Green Landscaping Group AB (publ)

STO:GREEN

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Green Landscaping Group Audiocast Teleconference Third Quarter 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Johan Nordström; and CFO, Carl-Fredrik Meijer. Please begin the meeting.

[Johan Nordstrom, CEO & Executive Director]

Excellent, thank you. So once again, good morning, and welcome, everyone, to our third quarter report of this year. Once again, the introduction was already mentioned, but myself, Johan Nordström, and I'm -- together with me here today, we have Carl-Fredrik Meijer, our CFO. And we are quite pleased to present another strong report here where we can see a significant growth and increased profitability. So let's dive into the presentation. So next slide, please. As mentioned, it was a strong quarter for us with a positive trend in both sales and profitability. In terms of sales, we came in at SEK 761 million versus SEK 551 million a year ago, and that means we have a growth of 38%, so a significant growth. As well as we could see that we had, I would say, a quite strong organic growth of 4.5%. So altogether, given the circumstances, we are quite happy with the growth rate in terms of sales. Profitability and EBITA amounted to SEK 68.6 million versus SEK 40 million a year ago, and that's a significant improvement of 72%. And I would like to, in particular, the EBITA margin of 9% was a very strong margin, which I'm kind of happy with for the quarter. So profitability-wise, we are moving definitely in the right direction here. Also, if we jump to the last bullet there, we made 1 -- we closed 1 acquisition, which is Utemiljö Skellefteå, not the biggest company, but it's a well-managed company with a great entrepreneur who is leading that one. And we are well positioned to continue to grow through acquisition, both in Sweden as well as in Norway and as we opened up Finland right before this summer. That means we are present in 3 markets. And we have, I would say, a good pipeline of companies who we are in discussions with of joining Green Landscaping. So those were the numbers. So next slide, please. So for the last 3 years, if we elevate the vision a little bit more, we can see that we have been growing quite significantly. So we are shy of 40% growth CAGR in terms of sales. And profit-wise, it's actually even higher. So we have a CAGR of 85% growth in profitability for the last 3 years. So those are quite strong numbers. And as I mentioned, we are present in Sweden, we are presently in Norway as well as in Finland, and the group today consists of roughly 34 different companies and growing. And of course, it is our ambition to continue to grow and building clusters of companies where we are present. So from that perspective, we are growing quite quickly. And profit-wise, we are increasing the profitability of the group, and we are growing the number of companies. So all in all, we are kind of happy with where we are today. Next slide, please. Contributing to our success is, of course, our ability to acquire great companies led by great entrepreneurs. And as can be seen, a significant portion of the growth comes from companies who joined the group. And a cornerstone of being successful by acquiring other companies, that's the strategy of decentralization and how we take care of the entrepreneurs and the businesses who comes into the group. And this is a recipe that we have been working on for a number of years, and we are quite successful in taking care of the entrepreneurs who comes in and being able to acquire new companies. So the organic growth of 4.5% is in line with market growth and the expectations. And of course, the acquired growth of 32% is a quite high number. So we have been successful in acquiring new businesses. Next slide, please. There are 4 initiatives that we are spearheading as being a large group, and those 4 initiatives is really about the purchasing, where we combine the spend from all the different entities into central contracts. The other part we were working is about Green steps and the environmental side of the business. The third one is digitalization and the fourth one is about lean tools. What we are presenting here is just 1 example of digitalization, where it benefits of being a bigger group because that means we can invest and develop different types of solutions for our customers, as well as for the individual companies who are a part of the group. So on the left-hand side, you can see what we are doing in -- for the maintenance contracts, for instance, where you can create a digital map with different layers. And on those layers, you can have the work that needs to be done. So that could be that you have growth, you have trees, you have for the winter, you have the ropes and such. And by having this ability, that means that we know exactly what to do when it needs to be done and who did it. So it's a checkpoint both internally as well as we can provide this data to our customers. So that brings us closer to the customer because we can provide them with quick and accurate data on what we have done when it was performed as such, but also it can be linked to internal systems like payroll and other systems that enables us to actually be more efficient and provide accurate data to the customers. On the right-hand side, we have an example of another tool, and this is just a special niche for us, but in terms of inspecting playgrounds. So instead of sending out an inspector who takes some photographs, who goes back to the office and then writes the report, everything is done by the cell phone in an application where you take the photographs, you have the checklist and you make sure that you don't miss anything. And once you're done, you basically complete the whole report while you are still on site, and then you go over to the next one. So this increases the quality of the report per se, but it also speeds up the whole process because you don't have to go back and write the report afterwards. So this is just 2 very small examples of digitalization initiatives that we are spearheading on a group level. Next slide, please. Construction of Kungshögskolan. So our subsidiary, Bengtssons Trädgårdsanläggningar, has been awarded a contract to end customer Malmö Stad to build the outdoor environment for a new school. And the scope here is that we do everything from below ground to aboveground. So it includes groundwork and landscaping and stuff like technical shafts, for all the cables and stuff, walk and sewage and then we come above ground to do playgrounds, sports turf, tiles, trees, flower beds, et cetera. So this is a quite large project for us and it starts now and will be finished in approximately 18 months. Next slide, please.

[Carl-Fredrik Meijer]

Another example on the -- one of the initiatives that we work on like Johan mentioned, one of the 4 is sustainability. And this is a small example of where we work with nature to create naturalistic planting, it's called. And this is a method where you mimic nature's own vegetation. And this is also good for bees and other pollinators. And you might have heard of the High Line in New York City, which is an example of naturalistic planting. Next slide, please. Order backlog increased by 30% to SEK 5.2 billion, and this is driven by a mix of acquisitions and retention of contracts that we already have, but also a few wins, of course. So a big backlog is an healthy one. And we think the order situation looks promising going forward. Next slide, please. Performance per segment. So what we see this quarter is that generally, we see that the margins in the different segments have increased. You can also see that it varies somewhat between the different segments. And this is just natural variations on projects and stuff. But the trend is, of course, positive overall. A few things to comment specifically is Stockholm. So we're pleased to see that we have increased profitability in Stockholm since we have been working for a long time to do just that. And we think it's early days, but we see a positive trend. So let's see in -- let's get back to that in Q4 and see where it takes us. Then I'd also like to comment on Finland, which shows a very strong margin this quarter. And I want to remind you that this is just 1 company, 1 quarter. So it's a very, very high margin right now, but that can't be expected to be as high going forward. I'm sure we will have questions on this later as well. Let's see what questions pops out during the Q&A. So let's -- next slide, please. Financial position. So the cash flow for the quarter was negative as well as it was in last year, and this is due to increased working capital. And it's a seasonal pattern in Q3 where we have a lot of projects going on. So we see -- we have a leverage of 2.4x, we were at 2.9x a year ago. We have a new financing contract in place of just short of SEK 2 billion, and this is to refinance current debt and for us to be able to facilitate new acquisitions going forward. The interest is spans from 1.25% to 2.05% depending on leverage. Solidity was 30% at the end of Q3. So next slide, please.

[Johan Nordstrom, CEO & Executive Director]

So that brings us back to the financial targets, and we have 4 of those. So in terms of growth, we have a target of growing by 10%, and we are exceeding that target by quite a margin. In terms of profit margin, we are aiming for 8%, and we are getting closer and closer to the 8%. We're not there yet, but it's improving. The leverage where we said we should be at 2.5x, we're at 2.4x, so I believe that is well under control. And as Carl-Fredrik mentioned, we have a new facility, a new agreement with the banks. That means that we continue on our growth journey by acquiring companies while keeping the leverage in check. In terms of dividend, we have yet to date as we are growing quite quickly. We have not had any dividend and that's where we are. So those are the 4 targets we have and our progress against those targets. Next slide, please. So to sum it up, as mentioned, we are pleased to present another strong financial report here in the third quarter of this year where we are growing significantly by 38%. The EBITA grows by 72% and earnings per shares are growing by 41%. So all in all, it's a strong quarter for us. And the CAGR for the last 3 years, again, there we are growing by almost 40%. And again, the profitability are growing by 85% in terms of a 3-year CAGR. So we are kind of happy with the performance so far. And I think that concludes the conference so to say, where we present the numbers. And then we -- I believe we open up for questions.

[Operator]

[Operator Instructions] First we have Dan Johansson from SEB.

[Dan Johansson, Equity Research Analyst]

A couple of questions from me. Maybe I'll start with Utemiljö Skellefteå, which was very encouraging to see that the sense you made is starting to pay off. Do you feel that you are in better shape now or do you still expect it to be a bit of advance right now for the coming quarters? Or have you sort of established yourself as you do from profit margins in Stockholm, can you share a bit more about how you feel about that?

[Johan Nordstrom, CEO & Executive Director]

I believe as Carl-Fredrik mentioned, we have been working for quite some time on improving the performance of the entities in Stockholm, and some of them are in a good shape, doing good, while others are still struggling a bit. But on the trend, they are improving, but it's still -- it's never a straight line. You take 1 or 2 steps forward and then you have 1 step back and then you keep moving forward again. But the trend is to what we believe here or what we can see actually in a few of the entities, they are improving, and we're kind of -- we are very pleased to see that they are improving. They have been working hard for a long time in a challenging environment. Stockholm is a tough market, but they are improving, and we're happy to see and report and appreciate the progress that we are making in that area.

[Dan Johansson, Equity Research Analyst]

That's good. Very encouraging. And perhaps on Finland, I know it's only 1 company but it's a very strong margin here in the quarter. My question is really it's a seasonally strong quarter for that company? Or is it just really a high-performing company you acquired there?

[Johan Nordstrom, CEO & Executive Director]

It's a great company, but that margin is not representative of the profit level of that company for the full year.

[Carl-Fredrik Meijer]

So there's a seasonality here, Dan, which plays in favorite for us this quarter.

[Dan Johansson, Equity Research Analyst]

Yes. Makes sense. Thank you for that clarification. And perhaps also following up on Finland, how do you -- now you have been there for a quarter, how do you feel about the reception so far? Do you get some inbounds from other companies who would like to join the group? Or are you still a bit unknown in Finland compared to Sweden where you've been for quite a while? Can you share your thoughts about that on the Finnish market going forward?

[Johan Nordstrom, CEO & Executive Director]

We have been in Finland in since the time going back and had a few, quite a few meetings and done roadshows and such. So of course, we expect to continue to being joined by other companies in Finland as we move forward. Otherwise, we wouldn't have opened up the market from that perspective. So are we well known? I believe that we are known at least. It takes time to build a new market for us at the same time as we can also disperse. There is a high level of activities in all the markets. That's not a big circuit where there are other buyers out there who are quite active. So we are as one of the companies who are active. And we also try to stay very prudent and really are careful when we do an acquisition, making sure that there's a cultural mix, and that we like the entrepreneurs and what they do and so forth is quite critical to us when we do an acquisition. And of course, we expect to do 1 or 2 more acquisitions in Finland in not too far away future.

[Dan Johansson, Equity Research Analyst]

Okay. Perfect. And competition, I mean, there's a lot of companies out there acquiring. Do you see some inflation in terms of acquisition multiples? So can you still manage to be within a range where you are comfortable? Or I guess the stock markets are coming up as well, so I guess that also inflates the private market. But are valuation multiples or what you're looking at, are they still decent?

[Johan Nordstrom, CEO & Executive Director]

They are still decent, even though as we -- as you are alluding to, as I am experiencing the competition or the number of buyers out there going back 2 years in time, yes, there's a higher competition, there's a much higher activity. But the way we have constructed our offering package means that we are still quite selective in the companies that we would like to acquire. So we basically could say no to more acquisitions than we accept, of course. We can also see that in structured processes, prices have come up. So from that perspective, it's been more expensive. But it's quite seldom that we take part in -- or we take part in structure process, but it's quite seldom that we actually acquire a company through a structured process. So we are still prudent. And even though the competition have gone up, it has been slightly more expensive. But it's still within a decent region when we do the acquisitions.

[Carl-Fredrik Meijer]

And I mean we are picky buyers. And we want companies with strong profitability and where we get really good match with the entrepreneurs and that the entrepreneurs want to stay on and join the group. I mean that's crucial for us. So it takes time for us. But I think that's good. That's our strategy.

[Dan Johansson, Equity Research Analyst]

Yes, excellent. That sounds very reasonable. And of course, you perhaps have more synergies than some other buyers out there as you are the largest player in the Nordics, of course, within your niche. Maybe also last question, if I can, on Norway, you mentioned a slight increase in material prices. For example, is it possible to share how you typically pass that on to customers? Is it immediately, or do you see a little bit of a lag in some projects? Or if it's possible to sort of say the magnitude of these increases and how much capacity on that would also be very helpful.

[Johan Nordstrom, CEO & Executive Director]

There are 2 questions on there. The one is the cost side that is more expensive, but it's also due to the logistic situation with products coming, raw mats they are coming from China, which you can't get hold of why the project is still running. And that means you have to source material if available, from other sources, i.e., local sources like stone from Sweden or stone from Norway instead of from China. And of course, that is more expensive. But to the best of my knowledge, we are in a good discussion with the customers, both in terms of the timing of the projects so you don't have any delays. And also, should you have any cost increases that to some extent can be shared between ourselves and the customer. So we have been -- I think there has been some challenges in Norway, even though the situation is improving. I haven't seen any major or large negative impact in our profitability. But I know that there has been a lot of discussion, a lot of work being done in order to make sure that the projects are being executed on time and to the right margins. So I haven't seen any major negative impact from it, but I know there has been a lot of work behind the scene on executing the projects.

[Carl-Fredrik Meijer]

And I think it's worth mentioning that we have quite many projects going on all the time.

[Johan Nordstrom, CEO & Executive Director]

Yes.

[Carl-Fredrik Meijer]

So we are able to adjust prices not only sometimes in the current projects, but of course, we adapt our prices to customers all the time.

[Johan Nordstrom, CEO & Executive Director]

Should we have had any major negative impact on raw material price increases, those numbers would have shown already in the third quarter.

[Dan Johansson, Equity Research Analyst]

Yes, exactly. I mean your margin is very good in this quarter. So that's clear. Just not to interfere there, understanding dynamics. Thank you very much for that. And I think I will jump into the queue. Thank you so much.

[Johan Nordstrom, CEO & Executive Director]

Thank you.

[Operator]

Next we have Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

So first off, question on the substantial margin improvement that you're seeing in Green itself. You commented that you're getting a few lease, profitability initiatives still in a very nice way. At the same time, the South region has, at least to my understanding been a couple of quarters ahead of other regions when it comes to getting the corporate structure in order and the sort of turning business units in the companies. How has that impacted your profitability journey? Are you being done with that as management retention been able to focus more on sort of margin-enhancing initiatives? And is that sort of leading what you're going to do in mid and north as these regions are complete in the corporate structure and turning business units into companies?

[Johan Nordstrom, CEO & Executive Director]

Being a decentralized company means that we actually have individual strategies for each and one of our entities. So I wouldn't draw any conclusions that if we do something in south, that would be done in a similar way in another area. What we have been discussing is about that we have companies at the lower end of the profitability level. And we are working actively with those companies. Stockholm has, of course have had a great focus because that's where we had the biggest room for improvement, so to say. But we also have had an -- we have entities both on the West Coast as well as in the southern part of Sweden, where we are working diligently in order to improve their quality, as well as their profitability. Are they, so to say, on the right track? Yes, I believe they are. Do we still have things to do in some of the entities in the southern part of Sweden? Yes, we have. So we are not, by any means, happy with every company's performance themselves, even though we appreciate the improvements they have done, and we know that they are working diligently on improving the situation. Then in other areas, you have other challenges compared to what we have in the southern part of Sweden. I would say that the biggest, from my perspective, the most challenging environment has been in Stockholm, and that's the one we have been in discussions about. And there, we can also see, I would say, the trend is the most digital in the entities in Stockholm that they are actually improving even though from very low levels. But that's the key point I can see in the third quarter report. That is actually that the entities in Stockholm are improving.

[Fredrik Moregard, Analyst]

And when it comes to south, is it possible to be a bit more specific on what initiatives have been most important in driving that margin expansion?

[Carl-Fredrik Meijer]

We -- I mean, of course, Bengtssons, the acquisition of Bengtssons, is of course a positive contribution to the margin. But I think there's a -- so these became own subsidiaries with their own cash and balance sheet and everything a year ago approximately. I think it takes time for to see that we have the right leader in place to -- for them to adapt and kind of nourish their own local culture. And I think that some of that is actually in play here and making sure that the margins are high. As you know, we focus more on margins than on sales. So -- we'll see. I think it's too early...

[Johan Nordstrom, CEO & Executive Director]

I concur. It's a bit too early to draw any major conclusions at this point of time. We need another couple of quarters before we can say that there is a substantial and solid improvement in profit margins.

[Fredrik Moregard, Analyst]

Sure. Yes, that's fair enough.

[Carl-Fredrik Meijer]

Typically, what we do is, of course, looking at costs, as how we have calculated the projects, how many entities we are. Do we get the add-on sales, if the customer happy or we're losing money in any contracts. I mean, this is going on in every -- this is going on all the time. So we're working with those questions, yes. And of course, that pays off after one.

[Fredrik Moregard, Analyst]

And speaking of add-on sales, I mean, you mentioned in the report that is impacting you less, you're seeing month-by-month improvement in that situation. Has add-on sales sort of researched as well? Or is that something yet to come?

[Johan Nordstrom, CEO & Executive Director]

I would like to say that we haven't been that severely impacted by the COVID-19. And that means I don't expect any major uptake either now as the situation is improving. So our business model is kind of resilient, and we're kind of happy being where we are in not being impacted as we expected in a major negative way. That means, of course, that I don't expect us to be positively impacted in a major way once jurisdictions are being less rigid. So, it's a resilient business model.

[Fredrik Moregard, Analyst]

Sure, yes. I guess, I mean we're talking, I guess, a couple of percentage points down when it comes to these issues. So clearly not a major issue, but still interesting to hear your thoughts on that recovery because the growth hasn't really been as strong as you would have expected over the past year when it comes to sort of long-term market trends.

[Johan Nordstrom, CEO & Executive Director]

Yes. What we can see is that we still have projects that are for various reasons being postponed. It could be material shortage, as I mentioned. It could still be that for other reasons that they are being -- they are still postpones going on where they move projects into the future. They are still a bit tricky to get hold of people who makes decisions and such. So it's not a normal situation to us. We can still see the effect of COVID-19 in play. But it's improving. But the more immediate situations where we have absentees because of COVID-19 and such, that situation has improved. But in terms of customers and the projects per se, there are still effects, the course of COVID-19 in our business.

[Fredrik Moregard, Analyst]

All right. That's helpful. Then the final topic from my side. I mean, other operating income was negative SEK 5 million. I think that was the first time that, that item turned negative since you guys went public. So maybe you can help us understand what the dynamics would play or why is that to your negative? And how should we interpret it for the coming quarters?

[Carl-Fredrik Meijer]

Yes. I think -- so we have new auditors and this was like an interpretation of sales, a classification matter. So that's why it's negative in this quarter. It's a correction. So I think the trend or the kind of size of it will go back to what it has been historically after this quarter?

[Fredrik Moregard, Analyst]

All right. So sort of underlying, you have a positive contribution sort of in line with this quarter, but that is offset by the revision of sales from previous quarters. Okay.

[Carl-Fredrik Meijer]

Of classification. Yes.

[Fredrik Moregard, Analyst]

Yes. And a follow-up then on how you're reporting that. Is that included in any specific region? And is it included in your organic sales figure or whether does it turn up in the rest of the figures?

[Carl-Fredrik Meijer]

Yes. No, I have to get back on that.

[Operator]

[Operator Instructions] There are currently no questions in queue. [Operator Instructions] As there are no further questions, I will now pass back to the speakers for the closing remarks. Please go ahead.

[Johan Nordstrom, CEO & Executive Director]

Okay. Excellent. As we don't have any other questions, I think that concludes the presentation. So thank you, everyone, for listening in, and thank you for the questions. And, yes, thanks from us. Thank you. Bye-bye.

[Carl-Fredrik Meijer]

Bye.