Green Landscaping Group AB (publ)
STO:GREEN
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Green Landscaping Group AB (publ)
Earnings Call Analysis
Summary
Q2-2023
Green Landscaping Group's Q2 was marked by success, with net sales rising by 32% and profit margins outperforming financial targets. EBITA saw a hefty increase of 51%, achieving an impressive EBIT margin of 9.2%, nearly double the industry average. The performance was buoyed by the segments in Finland and Other Europe, offsetting a contract-related acquisition in Sweden. A key highlight was the strategic expansion into the German market, which represents a significant growth opportunity given its size. The strong quarter also demonstrated a robust cash flow of SEK 80 million.
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Welcome to the Green Landscaping Group Q2 presentation for 2023. [Operator Instructions]Now I will hand the conference over to the CEO, Johan Nordstrom; and CFO, Carl-Fredrik Meijer. Please begin your meeting.
Okay. A warm welcome to everyone and to the second quarter report from Green Landscaping. Presenting today, as usual, is myself, Johan Nordstrom, the CEO; and our CFO, Carl-Fredrik Meijer.So let's move to Slide 2, please. We can begin basically here. The second quarter, to sum it up, was successful overall. We can see that sales and profit margins are increasing again and also surpassing our financial goals. The segments in Finland and Other Europe came in with fantastic results where basically everything that could go right did go right. We could see that we had some offset by what happened in Sweden, where we basically made -- have 1 contract where we made a contract-related [ acquisition ]. We made our first acquisition in Germany, which was quite fantastic for us. That's what we have been working on for more than 2 years, and we finally made an introduction into the German market. And that was -- we're quite excited about what's going on there. And of course, given the business situation in Europe at this point of time, we do see some increased competition in the tender process for certain projects and so forth. But it has not, to date, had any major impact on our business or we'll basically have to see how that pans out. So that's for the introduction.So let's move into the details on Page 3, please. And to sum it up, as I mentioned, we did have a good progress where net sales, again, is increasing by 32%. That is quite healthy. The organic growth slowed a little bit down to 4.4%. And that, again, is in line with the market long-term growth trend that we have. We had a slightly higher growth in the first quarter. So making the analysis on a quarter basis here is perhaps not that useful, but we are growing with the market and are happy to see the [ 4% ]. And then again, as we were quite active on acquisitions, in particular towards the end of last year, we can see that we're growing by 27% from new companies coming into the group.Profit-wise, the EBITA increased by, I would say, a very healthy 51%. And right now, we are at EBIT margin in the quarter of 9.2%. So it's quite a healthy margin. We should keep in mind that the margin in the industry on the average is probably below 5%. So we are doing a quite good job in order to keep up the margins here.Then if you note on the quarter, per se. Second quarter is a strong quarter for us because it's really the high season where everything is moving in the right direction, and we don't have any vacation periods or anything. So from that perspective, it's a good quarter. We did have a positive mix effect from acquired companies. And as mentioned, we did have a very strong performance from the segment Finland and Other Europe.Cash flow-wise, we came in at a very strong SEK 80 million. So happy to see that one, as again, as I did mention, we have been working for 2 years, actually more, understanding the German market and doing the comparisons to the public tendering processes, the size of the companies, what's the competitive landscape, is the market mature enough to consolidate and so forth. And then when we finally did enter the market through the company with Schmitt & Scalzo in Frankfurt, we are quite happy and very pleased to be in the German market. So it's a very -- I would say, it's a very important step for the group to enter into a new very big market. The market per se is perhaps 3, 4x as big as the Scandinavian markets together. So it's a major step for us.Next slide, please. Again, yes, breaking down the sales and looking at the right-hand side of the RTM and that we can see that there we are growing sales on a 12-month rolling at 50%, where we have a 10% organic that is slightly -- not so slightly, it's actually twice the number from -- in which the market is growing. And again, we are adding almost 40% on the acquisition side. So we are still a fast-growing company, and I'm quite happy to see when I compare to the margins and the growth rate is going in the right direction for us.Next slide, please. Looking upon the order backlog. And again, given the type of customers we have, that means that the majority of the order book are long-term contracts with public sector customers. And that gives us a great visibility and it also gives us a stability looking into the future. And of course, as we are growing the revenue, then the order backlog is growing as well. So that one has grown by 19%. And it's a mix because the service companies tend to have a longer order book, while the project-based businesses have a shorter order book. So if the company is growing by 40% or 50%, then we don't necessarily see that the order book imminently should grow at the same rate. So we are kind of happy with what's going on here. We haven't had any large contracts in the quarter that has been renewed or being up for renewal, and we have not won any major contracts either. Then of course, we are winning on a constant basis contracts, but we haven't had any of the big contracts coming up for renewal in the last quarter. So it's a stable environment that we are looking at.Next, Page 6, please. Again, strong growth in the quarter of 51%. It's a quite dramatic increase, I would say. But as also mentioned that everything that could go right in this quarter actually did go right. So I'm happy to see that one in particular, in Finland and the European segment. The EBITA margin are right now at a very healthy 8.6% on the rolling 12-months. And we are, as can be seen, on a positive trend. And then we have to keep in mind that during this period, we have had the coronavirus, we have had high inflation, and we had a bit of a downturn in new construction segment. So the market conditions have been quite challenging. And despite, I would say, challenging market conditions, we are still increasing our profit margin on the rolling 12-month basis. So we are pleased to see that one.Next slide, please. Taking a dive into the segments here. Then we have the Sweden segment. And there, we can see we had a somewhat slower organic growth to 3%. Also, we haven't made -- we haven't been active in Sweden in terms of acquisitions. So it's only a 3% growth. It's 1 company that came aboard in the -- from Sweden side. We see that we have a contraction on the EBITA, and that's mainly due to 1 contract in 1 of the subsidiaries, where we have been working with that contract for about 2 years now, and we have roughly 1 year to go on that particular contract, and then we basically made a decision that, okay, this is the way the contract looks like. So we made an impairment impact in the segment based on that contract. So it's a one-off. And it is what it is.Moving on to Page 8, Norway. Here, we are still growing at a very high pace. We're growing by 55%, 4% organic. I'm quite pleased with that particular number. It's a steady rate. I don't want to grow too fast and not too slow, so being at 4% to 6%, then you are growing with the market average. And then, of course, as we have acquired quite a number of companies, then we have a high growth rate at 52%. EBITA, again, is increasing significantly. It's close to 30% increase in the EBITA. And even though the EBITA margin is going from 13% to 10.9% or 11%, that's mainly due to that we -- in the early days, we had very profitable companies and the companies that are coming along are still above company average, but they are somewhat lower. So it's a normalization that is going on in that particular market. So I'm happy with the companies we have there. We are happy with the performance we have. So it's a normalization going on that the margins are somewhat coming down as we are growing the revenue in Norway.Finland and Other Europe, and as I did mention, we have a couple of new companies here that significantly impacted the segment. So in terms of sales, we grew by 178%. So that, of course, is a very high number, where we had a 2% organic growth, and we also saw that, per definition, that the acquisition came in at almost 170%. EBITA was 780%. And that is of course, we're coming from a very small segment and then we're adding new companies to it. And then we are moving into a strong quarter. And that actually means that it's a strong quarter for us. And then we have the new companies with Huutokoski nursery, for instance. They have the majority of their sales is in the second quarter. We had Stebule, who came in at very strong. We had a new German company coming into Finland or to this segment as well.So basically, when I say that the stars are aligning, yes, it's a lot positive that happened in the quarter. So all companies -- again, all companies contributed to the performance and then with the outliers of the nursery and the German and Stebule. So it's good to see that, that segment is growing. We have been talking about that segment previously that when you have such a few companies, and you are just adding 1 or 2 companies, then it's hard to do an analysis on the numbers per se. The same thing here, we're growing quite dramatically and adding new business into this segment. So we are happy to see that it's moving along and the coming -- that you actually have, what do you say, a minimum amount of companies in this segment moving into the future.Next page, please. Now as I did mention, we did our first entry into the German market with the company Schmitt & Scalzo and also that we have been working with it for actually a very long time where we have been visiting Germany, we visited different companies. We have build a platform, as I spoke earlier, that if you want to go into that market, you need to make sure that you have a stable platform. And we are also in the process of opening up an office in Germany. We are also in the process of making our first hiring in the German market. We also have people aboard already in the organization who are fluent in the German language, and we are spending quite a bit of time in Germany at this point of time. So I'm quite pleased that we made the first acquisition. And of course, we are aspiring to do more follow-up acquisitions into this market.So it's -- the company per se is a classic company in what we are doing, and we are always very careful when it comes to the first company that we acquire when we move into a new market. We saw that very clearly both in Norway as well as in Finland that you have to be careful to join forces with the right people in order to get the right perception and the follow-up acquisitions. If you're with the wrong company, then you might end up in difficulties, but this is not the case. We are quite happy with Francesco. There is the [indiscernible] in this case. And yes, look, we're happy with it and it looks good.And then I -- we are moving on here, and I'll let the voice over to Carl-Fredrik Meijer.
Thank you. Just looking at the financials. So to sum it up, I mean, Johan mentioned it was a strong development across the line. Net sales increased, EBITA increased even more, and EBIT increased even more than that, which I'm quite pleased with. We saw a strong cash flow generation. We saw an increased return on equity. We saw a solid order backlog despite increased competition. We saw that earnings per share decline, I'm coming back to that, despite the profit increase, and we saw that the financial leverage is within our target, it's at 2.4.So cash flow, we had SEK 80 million coming in from operating activities this quarter versus SEK 15 million last quarter. Going into that a bit later. I mean -- and the 2 sort of contributors that was the increased EBITA, of course, but also that the working capital were not increasing as much as it did last year. We had nearly SEK 600 million of cash at quarter end.So looking at the cash flow bridge, breaking it down, we had the SEK 109 million plus SEK 30 million, which is the EBITA of EUR 138 million. We're adding back the depreciation of 13%. And then we saw a change in net working capital of SEK 72 million. And looking at working capital in absolute terms, it is in line with what it was last year. But again, we started from a different position. So we had a less negative impact from that, making it SEK 80 million. Then we made an acquisition, which in cash was SEK 173 million. We did investments in CapEx of SEK 23 million. And then we had a huge item of new loans to SEK 750 million, and we repaid loans of SEK 630 million. And this has -- the last 2 bars has to do with the refinancing of the SEK 500 million that we increased our facilities with during this quarter. And in total, it was SEK 6 million of cash flow in the period.Looking at the financial leverage. We've been now at 2.4. It's in line or slightly below our financial target of 2.5x EBITDA. It's been fluctuating a little bit if you look in the sort of history going back to 2020, but we've been operating more or less at this level the whole time. And we think it's a level that we're comfortable with. Even though, of course, we're paying more interest now than we did before, it does not change. The higher interest rate does not change our sort of value creation model in any substantial way. So this is a good level to be at between sort of 2 and 3x. We think it's healthy and it's working very well for us.Looking at the maturity profile of the loans. As I said, we expanded it with SEK 500 million this quarter, with a possibility to expand it further. We have now total maturities of about SEK 2 billion, which is coming to end October 2025 with a potential to extend it for another year. And being at 2.4 leaves plenty of headroom to our covenant in our loan facility.So going -- finishing at the financial targets. We have a target of growing at 10%. We have been, as Johan mentioned, growing at 50%, which is quite a lot. We have had an EBITA margin of 8% is our target, and we're now at 8.6%, and we've been operating above the 8% level for quite some time now. We have -- we should not be leveraged more than 2.5x, and we're now at 2.4x. And we have a goal of making a dividend of 40%, but we have -- and the Board has made it more value creation -- value creating to invest all the cash into expanding the business. So we have not made any dividend yet.
Okay. So to sum it up in that case for the last side here. We are -- as you can hear that we're quite pleased with the performance of the company at this point in time. It was a very successful quarter for us overall, where we can see that both sales and profit margins are continuing on to increasing. And we are also surpassing our financial goals. We did see that Finland and -- the segment Finland and Europe came in at a fantastic result. We had -- we made the first acquisition in Germany, and we are clearly excited about the future in the German market and also with the company that we joined forces with. The market overall, as I did mention, we do see some increased competition in the marketplace. It has, to date, not had any major impact on our business per se. So we are continuing with making good progress here. So we're quite pleased with the quarter per se.So by that, I believe that concludes the presentation that we have, and we are also opening up for questions. So I hand it back to the facilitators.
[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.
My first one is on Sweden. Just if you could go a bit more into detail regarding this onetime impairment that you took in one of your units. And I apologize if you mentioned it, but within which kind of segment is it related to, if it was a landscaping or ground maintenance or anything like that?
Yes. Johan here. It's on the maintenance side, it's a 3-year contract. We have 1 more year to go. It came from a company, an acquisition we made basically 2 years ago -- 3 years ago, if I remember correctly. And that contract was quoted. So it was an outstanding quote when we did the DD process. So it kind of fell away from our radar. And unfortunately, I don't recall exactly if it was 6 or 8 months post closing that they started to deliver or the project start actually began. And then we have been working with that contract ever since in order to improve the profitability of the contract. We have been in contact with the customers, and we've also made an agreement with the customer that we should exit the contract as quickly as possible. And that means that we are working on that contract for 3 years in total.We have worked very hard on improving the quality, the financial side, the relationship with the customer, but we came to road's end in May, June of this year and basically said, okay, this is not the way we want. And that's why we made a provision on that particular contract for the remaining 12 months of that contract. So I think that contract expires in September or October next year.So it's a ground maintenance contract, and we will have had it for 3 years. And we've basically done our very best in order to meet the expectations of the customers and also be able to minimize the negative impact on that particular contract. So that's why we made a provision by the second quarter to get into a zero point from that perspective. The contract has been loss-making for -- basically since the start, and that -- it doesn't mean that we have carried the losses previously over the P&L as a running cost, and now we are making 1 provision and that will move on.
Understood. And has this entailed that you did a broader kind of look through into existing contracts? Or is this done kind of at the business level on an ongoing basis and thereby you feel comfortable that, well, the risk of other impairments are relatively low?
So we go through all the companies every month. And if we see any sort of deviation against what we expect, we, of course, delve into what's that or -- and talk about the local management about that. So we sort of make that analysis and risk assessment continuously. So this is...
From our perspective, this is a one-off that happened during the acquisition 3 years ago. Otherwise we are, of course, evaluating all the contracts and also when we are making new acquisitions, then we are more careful. So we missed that from 3 years ago. It does not have a huge impact on the corporation as a whole. It does have a negative impact in this quarter on the segment of Sweden. So it's not a major thing. It's a bad thing, I do concur, and we should do better. And of course, when we're making new acquisitions moving into the future, then we learn from our mistakes and, of course, are including any outstanding tenders that the company has made during the due diligence process.
Okay. Understood. And my -- I have 2 more questions. The first one is on the comments that you made this quarter and also the prior quarter regarding increased competition as businesses in adjacent areas venture into your kind of home turf. Are there any kind of particular segments where you've seen this picking up? And by that, I'm referring to any particular region or end market application.
Yes. It's not that much into the service sector. So it's much more into the project-based side where you can see that the construction companies who does have the technology and the equipment and the infrastructure to executing those projects. The service sector is somewhat different by nature. So we don't see that many companies are saying that the competition have increased in that sector, not really, no. So we are talking about the project side of the business, and we are talking about the bigger projects in that sector. And by bigger, I mean, projects to the tune of, let's say, SEK 30 million to SEK 50 million or perhaps as low as SEK 20 million, but that's very seldom. And that's on the average, a big contract where we should be quoting. So that's where we meet the new competition on a SEK 2 million, SEK 3 million contract. We don't see that going on. Those are too small. So it's basically larger contractors who are suffering at this point of time, given the market conditions in the traditional segment.Now they also have a slightly different cost structure than what companies in our segment typically have, meaning that they are -- their base cost to run the business is actually higher than ours. But we do see them participating in the bidding process in which they did not submit quotes previously.
Understood. And my final one is on profitability in the Finland and rest of Europe segment, 27% margins. I mean it looks like a software business. But just how should we think about seasonality and the kind of extrapolation of the current profitability, both perhaps just in the near term and also if we just look ahead, perhaps 1 or 2 years that, okay, was it a very high profitability level this year that we kind of gradually normalize at another good level but perhaps a bit lower level?
Yes. It's misunderstanding in right way. It's a problem when you have such a great success in one particular quarter because it raises the expectations and then trying to bring down the expectations and it sounds ridiculous, we're not quite happy with the performance. Now as I did mention that we did have -- it also depends on when we are accumulating the numbers by the new acquisitions and so forth because we did -- when you just have a few companies and we did add other companies historically into that segment, then we actually added them when they had their low season. So artificially, it looked like the segment was not performing according to expectations. And then all of a sudden, we have the other -- the problem is other way around at this point in time where we're actually adding companies who are, seasonality-wise, doing very fine, in particular in nursery for instance.It's natural when you look upon the nursery business. It's the same as with Jordelit. It's another company we have in the group. They have the absolute mainstay of their revenue comes into this quarter. And then we're also adding Stebule into this segment, and we are also adding the German company into this segment, all in the second quarter. And then the baseline, the companies we already had in the portfolio in Finland also have a very good progress in the second quarter. So that's what I meant by the stars are aligned that, yes, everything is moving quite well.I do not give typically guidance moving into the future. So I'm not prepared to make any forecast at this point of time, I'm not saying that. On the average, the industry generates something like a 5% margin overall, that's the industrial trend you have and you see a growth rate of about 4% to 5%. And anything above that means that we're actually beating the industrial numbers. We have a company goal of 8% EBITA. We can see that Norway is becoming more normalized around 10%. I think that's a very good indicator of what we should expect to see. We see that we are on roughly 8.5% in the group on the average. We are also improving in Sweden towards the 8%. So yes, I think that's as far guidance as I am prepared to give at this point of time.
The next question comes from Henrik Jernbeck from SEB.
Thank you for the presentation. So if I could fill in with a couple of questions here. In Q1 and perhaps Q4 as well, you mentioned some uncertainty regarding the second half of the year. And could you give us an update on that? If your that problem is now gone? Or if you're continuing to see some uncertainty for some subsidiaries in the second half maybe looking at Q4?
So yes, there is a great uncertainty. And of course, everybody is uncertain what will happen into the market with the conditions on the construction of buildings and also the inflation and interest rate and so forth. That does create an uncertainty. So when we talk to the heads of our subsidiaries and they, in their turn, talk to the customers, we have had a situation for a year now since the third quarter last year that when they look into the future and what they hear is it's just a signal that it's uncertain. And then when we look upon the order books for the coming 2 quarters, it looks quite healthy. And that's the situation we have had for 12 months now that the coming 2 quarters are looking good, but there are uncertainty in the third quarter, counting from today moving into the future. And we have had that situation for a year now that, okay, the coming 2 quarters are looking okay, but the third quarter might be -- let's say, the coming 6 months, there, we are pretty safe that, okay, it's looking good. And that's the situation we have right now that the third quarter of this year and the fourth quarter of this year, given the order book we have, it looks okay from our perspective.Then there are uncertainties about the first quarter in the coming year. And that's a trend we have had. So yes, that's basically where we are. So nothing has changed from that perspective. It hasn't got any worse or it hasn't got any better.
Okay. And I just want to also ask about -- because we have seen some quite extreme weather, especially in Sweden in Q3, but is this something that could affect your business or has affected your business in any way?
No. It hasn't had any major impact on the situation at this point of time. We'll see what it will -- might have -- we have to see what's going to happen. What I'm actually thinking about is that, okay, if we have some flooding, then that might have a positive upside. I do not know the magnitude of it, and I'm actually referring to Norway rather than Sweden, where I do see that we perhaps have some upside moving into the third and fourth quarter as there are some rebuild and cleaning activities that needs to be done because of the flooding and whether or not we will -- it also depends on the customer budgets there if they are using that money in the budgets for the cleanup or if that should be additional funding that goes into the customer contracts. So that's too early to say. But it might be a slight upside in the future, yes.
If we're looking a bit longer ahead, even though it's a difficult thing for us with these kind of bigger catastrophes or variations in the weather, it is actually positive for us because this will mean that -- I mean, our communities and cities will need to invest more into the infrastructure and rebuild it to adapt to this new situation.
To prevent flooding.
Exactly. So from a long-term perspective, I think it's -- we're in a good position.
Okay. And a follow-up to that. I think in terms of when you know and [ stuff ] that you said that if it's outside the contract, could this potentially mean a bit of a higher margin if you have to do some extra work?
Typically, you have a framework agreement with the customer and whether or not they can use the prices from that one. The upside is probably more on that the municipalities are getting additional funding from the government to cover the cost increase because of the flooding, if they have emergency funds and stuff. I think that's where you might have a potential upside that the revenue should go up. And then, of course, that gives you a higher utilization of the equipment. And by that, the margins should improve a little bit. But that's into the future. We will know more for sure when we actually -- moving into the fourth quarter. I think that's when we will see if we have any potential upside on it.
Yes, it will also have negative aspects on some of the other projects that we're doing. So -- and this is the good thing about our business is that it's stable in the sort of portfolio, different [ clients ].
And you mentioned negative effects here. Are you referring to perhaps some delays on project that could arise from extreme weather or some...
Exactly.
Yes.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Okay. Thank you very much for listening in to the conference here, and thank you very much for the questions. I believe that's everything for us. So thank you very much, and have a great day.
Thank you.