Green Landscaping Group AB (publ)
STO:GREEN
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Green Landscaping Group AB (publ)
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Welcome to the Green Landscaping Group Audiocast with Teleconference Third Quarter 2022. [Operator Instructions] Just to remind you, this conference call is being recorded.
Today, I'm pleased to present CEO, Johan Nordstrom; and CFO, Carl-Fredrik Meijer. Please begin your meeting.
Thank you, and a warm welcome to everyone. And as usual, it's myself, Johan Nordstrom; together with our CFO, Carl-Fredrik Meijer, who are presenting today. And we are pleased to report another strong quarter.
So let's turn into Page 2, please. And even though there are -- or there is some uncertainty in the market caused by high inflation, we have higher interest rates and we still are seeing some logistical challenges, this really shows the strength of our business model, and we believe we have a solid report.
So looking up on the revenue, we can see that we have a very strong growth where we're growing by 54% in the quarter. And that means that for the last 12 months, we are right now at SEK 4.1 billion in revenue. EBITA, there we came in at SEK 89 million, and that's also an improvement by 31%. And for the last 12 months, we are up SEK 325 million. In terms of EBITA margin, we came in at 7.6% compared to 9% previous period. And for the EBITA LTM margin, was 7.9%.
And as everyone can see, we're slightly down on the profit margin and that is mainly due to inflation pressure. This is a temporary situation, and we have a follow-up slide in the presentation further down, where we, in more detail, will elaborate what is going on. But for the last 3 years, we are on a strong trend where we are improving the margins, and then we see that in the high inflation environment, we are kind of flattening or on a plateau. But we are still expecting the EBITA margin to continue to improve as we move forward in the fourth quarter and moving into the next year.
Earnings per share is still up, so SEK 0.89, and that's a significant growth of 56%. We had a positive cash flow of SEK 53 million. The leverage is up from 2.4 to 2.7, and this is due to that we continue with the pace of acquisitions that we have been following for, I would say, the last 24 months. And we made 2 acquisitions in the period and that then we'll follow up with another 3 after the period.
So even though we have acquired quite a number of companies, we are at the same pace as we have been historically. And as we move into the fourth quarter and the first quarter of next year, we believe that the leverage will keep in line with our expectations, and that is about 2.5x. And also by the end of the period, we have extended our credit facility by another year.
So all in all, it's a strong report, and we're kind of happy to be where we are and see what is going on here. So we are growing quickly, we have a healthy margin and a solid order backlog.
So next slide, please. Moving into Page 3. This is just where we take a step back and look upon what's the trend of the company for the last 3 years, so what type of journey are we on. And what we see here is that we have a healthy growth. It's quite high growth with a 31% growth in revenue. And in terms of earnings, we are at a very strong growth of 100%, mainly driven by not-so-healthy margins in the beginning, but still we are on a very positive trend. So it's a stable -- from our perspective, a stable growth both in terms of earnings in particular but as well as in sales.
Next slide, please. And that's Slide 4. So for this conference, we have actually added a slide where we can see the trend in terms of the revenue that has been growing since the second quarter of 2019 up to the third quarter of 2022. We also have the profit margins, and that's really what we would like to highlight. And that is that we have continuously improved the profit margins since 2019 and been on a positive trend. And then for the -- in the second quarter of this year and the third quarter, we can see that we have, to some extent, plateaued, that the profit margin is now flattening out around 8%. And the primary reason is inflation, and we are basically moving sideways.
Looking into what will happen in the future here, we still see room for improvement to organically increase the profitability. We have companies within the group who did not meet our expectations and requirements. So that will mean that the trend to improve profitability-wise will continue, and also the effect of the inflation will disappear as the inflation rate is coming down. That will also have a positive impact on our profit margins. So we are in a situation where we are plateauing out on 8%, and we expect the trend to continue once we move into the coming quarters.
Next slide, please. And that's Slide 5. Just a short information about the acquisitions we made. And here, we are talking about Braathen, who is one of the leading companies in Norway and in Oslo, in particular. So it's a well-renowned company. It's been a lot -- been around since 1968. And it's also a fairly big company. It has a revenue of NOK 300 million. So from our perspective, this is one of the biggest company we have in the group with a stable -- let's say, it's a quality player with stable revenue and stable profit.
And they do share the culture part of it, that is kind of important to us when companies are coming in. We are selective -- obviously very selective in the companies that we choose to partner with. And this company fits quite nicely into the culture of [ complex ], and it's also a landscaping company with the same type of customers, the same type of tasks they perform that we know of. So this is, I would say, a bull's-eye acquisition for us. So we do welcome them to the group, and we're happy with that one.
Next slide, please.
So at Page 7. So we have also been acquiring Sorex Entreprenad, who we welcome into the group. This is a younger company founded in 2015, operates in Stockholm and [indiscernible] region. The main type of work is water and sewage and with managed sales of SEK 70 million at good margins. And the logic behind this acquisition is to -- that we see a greater demand for water and sewage work in the coming years. So this is a strategically well-positioned company to continue to grow alongside with our customers. So welcome, Sorex.
Next slide, please, Page 8. We will talk about 2 examples of new contracts that we have in this presentation. And the first one is the example of our core business within ground maintenance. It's in the Gothenburg region and a customer we've been working with for a long time. And as a property owner, we will provide all-year service of the outdoor environment. It's quite large contract with SEK 70 million in total for the 4 years that this -- duration of the contract. So just an example to show what we do.
Next slide, please, Page 9. This is an example where we will provide maintenance of a nature reserve in Stockholm. This is an example of the work that we do within -- it fits nicely within our ESG strategy. And this is both playing to the environment side but also the social side. So in this contract, we will work together with the customer, City of Stockholm, to provide work for 10 unemployed young adults in Järva. And the contract is in total 4 years. So this is a win-win, we think, between ourselves and the customer.
Next slide, please, Page 10. Order backlog has increased by 36% to SEK 7 billion. And this is one of the strengths of Green Landscaping, that we have such high order stock and good visibility on what happens forward. And in particular, now, we see that the order book for the year are almost full, and we see a strong demand even going into 2023.
Next slide, please, Page 11. Just to show you the P&L and the balance sheet. And just a reflection is that the -- what I'm happy about is to see that the growth and the profitability is reflected through the P&L all the way down to net income. And it's also worth mentioning that we started to kind of ramp up the acquisition pace back in 2017, '18. So the amortization of customer contracts and all the material assets in the -- from the purchase price allocation has come to an end for the first contract.
So the amortization of intangible assets of SEK 25 million is not increasing linear to the sales or revenue. So that, of course, helps that even though the EBITA margin that Johan Nordstrom talked about has not increased linear to our revenue, we see that net income is up 60%. Year-to-date, net income is up 77%. And the EPS growth is 66% in the quarter. So I'm really happy about that.
Next slide, please, Page 12. Performance per segment. So what we've seen is that we have growth driven by both organic growth and acquisitions in almost all the segments. Johan talked about the lag in price adjustments, which impacted the margin this quarter and the quarter before that. And this is a simply technical issue, that the indexation is down annually in our contracts -- in those contracts. And so we expect the prices to increase going forward and meet these cost increases that we've seen. And therefore, we expect the margins to rebound gradually going forward.
We see that we have strong margins in Norway, Finland, Region North and South, whereas the margins in Region Mid and Stockholm are too low, though we do expect a stronger finish this year than last year in these 2 regions. And the trend in Stockholm is quite positive, whereas we have more work to do in Region Mid. And just a notation that we will report our new acquisition in Lithuania as well as for Finland, and then we will do a different segment reporting on a higher level starting 2023.
Next slide, please, Page 13. Financial position. The cash flow, it was SEK 53 million, as Johan mentioned. And this has been, to some extent, impacted by the working capital increase that we've seen. This is, in turn, driven by higher outstanding accounts receivable, which is driven by the growth -- the sales growth with the organic growth; but also that we have a mix effect of more landscaping business in the group. And they use a little bit more working capital, especially during end of September.
The leverage is 2.7, up from 2.4. We expect that to deleverage, as Johan mentioned. We think that 2 to 3x is a healthy level given the low cyclicality of the business and the strong cash flow.
So next slide, please, handing over to Johan.
Okay. Thank you. Yes, a short -- let's say, going through the financial targets here, where we are according to the targets versus the targets. And that means we are growing by 45% and we have a 10% growth. So we're kind of -- as we have done for the last 2 years, we are growing quite much quicker than the financial target.
In terms of EBITA margin, we are at 7.9%, and that's pretty much in line with our target. In terms of leverage, we are at 2.7 versus 2.5. And as Carl-Fredrik mentioned, we are not really that concerned about being at 2.7 given what will happen in the fourth and the first quarter coming. And dividend, we talked about that one previously, and this is really up to the Board and the AGM decide on how that will be handled. But so far, we have not had any dividend. We have used the cash in order to grow the business.
Next slide, please. Yes, now to sum up the third quarter here. So as mentioned, we see very strong growth both in terms of revenue as well as in EBITA. And I do prefer looking -- taking a longer look where you see the CAGR of the 31%, that, that is really the growth rate we have had for the last 3 years; and also the very positive trend and, I would say, a very strong focus we have had since many years in order to improve the profitability. And one has to keep in mind that the market out there is quite big, and if you just want to grow by market share or grow volume, that is kind of easy. You just have to lower the profit margins and, all of a sudden, you can see nuanced growth.
The tricky part is, of course, to grow organically and also grow profitability at the same time. And that's where we have had our focus, and we have been quite successful in doing so. And that means that the last 12 months EBITA margin at 7.9%, that is significantly up from the 6.3%. And also that we had reviewed upon the earnings per share, that one is growing by 56%. And again, we did 2 acquisitions in the third quarter, as we mentioned, it's Braathen and Sorex. And we do welcome them to the Green family. And they are, I would say, very strong additions in terms of entrepreneurs who share our values to our company Board.
So a good quarter for us. So by this, we'll open up for questions, and we hand it over to the operator. Thank you.
[Operator Instructions] The first question comes from Dan Johansson from SEB.
Happy to see another stable quarter from you guys. A couple of questions for me. I think I'll take them one by one, if that's fine. First one, if you -- if it's possible to give a sort of a rough estimate how large part of your contract portfolio that are subject to these sort of annual indexation clauses. I guess, that mainly impacts you, if I'm not wrong, within ground maintenance where you perhaps have longer contracts with municipalities. And in terms of indexation, does most of it occur on the January 1? Or is there other periods where you also have indexation going on?
So you're right about that it's mostly in the long contracts that we have these index clauses. And it's not really the same type of problem as other business because we quote so often so we can adjust the prices there. In terms of when this is happening, it's done when the contract has started normally, and that is typically either during the spring time or in the autumn, those are 2. But it can happen any month over the year. And what we've seen is that the index that is most common has increased up to 11%, 12% starting from this summer. So therefore, we expect a quite, yes, big revisions when it comes to pricing over the coming months and quarters.
Okay. Very interesting. But still, you had quite good organic growth in this quarter. Stable -- I mean, 12% is obviously quite strong. Is that mainly volumes and you gaining market share? Or is there also a significant price component into that?
Yes, it's a good question. And we have been looking for the answer to it. To our best of understanding, as we -- if you look upon the maintenance business, it's really not that much material versus labor costs in that one. So if I look upon the growth there, I would say that 2/3 is to our -- this is just a qualified guess, we don't have firm data on it. But we kind of expect that, of course, that if you have a high inflation, prices go up. And you invoice the customers, then, of course, the revenue comes up. But it's, yes, inflation.
To the best of our understanding, I would say that 1/3 of the growth we look at is probably due to inflation and 2/3 is actually then to winning new contracts and, to some extent, the market is growing. So it's not necessarily so that we are growing market share. There is a small proportion is market share growth. Then another small proportion is, of course, the inflation part of it. And then the market, as I said, if the market grows by 5% without inflation and then you add inflation to the growth rate, and we have an ambition to grow with the market growth, so we probably gained some market share, but not that much. That's my point.
Okay. Yes. Makes sense. I get it. Perhaps, I mean, it sounds like we're entering a bit more challenging market now in 2023 with construction activity primarily coming down perhaps on the private real estate side. But it sounds, at least for the near term, what you see in your order book, that you expect organic growth to hold up quite well there given at least what you have visibility for. Is that the correct interpretation, that you're seeing very little of perhaps what you read in the newspaper right now?
Yes. There are defensive qualities in Green Landscaping, and you can clearly show them at this point of time. We have a very strong order book to begin with. We have stable customers, so we do expect the order book to be solid. I don't think we have a lot of air in the order book. And we do see some changes in terms of perhaps a bigger contract that might be postponed into another year or so. And we see that there's an increased competition in the larger contracts, meaning that other companies who have been harder hit by inflation and the -- let's say, the decreased activity in the construction sector, then they are looking upon what's going on here.
And some of our companies are changing focus also and going for somewhat smaller contracts than they have done historically. But from a volume perspective, the way the order -- the backlog is and the way the order book is built in the individual companies, we are not that concerned about any downturn in the first half year of 2023. And that's where we have visibility. So I would say the situation is kind of good, and the absolute majority of our companies are having a good situation for the coming first half year of 2023.
Sounds good. And I think 2 more questions, if there's time. I mean, also if you could specify a bit more in terms of the cost of improvement work you're doing within Region Mid. I guess it's a few million? Or is it more than SEK 5 million? Do you expect also to take some cost now in Q4? Or are you already done with, yes, a majority of the part of the work with improving the margin there?
Yes. Lessons learned from previous activities that we've done in particular in Stockholm, it takes some time in order to show. But the -- let's say, the magnitude of the needed -- the improvement needed is significantly less, it may depend on the root cause. And the issues are not as deep as we saw in Stockholm. Stockholm was a big problem for us and that we have spent several years improving, and that has costed us a lot of money.
So we don't have this situation in the Region West. But it's a typical situation where you're not -- you have to start looking upon what type of leadership we have in the entities. We have changed a couple of leaders in the entities we have there. We have had customer contracts where we haven't made any money and we haven't had that good progress in terms of improving the profitability. And that means that now we are starting to look upon what's going on here.
But having that said, I do not -- the process will continue. But it will not -- I don't believe, I have to look upon the data here, but I don't see it will have a significant negative impact on the group as a whole.
Perfect. And one last question. A bit on the reasoning of entering Lithuania and the market structure there. How is the competitive situation? Are there any players like really active in that market? Or is it more fragmented? And are the market dynamics and customers similar to the Nordics? Or are there any big differences that we should be aware of?
Yes. As we entered the market, we started to look upon what's going on in the Baltics. And shame to say, we didn't have that much previous knowledge about that market, but we were approached by -- this was a structured process that we ended up with. And I have to say, the more we look upon the market, the more positive we came. So the market is -- in particular, if you look at -- we started to look upon corruption and all that type of thing, what's going on there. They had high inflation historically and a lot of corruption. What's going on? Is this a market we should enter?
But the market is stable. It has been improving for the last 15 years. The last 10 years have been quite, I would say, good or the borderline of an extraordinary development in that country. Lithuanians who used to [ live above ] Lithuania are actually coming back again. So the population is growing. They are kind of low in terms of corruption index. And Stebule is a really great company. It's quite a big company. Even though it's, let's say, only EUR 50 million in revenue, but you have to take into account the cost side of that one. So should you have that company in Sweden or Norway, it would have been double the size of the company in terms of revenue.
They are making a healthy profit. They have a very good reputation. They are stable in terms of the contracts they have there. They have solid relationships with their customers. So it's really a company that fits nicely into the group. And from our perspective, when we judge the market, it was a mature market. And yes, we kind of saw that it's pretty much the same as we can see in Sweden and Norway. So once we [ arrived ] in that conclusion, if we compare that this is a company that belongs into the group and we followed suit, and they came aboard a couple of weeks ago.
Of course, Dan, it's -- I mean, a lot of public customers, same time of tendering process. They're rigid, very good. They focus on quality and stuff like that. So we like it.
The next question comes from Alexander Siljeström from Pareto Securities.
Most of my questions have already been answered, but I have one follow-up on the expansion to Lithuania and sort of how the inflationary pressure in the country is affecting the bill layer and sort of if that's a risk with regards to the strong profitability going forward. If you could give us a flavor on that.
Yes, because that was one of the major questions we had. As they are having -- equally as we have in Sweden and the rest of the company -- countries in Europe, we are suffering under inflation. And when you have long-term fixed contracts, that is not a good idea to be -- not a good place to be in unless you have index clauses in the contract, which they have. So from that perspective, given that they have a good customer relationship -- because that's a primary driver.
If you want to make sure that you can enforce index clauses, you need to make sure that you are doing your work properly and that you have a good relationship with the customer. And Stebule has been able to already start the implementation of the index clauses in some of the contracts. So the way we judged that situation was that, yes, it's a high inflation and they will likely be able to get compensation for the inflation. And to the best of our understanding, that process had already begun in Stebule. So I would say they are, to some extent, ahead of some of the companies in Sweden in this area.
Okay. Great. And then on the sort of the M&A pipeline, will you then focus on building a cluster here in Lithuania now in the coming quarters? And do you have some new interesting targets already there? Or how should we think about M&A going forward?
Yes. As you know, our strategy or model, it's built around having colleagues, having a cluster where you can share knowledge and also learn market data. Of course, that's one of the advantages we see right now, that when you have a high volatility in pricing because of inflation, having more companies in the group actually means that you have a greater visibility on what's going on in the marketplace as long as they are connected in the same geography, i.e., if they are in the same city, they can see what happens with the price in the bidding process. In Stockholm or in Gothenburg, if the prices might go up 5%, 10%, so they might come down 5%, 10%. Having numerous companies actually gives us a better picture on what's going on in a local market.
Also, as we did talk about on another call here about electrification, for instance, having great companies who are leading in the area of electrification, in particular, in Norway where they -- for -- I would say, the most advanced companies who have came together and created a council to discuss how they can improve and what's going on and the lessons learned when they are doing a project with electrification. And that's really the strength of the company, that you need to have 2, 3 or more companies in the same city to create this dynamic where you can support the other companies and, by that way, they can improve in their performance. So naturally, we are looking to add more companies in the geographies where we are present. And now we are present in Lithuania. So yes, we would like to see more companies come into the group in Lithuania.
[Operator Instructions] There are no further questions. Dear speakers, back to you.
Okay. So by that, I believe we conclude this telephone conference. So thank you, everyone, for listening in, and thank you for the questions that we received. And yes, thank you very much, and have a good day. Bye-bye.
Bye.