Balco Group AB
STO:BALCO
Earnings Call Analysis
Q4-2023 Analysis
Balco Group AB
Balco Group is a company specializing in balcony and facade solutions, operating mainly in renovation and new build segments, with key markets in the Nordics and Northern Europe. With the addition of Riikku Group, they now employ about 700 people. The company focuses on energy savings, with their products offering up to 30% in documented energy savings.
Balco Group reported an increase in order intake during the fourth quarter by 57%, reaching SEK 295 million compared to SEK 188 million in the previous year. However, net sales for the quarter fell to SEK 290 million from SEK 383 million the previous year. Full-year order intake was SEK 977 million, down from SEK 1,109 million.
The company acquired Finnish company Riikku Group in January, aiming to become a major player in Finland, a country with the highest level of balcony glazing. Riikku, primarily a supplier to building companies, is expected to bolster Balco's position in the new build segment and potentially bring their products into other Balco markets.
The equity for Balco Group has increased to SEK 748 million with an equity ratio improvement to 59%, demonstrating the company's financial resilience. The adjusted EBITDA margin for the quarter was at 5.3% and for the full year at 7.4%.
Balco set strategic targets including a 10% annual growth rate during a business cycle and a 20% annual growth in earnings per share. Recent results showed a 9% decrease in growth and a 39% drop in earnings per share compared to the previous year. The net debt to EBITDA remains at a healthy 1.6, well below the threshold of 2.5.
Balco is committed to improving its safety record, with reductions in work-related accidents (LTIF fell to 5.1% from 8.2%) and sickness absence (down to 3.7% from 4.2%). They are developing emission reduction targets aligned with the science-based targets initiative.
With a stabilizing of interest rates and falling inflation, market activity picked up significantly towards the end of the year. Going forward, Balco's primary focus is on boosting order intake and integrating Riikku Group, leveraging the acquisition to strengthen its new build segment and overall market position.
Balco's board has elected not to propose a dividend to finance the Riikku acquisition, an important part of their growth strategy. The company continues to seek out acquisitions of profitable, well-managed companies that align with Balco's business philosophy.
Balco has significant production capacity, with potential to increase output by 50% or even double, and despite order intake challenges, is focused on retaining key competencies for future growth. The company is addressing overcapacity on the operations side while aiming for a return to double-digit EBITDA margins.
You don't have any saved screeners yet
Hello, and welcome to today's webcast presentation where we have Balco Group presenting the year-end report for 2023. With us presenting, we have the CEO, Camilla Ekdahl; and CFO, Michael Grindborn. [Operator Instructions] And with that said, please go ahead with your presentation.
Hi. Welcome all to our Balco group reporting. First of all, I need to say that I need to apologize if I sometimes need to take a pause because I got a cold during the weekend. But I hope it will be okay for the presentation. Otherwise, I hand over to Michael.
But we start with some snapshot of Balco Group. Balco Group was founded in 1987 and consists of several balcony and facade companies. And actually, we have made the latest acquisition here in January. It was Riikku Group, who is now also a member of our Balco Group. The head office in Seinajoki, and the group has after the acquisition of Riikku about 700 employees.
Balco operates in 2 main segments: renovation and new build. The core expertise is to supply glazed balconies and balcony solutions primarily on the renovation market and the tenant owner associations. However, we also have a broad offering of balcony solutions securing both open and glazed balconies and also facade renovations.
Balco Group is the market leader in the Nordics with key markets being Sweden, Denmark, Norway and now also Finland. We also have a strong challenge position in other Northern European markets. With the constant focus on energy savings, it is important to emphasize that all glazings of a balcony results in energy savings.
Simpler glazing provides 5% to 10% energy savings, while Balco's [indiscernible] glazing provides a documented energy saving of 15% to 30%. Facade renovations with additional insulation give energy savings up to 10%. So that was a little bit about Balco Group.
And now we go into the highlights for the quarter and also for the start of 2024 actually. Very happy to see that the order intake increased during the fourth quarter to -- with 57% SEK 295 million versus previous year, SEK 188 million. As expected, our sales were lower in the quarter, and it ended up at SEK 290 million versus SEK 383 million. But this is, of course, also due to the lower order intake we had for the full year, SEK 977 million versus SEK 1,109 million.
I'm also very happy to say that we made a new acquisition here in the start of January. We acquired the Finnish company, Riikku Group, and this acquisition strengthened our position in the Nordic countries and supports our overall strategy. And I will come back to about this and tell you a little bit more about Riikku.
We continue to develop as a turnkey supplier and continue also to work with energy savings. During the past year, with all the challenges we have had, we have noticed that it's becoming more and more important for our customer category to have a turnkey supplier who can help them with all the renovation needs and also with energy savings.
And we can see that our concept of becoming a complete turnkey supplier, adding also expertise in energy savings and financing is delivering results. We are also very happy to see that our LTEF (lost time injury frequency rate) continues to fall from an already low level. Safety is always a priority for us. And especially in our type of business, we can never relax. We must and will always continue to work with it.
We are seeing now better market conditions as the inflation continues to fall and long-term interest rates have come down. Our customers are starting to talk about investments again. However, they have already received significant cost increases, and we have to continue to work with them on the financing of the project. So we still can see that the process is taking longer time than before the inflation in interest rates started to increase.
We continue to work with our customers to create the right products for them and by that, getting also the order intake, of course. We also continue to focus on our costs, and we constantly adapt our organization to changes in our occupancy. But it's also important to say that we retain the key competence. So we are not damaging the business in the long term, and we are prepared also for even higher order intake ahead.
So if we go have a little bit look on Riikku. As we said, this is the largest acquisition in the history for Balco Group. They have a sales of approximately EUR 40 million and about 200 employees. It was established in 2005 and is one of the 2 main balcony glazing suppliers in Finland.
And the Finnish market has actually the highest level of balcony glazing in the world. Balco has a company there since 2015, [indiscernible], but we have not been able to succeed in the market as we have wanted. So we had actually for quite a long time, had investigations and discussions because we know that we needed to do something about the Finnish market. We needed to have another platform.
So therefore, I'm very happy to say that we now finally have been able to get an agreement with Riikku Group, and we have this platform to continue to develop the Finnish business. Riikku Group has a strong position in the new building segment in Finland, but the renovation segment is also growing for them, and we will, of course, continue to develop it.
We see great potential in the renovation market of the Finnish market, which also includes turnkey renovation projects, and there is also a potential for Riikku products in other Balco markets. The head office is in Alavus, Finland, and they have sales offices in several Finnish cities, and they have subsidiaries in Finland, Sweden and Norway. They have a well-invested production facility of 7,500 square meters in Alavus.
And we are also very pleased to see that the existing management team with the CEO, Joakim Petersen-Dyggve, will continue to lead the company also here in the future. So with this, I hand over to Michael.
Yes, and I will go through a little bit the financials and start with the quarterly results. As Camilla mentioned, we've seen increased order intake, but the net sales amounted to SEK 290 million, down from SEK 383 million last year. And for the full year, the sales was SEK 1.215 billion.
Our adjusted operating margin -- EBITDA margin -- amounted to SEK 15 million compared to SEK 34 million last year, corresponding to a rating adjusted margin of 5.3%, down from 8.9%. If we look at the full year EBITDA, adjusted EBITDA was SEK 90 million with an adjusted operating margin of 7.4%, down from 8% the year before. Order intake increased in the quarter by 57%, up to SEK 295 million compared to SEK 188 million the year before. And for the full year, the order intake was SEK 977 million.
Order backlog has decreased SEK 200 million during the year, down to SEK 1.074 billion. The earnings per share was SEK 0.30 in the quarter and for the full year, it was 2.12. Our operating cash flow was SEK 6 million in the quarter and for the full year, SEK 4 million.
If we look at the next page and have a look at the renovation segment. Also here, we've seen a good increase in order intake. Net sales in the quarter amounted to SEK 242 million, down from SEK 327 million the year before, and it was 83% of the total sales in the quarter. For the full year, it was 90% of the total sales.
Order intake in the quarter increased by 95%, up to SEK 269 million compared to SEK 138 million the year before, and it was 91% of the total order intake in the quarter. Adjusted operating profit, EBITDA, in the quarter was SEK 12 million compared to SEK 35 million the year before, with an adjusted operating margin of 4.9%. Order backlog amounted to SEK 926 million at the end of the year, roughly SEK 200 million less than the year before, and it's 86% of our total order backlog.
And the next page, we see the new build segment. Here, it's still challenging market conditions, especially up in the Nordics. Net sales in the quarter amounted to SEK 48 million, down from SEK 56 million the year before, and it was 17% of the total sales in the quarter. Order intake amounted to SEK 26 million compared to SEK 50 million the year before.
Our adjusted EBITDA profit was SEK 2 million compared to SEK 3 million the year before with a margin of 3.4%. And the order backlog is more or less the same as the year before at SEK 148 million at the end of the year.
And going to Page 8 and have a look at our financial position. We still have a healthy equity ratio and the balance sheet and are still prepared for additional selective acquisitions. At the end of the quarter, the group's equity amounted to SEK 748 million, an increase from SEK 731 million the year before. And also the equity ratio improved to 59% compared to 56% the year before.
Our net debt, including leasing divided by EBITDA was 1.9%. And if we exclude leasing, it was 1.6%. We have a banking agreement with Danske Bank that is valid to October 26. We have a sustainability link revolving credit facility of SEK 510 million and an overdraft facility of SEK 75 million. So we still have unused money for additional acquisitions.
If we have a look now on our financial targets on Page 9, we have a growth target that Balco should achieve 10% growth per year during business cycle. Here, the result was minus 9% during the year of 23% compared to 22%.
Profitability. We have a profitability target, but the earnings per share shall grow by 20% per year during business cycle. Here, it was minus 39% in '23 compared to '22. We also have our capital structure that the net debt divided by EBITDA shouldn't exceed 2.5x more than temporarily. And here, the goal is set excluding leasing debt. And our result was 1.6%.
We have also the dividend policy, that Balco should distribute 30% to 50% of profit after tax, but also taking into consideration needs for Balco's long-term growth and prevailing market conditions. And the Board does not propose a dividend to the Annual General Meeting in order to finance the recent -- this acquisition of Riikku.
And sustainability is a prerequisite for our long-term growth. And as Camilla mentioned, we continue to make good progress in reducing our work-related accidents. And the LTE fell to 5.1% compared to 8.2%. And it's a very good result in the industry that we are working in.
Also, our sickness break improved in '23 and fell to 3.7% compared to 4.2% the year before. And as we mentioned in the quarter 3 report, we have committed to develop long and short-term targets for emission reduction targets, including net 0 targets in line with the science-based targets initiative. And back to you, Kamilla, with some market updates.
Going back a little bit to the market situation. As we said already in the Q3 report, activity started to pick up, and this was even more evident in quarter 4, with stabilizing of interest rates and also falling inflation. But the process are still taking longer times than before due to discussion with bank and potential advisers. So we still can see so to say that we are -- we have a lot of discussion out on the market still.
When it comes to the housing association in the Nordics, we have a unique sales model where we can help and support the associations with these kind of discussions. And this is with the final expertise. And we have seen that we are using this for several kind of discussions. It's giving a good result, and it's also giving good confidence for the customers to choose Balco as a supplier.
We know that there is and will be a great need to renovate not only balconies but also the entire surface layer of apartment buildings. About 40% of our total energy consumption is used for heating. And we had talked about that several times before, but we emphasize it again. We will, and we can be a part to turn out this -- to carry out these turnkey projects.
Also, of course, with the acquisition of Riikku Group, we will become a major player in the Finnish market, and we will further develop the Riikku parts renovation segment. And as we have said before, also the postponed orders are not going away. There are still there, and the need for renovation remains.
At acquisitions, we made actually, as we said before, the largest acquisition ever for the Balco Group history. But we, of course, continue to work with acquisitions, since acquisitions are an important part of Balco Group's growth strategy. And we are still looking for European balcony companies or companies with activities that can complement our green transformation product offering.
They should be profitable, well-managed companies, and we want to have a business philosophy and culture within the line of Balco Group. And we can offer them financial stability. We can offer them the collaboration and knowledge sharing within our group. And we continue to work with the decentralized business model as we have had during the past.
Some concluding remarks. The net sales in the quarter was SEK 290 million and the adjusted EBITDA margin, 5.3%. For the full year, it was just above SEK 1.2 billion and adjusted EBITDA margin of 7.4%.
We see a very good development regarding the working accidents from an already low level. And of course, we want to highlight that we have made the acquisition of Riikku Group here in the start of quarter 1. We can also made as a conclusion here -- we didn't put it here, but we can also add on here that U.K. and Ireland continues to develop good.
We took, as you know, in quarter 3. Sorry, I need to take some water. Sorry. In quarter 3, we took our first order to Ireland, and this market continues to develop good. Yes, the lower order intake, the past year will affect our turnover and earnings in the coming year and mainly the first half year.
And we continue to focus on our cost, but we also want to retain our key competencies so that we are well prepared for new orders ahead. We have several ongoing acquisition discussions, and we receive various prospects all the time. But you can see also that the acquisition of Riikku Group shows that we follow our strategy to acquire companies which strengthen our market position in already existing markets.
But as we said before, we can also show interest to strengthen our green transformation offering or to look at Balco [indiscernible] in new potential markets.
Yes. That was all from us. So some questions. Sorry, again.
And like you said, now I'll open up for the Q&A section here. [Operator Instructions] And we'll begin with one question here. How much EBITDA is acquisition adding on a pro rata basis?
We haven't communicated that otherwise to the market, I don't think we can say. But we can -- we have said that our profitability is lower than the Balco Group. But you can see that they are mainly in the new build segment. So the profitability is roughly as Balco Group's within the new build segment.
We'll take the next question from the person calling in. Please go ahead, you have the word. Okay. We'll move on to the next question here instead. Are you concerned about the net debt given the weak cash flow from past quarters?
Yes, that's correct that we have had the -- but the cash for us not been very good. And it's depending that we have a little bit too low order backlog, and that's the reason that we start to work on projects in advance -- a little bit in advance. But it's also that we want to be faster on the projects to shorten the time from we get an order until it's finished.
So it's partly in our strategy, but it's also due to that we have a little bit too low order backlog for the total capacity that we have in the group for the moment.
Thank you -- we'll take the next question here. Relatively strong order intake. Are there major difference in segments and geography? And do you see any common themes here?
We can see that it's improved again, but we are very glad in Sweden and the [indiscernible] renovation segment in Sweden that is normally our most profitable part of our business, so it's very positive. And we continue to see strong order intake also in U.K., as Camilla mentioned, but the U.K. is still developing very well. So it's mostly Sweden and U.K.
And we've got another person calling in, asking for a question. Please go ahead. You have the word.
Right... This is Sofia Sörling from Carnegie. Can you hear me now?
Yes.
Yes.
So my first question, just on the order intake in Q4. Could you give us the split between organic and acquired orders?
It's, I would say, more or less all is organic because [indiscernible] that was acquired is NMT that is now totally included in Balco AB. So they are -- from now on, just working as contract -- subcontracted to Balco AB for the assembly part. So it's, I would say, everything organic in order intake.
Okay. Yes. And then if you could, again, just give some more details on the main reasons for the lower profitability, both in renovation and the new build segment. You mentioned about like overcapacity. Maybe if you could also give some details on the current utilization rate?
And also what utilization rate or necessary volumes you need to more or less meet the steady state adjusted EBITDA in your view?
Yes, capacity when it comes to production, I would say that we could -- yes, almost more at least increase by 50%, perhaps even double production. So we have really a lot of capacity in production. Of course, we don't have a number of personnel today, but the plants are enough to do that -- then we still have also on the operations side, some overcapacity, but it's not -- it's perhaps, yes, 10% to 20%. I don't know exactly. Something like that. When it comes to personnel. And it's one reason why we start early on projects and not really following the normal payment plan so that we work a little bit ahead of the payment plans we have towards customers.
But what is mainly what you have seen on the -- sorry, I'll try to say, what you have seen, so to say, when you talk about profitability there is also, of course, that when you look at it, when the revenue is coming from other markets than especially Sweden and Norway, you can see that then the margins goes down and there is a lower margin on these markets.
So as we said, we have had a very good development on the U.K. market, but the U.K. market has lower margins as well as the German market. So that is more or less when we can see that the order intake continues to increase, we have seen, it has increased quarter 4, but to continue to do that, and we can get more and more orders from renovation market, especially in the Nordic regions. Then also, of course, you will have a better profitability.
Okay. And could you say anything about the order trend? Has it accelerated during the later part of the quarter? Or -- and also, if you could say something about -- have you seen any cancellation of orders? Or is this a net effect of both new orders and cancellation of orders? Or yes, if you can say anything about the trend in orders among your customers?
Yes. If you -- I would not say that it was not, so to say, that you see a big jump, so to say, from one month to another. But as we said already, we note we've already -- in quarter 3, that there was a different, so to say, activities on the market. There were some different signals in the market. And that was depending on that, then people started to believe that the interest rates, yes, probably one more increase the sort of the summer, but maybe not so much more.
And then we can see -- when that was actually delivered, the optimism that started after holiday season actually continued. So I would say it was a little bit, so to say, small steps. And then, of course, it takes one month to another when we are working with projects. You can never estimate, so to say, because it's depending on when you have the voting, et cetera, and get the signatures on the orders.
But I would say we have seen a slowly improvement for the whole autumn period.
Okay. That's great. And just my final question, in your own words, what do you see as like main focus now into 2024 for Balco?
The main focus is, of course, order intake. That it is important for us to continue and to focus on the order intake because we need it. And then, of course, the second one is also I would not rank them, but order intake is, of course, priority #1. But then we also have the acquisition to develop now the Riikku Group acquisition and to see the synergies we have there. We know about renovation market. We can develop them within that segment. They are very, very good in the new building segment. We know there is a challenge right now, maybe in the new building segment in Sweden, but that will come back.
So we can see that we -- so that is, of course, very important for us to continue to work with the acquisitions. And then the third one is to continue to focus on the cost.
Thank you so much. No further questions.
Okay. And we'll take the next question here coming in from a viewer. Regarding the gross margin, which is at an all-time low, even after adjustments for one-offs, what would it take to get it back to the historical average of 24%?
And are there any fundamental reasons why the historic average is not a suitable comparison, for example, changes in mix based on acquisitions, customer products or geography, et cetera?
Yes. It's exactly like that because the acquisitions we have done lately, if we see all other companies and the old Balco AB, so to speak, has much lower gross margin than especially Balco AB, Sweden and Norway, that has absolutely the highest one. They have another kind of structure in the company's more operations, personnel and production personnel, much less sales costs and administration costs.
So coming back to 24%, I would say, will be very tough because now we're also adding another company. Riikku [indiscernible] also another cost structure. So also, they will, of course, affect the future gross margin.
So we, ourselves, focus more on EBIT margin than gross margin because it's the total, of course, bottom-line result that is most important to improve.
Okay. Thank you. We'll take the next question here. Regarding Riikku, based on the public information, the EBIT margin appears to be at or below 3% for the last 2 years in spite of record high turnover.
What has the historic EBIT margin been in Riikku prior to 2022? And what do you reckon to be a normalized margin for the company?
It's been, of course, a little bit up and down. They have had two tough years before this on. So that's absolutely right. They had a very good year in ending on March 21. So they had financial year from April to March before. And we think that the normalized level is on our level of new build segment.
Thank you. And can you also talk a bit about the differences between Rico and Balco customers, new build exposure, cyclical exposure, et cetera? And will the majority of its revenue be booked under the new build segment or separately as a new segment?
It will be booked under the new build sorry, it's Mikael... Sorry.
We will not have a new segment for Riikku. It will be booked on a new build and renovation. And as it has been historically, they have been roughly 90% in the new build segment. So of course, main part will be in a new build segment. What was the other question again?
Can you talk about the differences between Riikku and Balco?
Yes. They mostly -- they are very rarely turnkey supplier, but that is the main part of Balco. So Riikku normally work towards building another building companies. So their main customers is building companies and not as we are, like tenant and associations and so on. So it's very few but there are tenant associations or direct customers like private landlords and so on. So it's really main part is building companies.
Okay. And is the Riikku figures included in the order intake backlog? And if not, how much does the acquisition impact the backlog?
It's not included, of course, because this is December figures, end of December. They were not part of Balco Group at the end of December. So it will be included in the next financial report in Q1.
And can you give some specific figures on the operating margin and profit margin of Riikku?
Yes, as we mentioned, it's roughly as our new build segment.
Thank you. We'll take the next question here. You write that you -- "We have a continued cost focus to defend our margins and adapt the organization based on changes in occupancy and order intake." Could you elaborate on this?
We have made reductions in several companies also during quarter 4, depending on the workload in the plants. So we are doing that all the time.
Then as I also say that we also are very -- we really want to keep the key competence in the companies because if you look, for example, from project managers, you look on designers, if you look for a good project, but as you have, so to say, a time for educating them more than 1 year.
And as we see that we are believing in our future and believing in coming order intake, we are very -- we really would like -- we are really, so to say, holding on to our project managers.
And we'll take one final question here. What is the good gross margin level for Balco Group after all the acquisitions?
Yes. As we mention, we don't really focus on just gross margin level. Our EBIT margin level should come back. And long term, we want our adjusted EBITDA margin to be 2-digit figures back again.
Okay. Thank you very much, Camilla, Michael, for presenting and answering all our questions. And also thank you to everyone who followed along for Balco Group's year-end report for 2023. Hope you have a great rest of the day and until next time. Thank you very much, and goodbye.
Thank you all.
Thank you, everyone.