Caverion Oyj

OMXH:CAV1V

Earnings Call Transcript

[Milena Hæggström, executive]

Good morning, everybody, and welcome to this news conference on Caverion's Q1 results. My name is Milena Haeggstrom, I'm the Head of IR for Caverion. And today's presentation will be held by our CEO, Jacob Gotzsche; and our CFO, Mikko Kettunen. After the presentations, you may also ask questions over the Internet and conference call.And now welcome please, Jacob.

[Jacob Gotzsche, executive]

Thank you, Milena. Good morning also on my behalf. I will share this morning's presentation with our CFO, Mikko Kettunen. The presentation will take approximately 30 minutes. Let's have a look at the agenda. We have 4 topics for today. I will start with the Q1 2023 performance in brief, including the continued execution of our M&A growth strategy. I will then continue with our operating environment, a few words about some of our most recent customer contracts, an update on our people agenda and then a reminder on our sustainability targets. Mikko will then cover our second topic on the agenda, our financial performance in more detail. Finally, I will close with our guidance of the full year 2023 and give the most recent status update on the public tender offers.Let's go to the first agenda item, Q1 in brief. Sorry, we have a technical problem here. I'm very pleased that the positive momentum in 2022 continued in Q1 and Caverion delivered strong performance and improved the performance and earnings in Q1. Our Q1 revenue was EUR614.8 million, up by 16.4%. The performance was supported by the overall revenue growth. We were satisfied with our organic growth of 13.5% with the order backlog reaching above EUR2 billion for the first time in Caverion's history. Recent acquisitions and business mix development supported our revenue growth and our earnings level for the first quarter. Our adjusted EBITA was EUR24.5 million or 4% of our revenue. Our consistent effort in improving project risk management have gradually resulted in healthier and more profitable portfolio.I'm also pleased that in the current operating environment, we could improve our operating cash flow before financial and tax by 33.5% from the previous year's quarter's cash flow to EUR52.1 million in Q1. As part of our implementation of our sustainable growth strategy, we closed 1 acquisition in the first quarter where we welcomed about 70 new employees from TM Voima Group substation and power transmission line business both in Finland and in Estonia. The acquired business had a total revenue of approximately EUR48 million last year. We continue to screen for high quality companies that complement our capabilities and competencies and also add something to our geographical footprint. So all in all, we are very pleased about the overall development of the company in the first quarter of 2023. All is in line with our sustainable profitable growth strategy that we launched last year.Let's have a look at our operating environment. Overall, the economic uncertainty has still impacted our market. Inflation has remained on an elevated level even during Q1. This can still be seen in the cost inflation related to material prices. We have continued to manage any increases in material prices, delays in the supply chain on a daily basis without having significant impact in Q1. The recent drop in sentiment indicator has stabilized in EU during the first quarter, but the operating environment is still impacted by lower economic growth prospects and the recent interest rate hikes. Also the corona pandemic still continued to have an impact on the operating environment with higher sick levels than we have seen before the corona pandemic.In Services, the market demand and general investment activity remained positive. We have continued to see a general interest for service and service supporting our sustainability such as energy management, advisory services supporting our strategic focus in the green growth agenda. There has also been interest towards long-term large scale service agreements. Growth has been to some extent limited by the availability of competent workforce and delays in some parts of our supply chain. In Projects, the market demand remained more stable. The market was impacted by increases in material prices, delays in decision making and supply chain as well as the uncertainty in the business environment especially related to new construct. The economic environment that we are operating in hasn't changed a lot in the first quarter. On the slide you see the economic sentiment and the construction confidence indicators issued by the European Union in March 2023.It's visible that the drop in the sentiment indicators from last year have now stabilized. Although Caverion is exposed to the construction industry in our Projects business, part of the revenue is stemming from renovation and a big part of the Projects is related to newbuilds in the public sector. This segment has typically performed resilient through cycles. Other customer segments are typically also impacted in different stages and renovations typically increase when there is lower activity in newbuild. If you look at the next slide, here we can see that the customer prices has increased rapidly. Inflation has remained on an elevated level even during Q1. This is also visible in the cost inflation related to material prices that has continued to impact our market. We have continued to manage any increase in material prices and delays in the supply chain on a daily basis without having significant impact on our performance in Q1.The key measures for managing the cost inflation include price increase clauses in our tenders; agreements covering material, labor, energy and fuel cost amongst many things. On the next slide, we will show you that we have been able also to grow with our customers in the first quarter. And I'm really delighted that our 14,600 skilled employees has been able to grow the business in the first quarter. Here you see 3 examples of 3 recent customers that we have gained. The first one is a very good example of a lifecycle project where we guarantee the conditions for the next 20 years in a new campus. Our customer, the Tuusula municipality has chosen Caverion as their lifecycle partner together with Fira. Caverion will design and deliver all building solution for the campus. After completion, Caverion will be responsible for the operations and maintenance service and ensuring the plant energy consumption of the property for 20 years.The building's carbon footprint will be as small as possible favoring solar power and heat pump technology as well as renewable energy sources. In the middle of the page, you see the second case where we are responsible for the technical installation in a new built office campus for HEADS near Munich, Germany. Our customer is Rock Capital Group. The contracts including installation of heating, sanitation, ventilation and cooling system. The last, the third one on the right side. Here we are implementing sustainable office premises for the Center of Registers in Vilnius, Lithuania and helping them to achieve their sustainability targets. Here we are modernizing an office building and delivering all technical and smart solution by Caverion. Our modern building management system will ensure an efficient use of energy, also adding EV charging station, solar power plant will also be added to this solution.If we go to the next slide, as I've said many times before, our biggest asset in Caverion is people. At the end of March, we employed approximately 14,600 employees. The sick leave is now a lower level than during the corona pandemic. However, it's still at a little bit higher level than before the pandemic. We have taken many extra actions to protect our people and employees due to the corona situation. Safety always comes first in Caverion. Our accident frequency rate was 3.7 at the end of March, one of the best in our sector and we continue to focus on this every day aiming for 0 accident culture. On the next page, you can see that we have continued focusing on our sustainability agenda in Q1. In line with our purpose of enabling performance and people's well-being in smart and sustainable build environment, we are driving our sustainability actions by caring for our people, ensuring sustainable value chain operation, increasing our own handprint and decreasing our footprint at the same time.A more detailed progress on these sustainability target and KPIs at year-end have presented in our Q1 interim report. We report on the KPIs on an annual basis, but let me just close with the 1 figure that we track quarterly that is very important to us. I already mentioned that our lost time injury frequency rate stayed at the same level in 2022 and 2021 and now at the end of March, we improved the levels at 3.7. This we are very proud of. It's a very low level compared to our peers and our target is very challenging at 2.0. This demonstrates that we really work with safety on our daily life and as said before, we are aiming for 0 culture accident in Caverion. So we really care for our people. Last year at the end of Q4, we also showed you a sustainability target and that we launched it in Q4, our training of all our employees and that was started in December. Now at the end of March, we have trained 97% of all our people in the whole group of the sustainability.I will now hand over to Mikko, who will go through our financials before I close with our guidance and give a status update on the ongoing public tender offers. Mikko?

[Mikko Kettunen, executive]

Thank you, Jacob, and good morning also on my behalf. Now I will go through selected highlights of Caverion's financial performance during the first quarter of 2023. Our revenue in the first quarter was EUR615 million. This represents a growth of 16.4% compared to the same period last year. Our organic growth was 13.5% driven by increased underlying activity and partially also by the increased costs of materials and external services that we were able to successfully factor into our sales prices. Let's now have a closer look on the revenue composition. All of our divisions have been growing in the first quarter apart from Industry where the termination of Metsa Fibre's outsourcing agreement impacted revenue negatively. What is also noteworthy is that in Sweden and Denmark, the organic growth was exceptionally high due to certain positive revenue timing effects, which are expected to level out over the coming quarters.With respect to the split between Services and Projects, we can see that the share of Services business unit accounted for almost 2/3 of group revenue during the quarter. Order backlog exceeded EUR2 billion for the first time during the 10-year history of the stock listed Caverion. Comparing this KPI to the historical ones now that the inflation has picked up after a long period of almost no inflation at all, one can naturally argue that the number is slightly inflated. In comparison to the corresponding quarter-end in '22, we can note that in addition to inflation, several acquisitions completed during the past 12 months have positively contributed to the growth. At the same time, the weakening currencies in 2 of our key markets, Norway and Sweden, are decreasing our group order backlog measured in euros. All pluses and minuses accounted for, however, I'm quite satisfied with the increasing order backlog in the current market environment.Let's then look at the highlight of the quarter 1 profitability. Our Q1 adjusted EBITA amounted to EUR24.5 million, which is an improvement of over 40% compared to the corresponding period last year. The respective adjusted EBITA margin was 4.0% of revenue. Taking into account the seasonality in our business volumes and profits meaning that the end of the year is typically much better than the beginning, this was an excellent first quarter to start the year with. That being said, however, we need to bear in mind that our profitability was impacted positively by certain timing effects as I already mentioned. Let's then turn to our cash flow development. Our first quarter operating cash flow increased to EUR52 million and our last 12 months cash conversion was slightly over our target level of 100%. A large part of the operating cash flow was spent in the TM Voima acquisition that Jacob presented earlier.Our first quarter capital expenditure was therefore higher than in the previous year when we didn't complete any major acquisitions. In the working capital front, the first quarter didn't provide much news. If anything, I'm satisfied that after an extraordinarily strong fourth quarter of last year in terms of cash flow, our working capital remained roughly at the same level measured in euros that we were at at the end of March last year or minus 6% of last 12 months' revenues. Let me then finish my part of the presentation with a few words about our financing. The active implementation of our sustainable growth strategy through acquisitions has increased our net debt to approximately EUR205 million at the end of March. Despite of the increased net debt, the recent improvement in profitability has brought our leverage ratio down to 1.2x EBITDA at the end of March.As you can see in the graph here with EUR20 million lower net debt in the end of third quarter of '21 we were at 1.4x and in mid-'22 the ratio was 1.5x EBITDA with almost the same level of debt as today. Backed by this improved leverage position, we have decided to redeem our hybrid bond of EUR35 million as we announced earlier this month. Now Caverion issued hybrid notes originally totaling EUR100 million almost 6 years ago in June of 2017. Back then our company was sailing on very rough waters financially. Since then, the amount of hybrid notes in our balance sheet has been gradually reduced first to EUR66 million and then to EUR35 million in 2019 and now finally to 0 in May of 2023. I find this to be an important milestone for Caverion. The fact that we are in this market environment able to refinance the most expensive debt instrument in our balance sheet with loans that are bearing significantly lower interest underlines very tangibly the successful turnaround of the company.That concludes my part of the presentation. Let's welcome Jacob back on stage to present our market outlook and guidance.

[Jacob Gotzsche, executive]

Thanks, Mikko. In 2023 we expect the underlying demand to be overall positive in Service. In Projects, the economic uncertainty driven by the increasing inflation and interest rates as well as the war in Ukraine is impacting the demand environment for new construction negatively. With our balanced Project business portfolio, we still expect the underlying business activity to remain stable in 2023. This is supported by the healthy order backlog. As we have said earlier, the activity in Projects is also impacted by different cycles, eg. the public sector will not decrease as fast as other customer segments and some will potentially not be impacted at all. Against this market outlook, we state our guidance that in 2023 Caverion Group's revenue and adjusted EBIT will grow compared to 2022.We strongly believe in our purpose to enable building performance and people's well-being in smart and sustainable build environments. The digitalization, the sustainability megatrends are in many ways in favor to Caverion and believed to increase the demand for our offerings also in the future. Finally, let me close by giving you a brief status update of the recent public tender offers and the next steps. If you look at the next slide here, as you know, there has been 2 bidders competing on the public takeover of Caverion, the Bain Consortium and Triton. The Board of Directors of Caverion has recommended Triton's public tender offer in its renewed statement on the 5th of April this year. According to this tender offer, the share price offered stands at EUR8.75 in cash consideration for each share payable at the completion of the offer. It's now estimated to take place at Q3 or Q4 this year.Those shareholders who have already accepted the other offer should first cancel their previous acceptance and then make a new one for the alternative through an account operator. A more detailed status update on the recent tender offers has been presented under Events after the reporting period in our Q1 interim report. To close up, these tender offers announced provide clear evidence that our goal to achieve sustainable growth by serving our customers along the entire lifecycle of the build environment, assisting in the green transition to smart building is an attractive strategy. In the meanwhile, we at Caverion continue our cooperation with our customers on a daily basis and focus every day.This concludes our presentation and we are now ready to take the first question. I will now hand over to Milena who will run us through the Q&A.

[Milena Hæggström, executive]

Thank you, Jacob and Mikko. So we are now ready to take questions and let's first take the questions over the conference call. So please, over to the operator.

[Operator]

[Operator Instructions]

[Milena Hæggström, executive]

It seems that we don't have any questions over the conference call. So let's move over to the questions over the webcast. And we have 1 question from Danske Bank. Albeit higher than in Q1 '22, margins in Q4 have dropped in Q1 '23 versus full year '22. Where does this drop in margins come from and it seems too large to be explained by seasonality only?

[Mikko Kettunen, executive]

Yes. I think that's a good question, but the seasonality really is big in terms of profitability in our business and the first quarter of last year is the more reasonable comparison point to that respect. Also last year, if you look at last year's first quarter and then last year's full year, the first quarter margins were clearly below the full year and that is because of the rest of the year and especially the fourth quarter typically is significantly better in terms of margins and hence it's lifting the average of the year higher.

[Jacob Gotzsche, executive]

And we are also focusing of course on the nominal improvements in our first quarter so our adjusted EBITA is up with 40%, which we think is very satisfactory and also that we are 0.7 percentage points up compared to last year. For us, that's a really good achievement. And in our business, there is seasonality and we are above our targets for the first quarter.

[Milena Hæggström, executive]

Thank you. And it seems that we don't have any more questions over the webcast either. So thank you all for your participation and this concludes our call today and very happy 1st of May also.

[Jacob Gotzsche, executive]

Thank you very much. Happy 1st of May, everybody. Thank you.