we can increase the profit, and through acquisitions is -- that's one way to do it. And with the balance sheet we are having, of course, we will get plenty of opportunities to continue to create shareholder value through both organic growth, as we have shown in this quarter, but also through future acquisitions, definitely. And small and large acquisitions is part of that plan.

[Operator]

And our next question is a follow-up question from Lucas Ferhani of Deutsche Bank.

[Lucas Ferhani, Research Analyst]

Just again on the backlog and the order intake. So I understand from the release, most of it is driven by the weaker servicing business. But on purely installation, are you already seeing signs of maybe weaker demand because of the uncertainty going forward?

[Mattias Johansson, CEO & Group President]

No. So far, we can't see weaker demand. No. Yes, I think, that's a fact.

[Operator]

[Operator Instructions] There are no further questions at this time. Sir, please continue.

[Mattias Johansson, CEO & Group President]

Okay. Thank you very much, everyone. And I think this -- at least from my and Ossa's perspective, this was a good final of the first 2 quarters of the year. And we are not too satisfied, but we are really proud of the 2 first quarters of Bravida, this year. So we are planning to have some celebrations tonight at least. So I hope you can have some nice vacation when it's time for that. So have a nice summer. And thank you very much. Bye-bye.

[Åsa Neving, Chief Financial Officer]

Thank you.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.