Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2023-Q2

[Mattias Johansson, executive]

Good morning, everyone, and welcome to this presentation of Bravida's Second Quarter 2023. And as always, it's myself, Mattias Johansson, CEO, who is going to take you through the presentation together with...

[Åsa Neving, executive]

Asa Neving, CFO.

[Mattias Johansson, executive]

Welcome. And yeah, let's start. And the agenda, the one of you have followed us for a while, recognize this. We start with our Nordic -- the position in the Nordic market, take you through the Q2 numbers. Asa will present different countries performances. And then we summarize and ask your questions.So our position in the Nordics. We are continuing to grow our business. Today, we are 13,700 employees. We actually, after this quarter, have close to SEK29 billion in sales. A lot of recurring customers and a big part, the major part of our sales is coming from small projects and small orders. We are and want to stay as the leading Nordic provider of sustainable technical solutions for buildings. We are a one-stop shop for our customers. Our customers can use us from early phases in project planning through installation, the new build construction, et cetera, and through renovation, service and maintenance. We can offer all different disciplines that actually all our customers need in their premises, houses, buildings, et cetera. And we will definitely -- we are an enabler to help the society to transform with low energy consumption, electrification, other sustainable services, et cetera.So our position is stable and we are definitely in a very important space for the future as well. This is why, I guess, you are a holder of the Bravida shares. A fantastic track record. You can see, it seems like we all have been a bit spoiled the last 2 years. The growth have been extremely high. We have gone for the last 2 years from SEK22 billion in sales to close to SEK30 billion with very stable margins and an average cash conversion at 100%. So this is of course something we are planning to continue to do. We can continue to do acquisitions. We can continue to gain market shares in the new markets such as energy, renovation, energy efficiency, electrification, et cetera.So what does Nordic leader in sustainable technical solutions actually means? Of course, that we have the core business, but we're also working with charging stations for electrical cars, solar panels, et cetera, taking down energy consumptions. And all customers have access to our entire offering. And that is an advantage when the systems are getting more and more complex than integrated into each other. We have a life cycle perspective for every building. And we are and want to stay as the industry leader in sustainability.So the key with the quarter, and we start with the market outlook. It is of course quite challenging, difficult to do any forecast about where the market is heading. We're still seeing overall good demand for service and installation, except for new build residentials. Bravida has a quite low exposure to new build residential. So this quarter it's actually lower compared to the last quarter. It's down to 8% of the total sales today. And still, we are managing to grow our top-line.At the same time, as we see that there are some challenges in the market. We see price pressure in the market due to the fact that there is a low demand in some areas. At the same time, we can see some cost inflation, both on material still -- on the material side. Even if the raw material prices is going down a bit, we can see, I guess, the producers have increased costs for energy and labor, which gives us higher prices. But we also see a growing demand, and this is on the positive side, a growing demand for sustainable and energy-efficient solutions.Increasing interest rates, of course, inflation leads to delays in some investments and it will mean a pressure on the margins in the whole industry as well as for Bravida, of course. But at the same time, as we talk about a bit uncertain market, we see -- we can see that the order intake, if you have read the numbers, is really strong, which gives a quite mixed picture of the current situation.So the highlights for the quarter. 5% organic growth and we are growing in all countries. We are growing organically in all countries. The net sales is coming down a bit in Norway due to some currency effects. We are growing 6% from acquisitions. We can see that we are growing in both service and installation. And order intake is improving in Norway, Denmark and Finland, and in total, plus 14%, which is really high numbers if you compare to historical numbers. If you compare to the last quarter, it's somewhat lower, but still it's a very high number.We have had some margin -- lower margin in the quarter. It's 5.6% compared to 5.9%. And it's explained by 3 factors, as I see it. First of all, we are investing in our future capabilities. We are investing in new digital systems. We are investing in some new resources to be able to catch opportunities in the market. But then, of course, we have struggled a bit with the cost inflation on material mainly. We have handled that situation really, really well throughout the pandemic and last year. But this quarter, it has started to leak a bit and we haven't been able to transport all the cost increases to the customer this quarter. And I guess, our estimate is that we will have some pressure on the margin in the coming quarters as well.And the third part is that we have been growing too much. 14% growth in the quarter, somewhat lower than some of you expected, but still 14% is a really high number if you compare to the history, and I'm going back to this slide again. We have been growing for many, many years. But the last 2 years, we have been growing much, much faster than before. And this has costed us a little bit too much because of we haven't been able to do the sourcing in the way we want to do and we are also being forced to hire subcontractors and other resources in a little bit too inefficient way. But in the end of the day, the most important thing is, of course, that earnings per share is growing. Earnings per share is up 5% in the quarter. So high growth is actually winning above slightly lower margin this quarter, meaning 5% extra on earnings per shares. Our strategy is that we want to have a higher focus on margin than on growth, and then that is something we want to come back to.Cash flow is improving in the quarter, SEK134 million compared to SEK62 million. And the injuries, very happy to say that they are improving. They are down with 2%. And we can see a really strong improvement in Finland, but also in Norway, which have -- and I'll come back to that, Norway has extremely low good numbers. And the Group, you see the net sales in the quarter is SEK7.3 billion compared to SEK6.4 billion. We are growing almost SEK1 billion in the quarter with a stable margin, and that is the way I think you should look at it. In total, the order backlog is around SEK70 billion, SEK16.5 billion compared to SEK17.5 billion last year, still a very strong and stable order backlog.And order intake is up a lot, SEK7.4 billion compared to SEK6.5 billion. So quite positive signs in the order intake in the quarter. And that means the net EBITA of SEK407 million compared to NOK376 million. So you have a SEK24 million plus SEK7, SEK31 million higher EBITA this quarter compared to the second quarter last year. And year-to-date, we are on SEK777 million compared to SEK671 million. So we are growing our EBITA with SEK100 million plus year-to-date compared to last year.Order backlog down 5%. Order intake, again, up 14%. We have increasing costs for new systems, as I told you about, at SEK31 million compared to SEK22 million. And those initiatives are very important for the future. We have rolled out a new procurement system recently in Sweden and Finland. It's working very well. And that is now we start to harvest from those investments. And that will, of course, benefit to a better company in the coming years.The net sales performance, you can see this bridge in the quarter. Organic growth adding SEK330 million, M&A close to SEK400 million and then we have some currency effects of SEK150 million and that is what takes the sales from SEK6.4 billion up to SEK7.3 billion, growing in both service and installation, a little bit more on installation than service, which is a mix that we don't want to see. But positive to see that we are growing the service business with 12% and that is actually showing that the demand for service is strong for the moment.And I said, acquisitions 6%. It's the first quarter in a while where the acquisition is adding more than the organic growth. And when we're talking about the organic growth and acquisitions, we have quite tough comparable numbers compared to last years. We have been growing a lot the last 12 months. So that's something I think you should have in your mind going forward as well.EBITA 5.6% compared to 5.9%. We can see that the improved -- it's improved in Sweden, it's unchanged in Norway and lower in Denmark and Finland. And we are not happy with the performance in Denmark and Finland this quarter. There is actually some things that we could have done better, and that is of course something we should work with going forward. We will strengthen our way of working with profitability in existing business in combination that we want to improving our way of being more proactive in our sales efforts as well.In the quarter, the EBITA margin is affected by high inflation of course, but also the high growth rate. I've said it before, when we are growing as fast as we have been doing, it is actually tough to do that with increased profitability. We have been growing too much. It has -- we have preferred to grow slightly slower and instead have grown the margin a little bit more. And in the last quarter, we haven't really been able to transport all the cost increases to the customers, and that is the first quarter in many, many years that that has occurred.Non-recurring costs for implementing the new digital solutions and IT systems is 31% in the quarter. It's 56% year-to-date, important investments of course. And we can see the forecast for the full year regarding those investments are somewhere between SEK115 million and SEK125 million. Then of course, EBITA is affected by investment in new capabilities. We're hiring people that are not adding any volume today. And of course, sustainability -- our efforts regarding sustainability and a modern IT platform according to plan is also something that add to the cost side.So this is a slide that are showing what the initiatives actually means that we are talking about. We have some increased recurring costs for strengthening the IT platform, digital development capabilities, increased sustainability focus and improved HR support. Then we have some initial costs for investments in the new businesses and that is regarding technical facility management, automation and energy management. And this is pretty much about hiring new resources to be able to deliver the future demand for the customers. And this is expected to add positively to the margin in the end of '23. So no changes regarding that.Then we have some non-recurring costs connected to the new digital systems. That is procurement, procurement management, project management for all the initiatives like CRM, technical facilities, management, et cetera. Order intake, as you can see, order intake the last 12 months are going up. The trend is positive, which is gladly of course. We have a stable order backlog in Sweden and it's growing in Denmark and Finland. You can see that the order backlog have been very stable for the last 2 years. And we are happy with the actual situation in the order backlog, and it's more about actually execute on existing orders on the installation side. And that is something we think that we will handle of course. Some challenges regarding the cost increase is to transport them to the customers. And there will be some smaller pressure on the margin in the coming quarters as well.Sustainability, as I said a couple of minutes ago, the injuries is going down on Group level with 2%, which is of course something we are very happy about. You can see to the right that the improvement is best in Finland, going from 16 down to below 12, but outstanding is Norway. They are close to 2 and have improved from 3.5 to 2.1. And that is, I guess, pretty -- I guess, that is some of the best numbers in the whole industry.We also have actually replaced fossil-powered vehicles year-to-date with 600 electrical cars, which is something that will add positively to the KPIs the coming years. We see that this is meaning in the change in CO2 emissions from vehicles from 0.96 ton, it's easy to say it in kilogram, 960 kilos compared to 820 kilos instead per million SEK in sales, and that is a decrease with 15%. We can quite often see when we're doing acquisitions that we are actually also acquiring a fossil-driven car fleet or fleet. And that is something that we are adding positively to the whole society when we are putting them into our car policy and over time changing those fossil cars to electric cars as well.So acquisitions. We have done 10 so far this year, adding SEK345 million in sales. We have a smaller one signed in Q3, which definitely see a strong pipeline and we will continue to do acquisitions. We have a strong balance sheet, as you know. And this is a way of creating value for you as a shareholder and investors of course. And we still see acquisitions at attractive multiples.You will probably ask about if the pipeline is the same as before? I would say, for the moment, it is definitely at the same level at least. There are lot of interesting discussions going on. The multiples hasn't gone down. It's still at the same level, very stable. On the other hand, it hasn't increased very much the last year. And we see companies that are willing or forced to actually divest some parts of their businesses. And we have more been contacted, more frequent the last quarter by companies who is asking us if we are interesting to buy. So let's see, it's about timing. It's about the quality of the business. It's about our own local footprint. And it's about price, of course. But regarding acquisitions, it is something that we will and can continue to do.So now it's time for Asa to take you through the performance by all the countries.

[Åsa Neving, executive]

Thank you, Mattias. So as always, let's start with Sweden, as this is our largest country. In Sweden, we have grown the top-line to SEK3.7 billion. That is a growth of 12% and the growth is coming from both service and installation. We've had an organic growth of 5% and acquisition has been growing by 7%. EBITA has grown to SEK248 million and that is an EBITA margin of 6.7%. So that has increased. Even though we also in Sweden have had some challenges with high cost inflation, we've managed to improve margin from 6.5% to 6.7%. The order intake is minus 6% and this decrease is coming from installation. But we can see that the order intake is pretty unevenly distributed throughout Sweden where we have a good intake in the mid and Northern part of Sweden and where we have a decrease in the Southern part. The order backlog is minus 8%, but at SEK8.7 billion this quarter, but still on a good high level.Moving on to Norway. Norway have a -- if you look in local currency, it has been growing the top-line with 5%. But the currency effect makes it negatively minus 1%. Norway is growing in services. The organic growth is 4% and growing from acquisition by 1%. And we have to remember that Norway had a really strong organic growth last year with almost 30%. So strong comparative figures, but still growing this quarter as well. The EBITA margin is unchanged to 5.7% and this is a good performance. Also here we have had tough -- some tough challenges with cost inflation. Order intake is plus 6% and it's an increase in services. The installation projects are decreasing and this is according to plan. We want to be more restrictive here when we're taking on projects because Norway has been growing really fast and we haven't really been able to keep up with the margin. So this is according to plan. And this is why the order backlog is down minus 26%.And then Denmark, Denmark had a high growth 26%, in local currency it's 15% and the growth is coming from both service and installation. The organic growth is 6% and from acquisition 9%. And also Denmark had really strong comparative figures in 2022 with a bit more than 20%. The EBITA margin declined to 4.0% and this is due to some project write-downs that we have had and that we have had also in the previous quarters and that we talked about before. The order intake is plus 72%. And then you can say, yeah, well, you want to take down the growth because you have been growing so fast and then you still have a good order intake. But we do actually -- we are being very restrictive on what kind of projects we take on. But here, we have a one larger sprinkler project on around SEK230 million, which we are very comfortable with. And we also have a couple of projects with DSB, so the Danish railway company, amounting almost to SEK240 million in total. And this is a customer and a region that is producing these projects that we really believe in and have comfort in. So order backlog is then increasing by 13%.Finland, our smallest country is growing sales by 33% and it's 22% in local currency. Here the growth is coming from both service and installation. The organic growth is plus 8% and from acquisition plus 14%. In Finland, we had a small -- a lower margin of 3% compared to 5% last year. We are not satisfied with this. Also here, we have had some project write-downs, not being able to pass through costs to the extent that we have been wanting to. Order intake is plus 13%, coming both on service and installation and a strong order backlog of plus 49% year-on-year. So that is our countries.Then moving into our financial position. If you look in the middle here, you can see the operating cash flow. And it has been improving, as Mattias said, during the quarter to SEK134 million compared to SEK62 million last year. Year-to-date, it's still on a lower level, SEK193 million compared to SEK404 million. And this is due to a lower working capital compared to last year.Looking at our financial position on the left-hand side, you can see that we have a cash balance of SEK879 million. We have loans. So it's term loans, SEK500 million, RCF withdrawing SEK200 million and commercial papers on SEK1.5 million. That's adding up to SEK2.2 billion. And then we have leasing on SEK1.1 billion or SEK1.2 billion. So net debt is SEK2.5 billion and the LTM EBITDA is then SEK2.3 billion. So that leads to a net debt/LTM EBITDA ratio 1.1. And on the right-hand side, you can see the finance structure that we have on the loans that we have.Then last, our financial targets. So as you know, we have an EBITA margin target of more than 7%. We are right now on an LTM figure of 6.3%. We still believe that we will reach this target in not too far time, but it will not -- it will be difficult to reach it this year with the challenges that we have. Cash conversion is 69%, so a bit lower than we want it to be. We want it to be more than 100%. And this is due to the working capital. EBITDA, net EBITDA -- net debt to EBITDA ratio is -- should be below 2.5 and it is at 1.1. Sales growth is 20% year-to-date compared to our growth target of 5%. And the net debt to EBITDA we paid out was above 50% for this year.And I will stop there, Mattias.

[Mattias Johansson, executive]

Thank you, Asa. And yeah, when you can see the financial targets, you can see that we think some kind of optimal balance between the margin development and the sales growth is 5% sales growth and we have been way above this for a couple of quarters. And of course, that is some -- one reason why we are struggling a bit with the margin. But still, EPS is going up and that is the most important for you in the end of the day.So a summary. Sales increased in all countries 14% compared to the target of 5%, organic growth 5% -- organic growth in all countries and we are growing from acquisitions with 6%. We have talked a lot about the margin, and I guess, we will get some questions about that as well. But it is affected in the quarter by high inflation and the high growth rate as well, some investments of course. And we have not been able to pass on all those costs to the customers in the quarter. We have handled that really good for a number of quarters, years actually, through the inflation, logistics challenges, et cetera, but now it wasn't possible.I said the cost to develop the business as well is impacting the margin. And earnings per share is up 5%, injuries is down with 2%. And before we open up for questions, it is after the summer finally time for the production to start in the bypass Stockholm as well. You have been asking that question a number of quarters before, but after summer, it is starting.So by that, we are opening up for some questions.

[Operator]

[Operator Instructions] The next question comes from Karl Noren from SEB.

[Karl Norén, analyst]

First one question here on the organic growth. Quite the acceleration from previous quarters, so now we're seeing a tougher comparables year-over-year again. So I was wondering if you think organic growth could be negative already in Q3 or what do you see there?

[Mattias Johansson, executive]

It's of course a good question. It's tough to say, but high comparable numbers definitely. And that's the combination that we are actually -- we have tried to be a bit picky about what kind of customers and projects, et cetera, we are willing to work with. So the high comparable numbers in combination with our actually, what to say, that we have been trying to take down the growth a bit, of course, can mean that we have a slightly negative organic growth in the quarter, it could be the case. We really don't know. But it should still -- we see a stable order backlog. It shouldn't be too steep, too much down at least. So that's the best answer we can give you guys.

[Karl Norén, analyst]

And then my question, you started to mention prior increased price competition already in Q1. And maybe if you look on the margins, maybe we saw already some of that in Q2. But do you expect the price competition to be even more fierce here going forward or are we kind of now in a tough price competition market or how you say it?

[Mattias Johansson, executive]

I think that it can of course be even worse. But I also think that the players who have been trying to move from the residential market into new markets, they have done that for a while. It's still an okay demand overall. But if the overall demand will go down, I guess, that will have even more impact on the prices. But I think as we see today, the market is as good or is good enough to make us do the right choices in what customers we want to work with and how we want to price their projects and services, et cetera. And our strategy is that we are pricing the way we think the different services should be priced. And then if we are winning them or not, that is up to the market to decide. If we are not winning enough business to the right prices, then we are scaling the top-line down. But we are not there today, I guess. We have some places already now that we are scaling down, but that is the same case in all years. But now we are searching for problems more than we -- or looking for more problems today than we did 2 years ago. So I think there can be somewhat higher price pressure, but not very much more. But it's very difficult to say of course.

[Karl Norén, analyst]

And then if we just look on Q2 here, is it possible to give any indication of the price impact on the growth? Was it slightly positive you would say or...

[Åsa Neving, executive]

We haven't looked at Q2. We had around 4%, 5% in Q1. So I would believe that...

[Karl Norén, analyst]

Similar to last year?

[Åsa Neving, executive]

Yeah, similar to that. Not more than...

[Karl Norén, analyst]

And then one more question on the order side. I think order was quite strong here in the quarter. And just wondering about the Denmark order intake, which was strong, even adjusting for the sprinkler order you mentioned and maybe the DSB one. But can you say anything about the underlying market in Denmark?Is that similar development in the other Nordic markets or is there anything standing out there?

[Mattias Johansson, executive]

The million dollar question. We think that -- we hear that the market is going down everywhere. We are pricing more cautious. We are pricing at the same level as we have done before, even a little bit higher. And still, the order intake is this high. It must mean that the market demand is quite strong in Denmark.

[Åsa Neving, executive]

I mean, if you take out those projects that I mentioned, it's mostly smaller projects around. They have a couple of between SEK10 million and SEK20 million. But yeah, so it seem to be a good demand.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Mattias Johansson, executive]

Thank you so much. It seems like we covered some of the questions you normally have in the presentation. Yeah, thank you for listening. We still think that we have a solid order backlog. We are increasing the earnings per share with 5%. And let's see what the market will bring. But still, quite okay demand. And we are looking a bit positive to the new market trends regarding the green deals, energy transformation, energy efficiency, et cetera, in the market. And we hopefully will see an even better demand for that kind of services when the energy price is going up in the -- after the summer again. So by that, I think we say thank you so much.

[Åsa Neving, executive]

Yeah, and have a nice summer.

[Mattias Johansson, executive]

Have a nice summer. Thank you so much.

[Åsa Neving, executive]

Thank you.