Bravida Holding AB

STO:BRAV

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to the Bravida Q4 Report 2019. Today, I'm pleased to present CEO, Mattias Johansson; and CFO, Åsa Neving. [Operator Instructions] Speakers, please go ahead.

[Mattias Johansson, CEO & Group President]

Thank you and good morning. Mattias here, and welcome to Bravida's Q4 Report for 2019. As usual, I will start presenting and then my CFO, Åsa Neving, will continue.So starting on Slide 3. At the moment, we have a sales -- LTM sales at SEK 20.4 billion and the LTM EBITA at SEK 1.226 million (sic) [ SEK 1,226 million ], and we are now more than 11,500 employees. As you know, we are located in more than 160 places. And if you look to the right on the slide, you can see how diversified our market is, which, together with 2 other buildings, actually show the low risk in our business model. We have a small average contract size because we have close to 50% of sales in service; low customer concentration, as I mentioned before; and the diversified end markets.Turning to the highlights on the -- for the quarter on the next slide. The net sales grew 3% to 5 point -- close to SEK 5.7 billion due to M&A growth at 5%. We had growth in Sweden and Denmark, and the sale -- the service sales growth was 6%. The installation growth was 0.We have a very high order backlog at SEK 14.5 billion, close to. It's up 21% year-on-year. We still have a good momentum in the order intake. Our order intake was SEK 5.5 billion. And if you compare to the last year, you see that this is lower. But last Q4, we had one of the big contracts from Bypass Stockholm. Excluding that contract, we still have an increase in the order intake with 8.5%. We have a good order intake in Sweden, Denmark and Norway.EBITA decreased by 3% to SEK 425 million, and the margin decreased to 7.5%, should be compared to 7.9% last year. And as you have heard in our Q3 report, we plan to take a structural -- restructuring cost in Stockholm, and that's something we also have done in the quarter. It's SEK 58 million. And if we adjust for that cost, we actually had a higher margin in the quarter, which we think is good, of course. EBITA pre-restructuring increased by 10% to SEK 483 million.Cash flow from operating activities was improved to EUR 989 million, and cash conversion is above our financial target at 115%, stronger than last year. Working capital, minus SEK 1.1 billion or minus 5.6% of sales. Net debt is -- we have a strong balance sheet, 1.3x EBITA on LTM basis. And a strong cash flow not only enabled us to continue with M&A, it also gives us the possibility to increase the dividend with 13%. And that means that the dividend proposal is in line with the financial target.We have done 4 acquisitions in the quarter adding SEK 170 million. 20 acquisitions in '19 in total adding SEK 1.1 billion, and we still see a good pipeline. So we think that we can continue to do M&A and continue to strengthen the company throughout these activities.The market trends on Slide 5. We still see a good market in Sweden, Norway and Denmark, and as we -- as before, a stable market in Finland. In Sweden, the main growth drivers are public investments in building and infrastructure. We see a good activity in service, and the construction confidence indicator is above normal level.In Norway, overall service and installation activity is good, and the drivers are public investment and energy efficiency projects.And in Denmark, a strong market supported by public investments and service, mostly residential, health care and education buildings that are driving the volumes. Even in Denmark, good activity in service. And then Finland, stable market. Refurbishment and public investments are at good level, and we see a stable service and installation market.Turning to Slide 6 and the sales and EBITA development. 3% up in sales, where 5% comes from M&A. We had a negative organic growth. When we look at the growth, I think it's -- we are happy to see that the service is growing 6%. We have continued to do acquisitions, which contributed 5%. And I think, as you know, we had a dip in organic growth in '16 as well. And this type of business, when you try to balance the risk profile with growth, you will have some pillars with slightly weaker organic growth.But we are very selective when it comes to what kind of installation project we try to win. So we think with a strong order backlog and the margin we have in that, we think we have a good position to both turn that into organic growth throughout the year but also improve the margin.We had sales growth in both Sweden and Denmark. The margin was lower. EBITA is minus 3%, down to SEK 425 million, which gives us the margin of 7.5%. EBITA margin was improved in Norway and lower in Sweden due to the restructuring in division Stockholm, as you know. EBITA margin in Finland was lower due to write-downs and lower volumes in some branches.When it comes to Finland, we can say that the challenges we have had is more isolated now to 1 city and 3 branches. If we exclude those branches, we actually have quite good margin in 3 out of 4 regions in '19, which is actually giving us some confidence that we can improve the margin throughout 2020.The margin is -- was lower in Denmark due to one unprofitable project and acquisitions we did in '19 where it takes a slightly longer time to actually get them up to the level so they contribute to the margin. For the moment, they are diluting the Danish margin.Turning to the next slide, and that means Slide 7 and the order momentum. The order backlog is up 21% year-on-year, unchanged order backlog during the quarter. We have an increased order backlog in Sweden, Denmark and Finland and unchanged in Norway. And as always, with Bravida, we have mainly small and medium orders in the order backlog.But said that, I also think it's worth to mention that that big and more complex project is a good market for us as well because we think the competition is slightly lower, and we have the know-how and the size to compete and be a good supplier for the customers in that segment.One large order in Sweden. An industrial building was taken into the books in the order backlog. It's SEK 680 million. And a large order received in Q4 '18, Bypass Stockholm, adding in that quarter close to SEK 1.6 billion. And that is explained in the declining order intake if you compare this Q4 to Q4 last year. And if we exclude that, we still have a growth in the order intake, which is important to understand.Turning to next slide and the acquisitions. We have done 20 acquisitions in '19, adding roughly SEK 1.1 billion in sales. We have done acquisitions in all countries. We are now ready to intensify the work with acquisitions in Norway after Oras. And we slight -- slowly moved to the same position in Finland where we think it's a good idea to do acquisitions, mainly contain the service business in Finland as well. Otherwise, most of the cases we acquired last year was in Sweden and Denmark.We still see a continued strong pipeline. We can do acquisitions on attractive multiples. So this is a good way of creating value for you as a shareholder.And now over to Åsa. Please?

[Åsa Neving, Chief Financial Officer]

Thank you, Mattias. I will guide you to the figures in the different countries, and we will start with Sweden.If you look at the top line, we have had a -- for the fourth quarter, we had a sales growth of 3%. This is due to acquisitions. If you look at the organic growth, it was negative minus 2%. The reason for this organic -- negative organic growth is because of the Stockholm division, where we have, as said before, taking down -- we closed down a couple of branches and we are taking down volume there.Also in our division, [indiscernible] or national, sorry, we have had -- last year, we had a couple of projects that have a very -- larger projects with a very high production that we haven't had this year to the same extent. We had an increase in service with 5% in the quarter, so it's very good. If we move to the full year, the sales growth was 4% and the organic growth was negative minus 1%.Moving on to the EBITA. The EBITA for Q4 was SEK 251 million. That was a slightly lower margin at 8.4%. We took restructuring costs in Stockholm, as Mattias have said, on SEK 58 million. And if we exclude these restructuring costs, we had a margin of 10% in Sweden. So the rest of Sweden has performed really well during the quarter.We still have a good market. We have a good order backlog. The order intake was a little bit lower in -- and that was most explained by the Stockholm Bypass order that we got in last year in the fourth quarter.During this quarter, we got one large contract in -- an industrial contract of around SEK 700 million. That is in our order books now. The order backlog was plus 27% year-on-year. And if you exclude the Stockholm Bypass, we have -- we were plus 15%. And also our order backlog increased in the quarter by SEK 640 million.Turning to the next slide, Page 10, moving on to Norway. The sales growth in Norway was minus 5%, and we had a negative organic growth at 4%. The -- if we look at the full year, the growth was plus 2%, and we had organic growth of 2%. The sales was lower due to a lower production in the installation business of minus 14% during the quarter. Services was up 5%.We had -- if we move on to the EBITA, the EBITA was SEK 88 million and the EBITA margin improved to 6.7% from 6.6% last year. If you look at the full year, the EBITA margin decreased to 5% from 6%. And this is, of course, due to these projects from the Oras acquisition that we have talked about in the last quarters that we took some losses in. And these projects are now closed or they are finalized. And we have also taken -- we have made sure that we will not take -- have any more hits from these projects that have put some provisions in our books for the fourth quarter as well. So they are closed.If we look at the order intake and order backlog, we had a strong order intake, plus 23% year-on-year. The order backlog is unchanged. But we -- as we have said before, we have many partnering projects in early stages here that is not yet included in the backlog that we believe will come in during this year.And also as we published last week, we have signed a contract with Skanska, a technical installation at the hospital of around NOK 600 million to NOK 800 million that we will put in on the order books now.Turning to Page 11, moving to Denmark. For the quarter, we had a sales growth of 17%. This is explained by acquisitions. We had a 0% organic growth. If you look at the full year, the growth was 19% and the organic growth was 3%.Moving on to the EBITA. We had an EBITA of SEK 70 million, and the EBITA margin was lower at 6.6% compared to last year. This is due to -- we had one unprofitable project that we are about to close. And there is also the dilution from our acquisitions that we did earlier in 2019. We did 5 acquisitions [ pretty ] at the same time. And this is taking a little bit longer than expected to get them to their profitability level that we expect them -- that they should be. So they have had some negative effects on the margin, but they are improving now.Yes, the full year margin was then 5.4% compared to 5.8%, and this is also due to the fact that I just said. The order backlog is at a high level. We had an order intake at plus 1% year-on-year and an order backlog of 23%.If we move on to Slide 12, we are heading to Finland. And Finland has had a negative sales growth of minus 6%, and this is explained by lower production in the installation business, mainly the organic growth of negative -- minus 11%. We have had low volumes in some branches, and we have also had some delays in project starts in mainly the southern part of Finland.For the full year, the growth was 6%, and we had a -- this is due to acquisitions. We had an organic -- we have, again, a growth -- or a negative growth of minus 7%. The EBITA was SEK 14 million, decreased to 4.2%, and this is due to -- that we had some project write-downs in one region, and we also had low volume in some of the branches. But as Mattias said, we have isolated these problems or challenges that we've had in Finland to one area. And Finland is improving. Even if it's not shown in the figures, it is improving, but it's going slowly. We had a lower order intake, minus 28%, and an order backlog of plus 28% year-on-year.So moving on to the next page, that is Slide 13. And looking at our cash position, we have a really strong cash flow for the quarter and also for the year. If you look at the long -- if you look at the cash flow at the year-end, we have increased more than 50%. And this is a test -- the leasing effect of IFRS 16 has some effect, of course. But it's also due to the fact that we are improving our working capital, which is really good.If you look at the net debt adjusted EBITDA ratio, it is at 1.3. And if you exclude IFRS, it's on 0.8, and this is comparable then with 1.1 last year. So very strong cash flow going forward.Then if we move to the next page and get into the financial targets. If we look at sales, we have a target of more than 10% sales growth, 5% should be organic and 5% to 7% should be from acquisitions. We have reached the acquisition target of 5%, but not the organic where we are a flat 0% for the year.The EBITA target is more than 7%. We are ending up at 6%, so we have not reached that target this year. At the cash conversion and dividends, we have a target of a cash conversion of above 100%, which we have reached. We have a cash conversion this year on 115%. And we are suggesting a dividend payout of SEK 2.35 per share, and that is more than 50% of the net profit. We also had a net debt ratio that is well below the 2.5. It's on 1.3 including IFRS 16 and 0.8 excluding IFRS 16.We are also currently doing a review of these targets. We have had these targets since the IPO. And I think 5 years after the IPO is appropriate time to actually do a review. This also fits very well with the business plan work we are doing now for 2021 to 2023. So we're doing this at the same time. There has not been any decision, and we have not done -- on whether we will change these targets or not. But we will communicate if we do that at the Capital Market Day in March. And there, we will put this in a holistic content, talking about our business plan going forward also.I think that's more or less it. I will hand over to you then again, Mattias.

[Mattias Johansson, CEO & Group President]

Thank you, Åsa. And turning to Slide 15, just to give you a slightly longer perspective on what a company like Bravida can do and not just only focusing on a quarter. You can see 3 different graphs or pictures showing the development throughout the last 5 years plus.And as you can see, Bravida is a robust and resilient cash flow generator. We have grown from SEK 12 billion to over SEK 20 billion in the last 5 years. And our cash flow will, in the future as well, support our M&A growth, will support future dividend and continued strength in our balance sheet so we can use that to develop the business.And if you look at the mid -- the picture in the middle, you can see that we had a slightly drop in the development in EBITA in '19. But we think this is very much due to the restructuring we have done. So we think we have a really strong position going forward so we can continue this development.And on Slide 16, I will summarize the quarter. And as you have heard a couple of times now, the sales was increased with 3% and the growth came from acquisitions. We had a slightly negative organic growth, minus 3%. The order backlog for installation -- it's only installation that's actually in the order backlog. The service is not booked as -- in the order backlog. But the order backlog is at a very high level, SEK 14.5 billion. We see a continued good business momentum for service that will support the growth in the coming quarters.The margin was 7.5%. And in that margin, we had taken the restructuring cost in Sweden close to SEK 60 million. The EBITA margin was improved in Norway. M&A execution is on track with a healthy pipeline. 20 acquisitions completed in '19 and adding SEK 1.2 billion in sales. The net debt compared to EBITDA is 1.3x, and that's including the new IFRS rules.We have a strong operating cash flow at -- close to SEK 1.6 billion. Cash conversion, well above financial target of 115%. And the Board proposed a dividend at SEK 2.25, which means 52% of net income and well in line with the financial target. That's an increase of 13% as well. And we -- finally, we see stable, good market conditions continue.And finally, before we open up for questions, we want to remind you about the Capital Market Day in March, 4th of March, 1:00 p.m. to 5 00 p.m. It's in Stockholm at the venue called World Trade Center. And you can sign up for this on our website before the 21st of February. So hopefully, we will see you there.Thank you very much. And I think we will take the questions now.

[Operator]

[Operator Instructions] And we have the first question from Kristian Andersson from SEB.

[Stefan E. Andersson, Analyst]

Stefan. So it's probably -- it's Stefan Andersson. Okay. First question, you had this restructuring that you preannounced at SEK 60 million and the SEK 58 million was affected in the quarter. Just wondering, is there anything else to do for Q1? Or are we done with that activity now?

[Mattias Johansson, CEO & Group President]

We think we are done, yes. And so we're done here.

[Stefan E. Andersson, Analyst]

Yes. And then looking at the underlying margin in Sweden, seems to be 10.3%, 10.4%, something like that, if I add back the SEK 58 million, which is almost 2 percentage points higher than last year. And in a historic perspective, very, very high. Could you maybe help us not to get too carried away? Or maybe we should get carried away about that margin year-on-year? If you could give us more detail.

[Mattias Johansson, CEO & Group President]

Yes. I think it's a good question, but I'll try to explain it. I don't think you should be carried away, but a strong quarter in Sweden, definitely. And for the last year, as you can say, that we have -- we had 4 divisions in Sweden. And the other 3 has performed very well over a long time and on a very stable level. And Stockholm has been the one who has underperformed on lower margin and you note in that perspective, diluted the Swedish margin.So I think -- and this is a result of -- that we very openly tells you about the costs we have had with this -- due to this restructuring. On the other hand, I think you should know that it is a strong -- we have had a strong quarter in the other 3 divisions in Q4 for many, many years. But I think this was really that -- I think that's how we should see it. That will be probably the Q3 or 4 next year as well, but this was a good year, yes.

[Stefan E. Andersson, Analyst]

And when you say a good Q4, you -- is that successful project closures where you've been able to use some profit?

[Mattias Johansson, CEO & Group President]

I wouldn't say that it is not one or few big large closes or projects. It's high service activity and many small, average-sized contracts that we have finalized.

[Stefan E. Andersson, Analyst]

Okay. Good. Then if I look at the M&A, you talked about the good pipeline and so on. Would you be in a little bit on a slowing pace, I guess, and then I shouldn't draw any conclusion from, sort of, in 2020, but you haven't done that much so far? How do you see the pipeline? Are you positive that you could step up in 2020 over last year when it comes to acquiring revenues?

[Mattias Johansson, CEO & Group President]

Yes, I haven't seen the analysis you referred to. But my feeling is not that we have slowed down. I think it's more about timing when we can close this. The pipeline is good, the activity is high. And I think you should remember that we increase -- reinforce or strengthen the central M&A team. That should help the organization to do acquisitions. And we took quite a big step up in the activity in '19 compared to '18. So I shouldn't expect a very big increase in '19, but we will continue on the same level, at least. That's my expectations there.

[Stefan E. Andersson, Analyst]

Yes. And then the final thing then. On -- you touched it and of course, difficult to -- for you to answer this, but the financial targets since you flagged -- that you're looking at then. I just have to ask. Looking at the sales target of 10%, that's a target that you actually have reached 2 or 3x if we go back to the last 12, 13 years. The margin side, I don't think you've ever reached that. I mean is this fair to say that you are not looking at raising targets? Or are you more looking at changing or lowering targets?

[Mattias Johansson, CEO & Group President]

Let's see. As Åsa said, this is a work that we -- it's carried out alongside with the strategy work for the future. And -- but just to comment on the margin target, we think that's definitely the target that we can achieve. And that's, at least from my perspective, something that we, I think, want to achieve, yes.

[Operator]

[Operator Instructions] And our -- we have a question from Henrik Mawby.

[Henrik Mawby, Senior Analyst]

Henrik Mawby from Nordea. One question for me, if I may. On the profitability issues that you've had in the Stockholm division over the past few years, what is the -- have you done? What's your analysis of what the root cause of that low profitability in that region is? I suppose it's competition from -- for some reason, but why is Stockholm's particularly exposed to higher competition? Is it foreign workers? Or what's going -- what has been going on there?

[Mattias Johansson, CEO & Group President]

No. I think -- welcome back to Bravida, by the way. But I think we have said before that this is not market-related. It's not company-related either. It's more branch-specific issues we have had because this is what -- we have to add to 1 -- 2 region, Elektro in Stockholm area. And they are working with the same customers in the same market, with the same everything, so to say.One of the regions is profitable to, at least, margins that we think is good margins. The other one has been heavily loss-making. And this is the restructuring work we've done throughout the last 2 years, especially in '19, where we have the new head of division in place. And together with the central team, this -- Lars Täuber has done a good job and divided, isolated the challenges, meaning that we ended up with 2 regions, 1 profitable and 1 loss-making. And then we decided to close the loss-making down. So I wouldn't say it's due to high competition because the other region has the same competition and they are making money. So it's more about the ability within that organization in all levels, how they can compete at all, I would say.

[Henrik Mawby, Senior Analyst]

Okay. And just one follow-up on that. You say it's been loss-making. Can you quantify on what type of magnitude those losses have been?

[Mattias Johansson, CEO & Group President]

No, I don't think we have done that before, but -- and in some way, accelerated the last year. And it has been clearer and clearer with what we have to do. And then it's also something we have to do, unfortunately. And yes, so I thought that.

[Henrik Mawby, Senior Analyst]

Is it fair to assume that it's on a level on par with the one-offs approximately, SEK 50 million, SEK 70 million losses?

[Mattias Johansson, CEO & Group President]

Actually, I don't have that numbers, but those close to SEK 60 million is a combination of taking out people and other restructuring costs, but also finalize bad projects.

[Operator]

And we have the next question from KJ Karl Bonnevier from DNB Markets.

[Karl-Johan Bonnevier]

We have had very good growth in the service segment. And I guess you are, with the organic growth reacceleration, you're talking about the 2020, also seeing installation service coming back from the backlog. Could you give us some idea about the quarterly profile? And then where you can, say, yes, organic growth rate is factored during this year? Will the good growth correlate as with your financial targets, obviously?

[Mattias Johansson, CEO & Group President]

Did I understand it correctly? If we can give you some information about when we come back to organic growth? Was that the question?

[Karl-Johan Bonnevier]

Yes. No, if you could see the quarterly profile for it. And obviously, you have very good organic growth already in the service segment.

[Mattias Johansson, CEO & Group President]

Part of the service growth is acquired growth as well because that's what we focus on when we do the acquisitions because we think it's more value for Bravida to acquire service businesses than installation businesses. So it's not only organic.Then we have some difficulties to actually do the analysis and see when the organic growth comes because of -- when the customers decide to start the projects, et cetera, et cetera. But we can see that we have a positive trend regarding the organic growth in the last 3 months. And we have said before that we expect the organic growth to come back sometimes in H1, and we have no reasons for stop believing. But that's a fact or that's our expectation at least.

[Operator]

[Operator Instructions] There are no further questions at this time. Speaker, please go ahead.

[Mattias Johansson, CEO & Group President]

Okay. Thank you very much. And a reminder again, the Capital Market Day in March 4 and please sign up. Happy to see you there, and have a nice day. Thank you very much.