Balco Group AB

STO:BALCO

Earnings Call Transcript

[Operator]

Hello, and welcome to today's presentation with Balco Group. 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.

[Camilla Ekdahl, executive]

Thank you. Welcome to Balco Group Quarter 4 presentation. First of all, for some maybe new listeners, a very short snapshot about Balco Group. Balco Group was founded in 1987 and consists of several balcony and facade companies.

Balco operates in 2 main segments: renovation and new build and our core expertise is to supply glazed balcony solutions on the renovation market to tenant-owned associations. Balco Group is a market leader in the Nordics with key markets, Sweden, Denmark, Norway and Finland. And we also have a strong challenging position on other Northern European markets. And if you have a look on the chart where we show the revenue per market there, maybe then for old listeners, you can see that if we see the revenue per market on 2024 versus 2023, we have an increase there on the part belonging to other Nordic countries where we go from 25% to 45% then it's an increase -- decrease for the Swedish market and the rest of Europe is on the same level 13%, compared to 2023.

So let's go over to our fourth quarter. We had a very strong cash flow both in the quarter and also for the full year, where the operating cash flow amounted to SEK 58 million for the quarter and SEK 139 million for the full year. The order intake increased by 22% to SEK 360 million and -- in the quarter and by 41% for the full year to SEK 1,377 million.

Here, I can say that the organic order intake was unchanged for the full year, but we had an increase in the second half of the year by 6% and that shows that our impression is that the market has actually bottomed out now.p

The net sales increased by 33% to SEK 386 million. And here, the increase comes from the acquisition we made previous year. Organic increase for the quarter was 1%. We have had a very good development in Norway, both in the quarter and for the full year. And during the fourth quarter, Balco AB received a major project in Norway with an order value of about NOK 50 million. And we can see here that our solution to integrate air-to-air heat pumps into our balcony projects have been successful in the Norwegian market.

During the quarter, we also finalized the integration of the Riikku subsidiaries into the other companies in Balco Group. And the cost for this has been taken in the fourth quarter. Here, we received very positive feedback both from our internal organization and also from the customer side on these integrations.

I'm also very happy to say that our sustainability KPIs have developed good in the positive direction. For the full year, we have shown lower sickness rate, lower employee turnover and also lower carbon dioxide emission for the full year. And we also have here that the Board has -- of Directors proposed at the Annual General Meeting result that no dividend shall be paid out for the financial year.

If we go over a little bit more to the market. I would say that the market situation has more or less been unchanged since previous quarter. We have said before that we have seen an increase in activities, and we continue to see that increase. And especially if we talk about the renovation segment for the balcony companies in Sweden and Norway. Here, we have a positive direction for sure. And as I said, the order intake and sales have developed well in Norway during the full year. And here, both regarding the major turnkey contracts that we can do with air-to-air heat pumps and also single balcony projects.

However, we see that it continues to be a strange competitive situation for our Swedish facade companies and we also have a strange competitive situation for our balcony company in Denmark. In Denmark, our main product is City Balconies and the City balcony is more or less what you see on the picture there. It's a smaller but open balcony and we are putting them on to older houses. And if you look to say, on the renovation market where they already have a balcony that is developing accordingly as in the other countries, also in Denmark, but quite a lot of -- quite a large amount of our sales in Denmark is connected to that we put new balconies on existing old houses. And here, we can see that the markets are more cautious. And the decision times continues, as we said before, to take longer time.

If we look on the Finnish market, we can see that the newbuild market has bottomed out, but we can't see any rapid return for new construction of multifamily buildings actually in any Nordic countries yet. But in Finland, there is a support now -- support system for the construction and renovation of multifamily housing. So that can be a positive impact during the year and they're especially promoting that they should be -- have an early start. So as long -- the longer you are coming to the project, the more so it's easier for you to get the support. So we hope that, that could have a positive effect on the new building business in Finland.

However, the newbuild segment in U.K. and Germany continues to develop well as well as the finish renovation market. So if you go a little bit over to more the figures, Michael?

[Michael Grindborn, executive]

Yes, and have a look at the quarterly figures and also the full year figures. Net sales in the quarter increased by 33% to SEK 386 million. Here acquired group was 34%. We had a negative currency effect of 2%, and organic growth was 1%. For the full year, net sales increased by 17% to SEK 1.418 billion. Adjusted operating profit, EBITA, amounted to SEK 18 million in the quarter, corresponding to an adjusted operating margin of 4.7%. For the full year, adjusted operating profit was SEK 70 million with an adjusted operating margin of 4.9%.

Order intake increased by 22% in the quarter to SEK 360 million. And for the full year, it decreased by 41% to SEK 1.377 billion. Our order backlog has increased by 22% to SEK 1.309 billion or the earnings per share, it was negative in the quarter. And if we look at the full year, earnings per share was SEK 0.05 and adjusted earnings per share for the full year was SEK 0.89. We had a very strong operating cash flow that amounted to SEK 58 million in the quarter and for the full year, SEK 139 million.

Have a look at to 2 segments and start with the Renovation segment. Here, net sales in the quarter increased by 16% to SEK 281 million, which corresponds to 73% of the total net sales and for the full year, net sales per renovation segment was exactly SEK 1 billion. Order intake in the quarter increased by 6% to SEK 285 million, which corresponds to 79% of total order intake. And for the full year, order intake has increased by 28% to SEK 1.074 billion.

Adjusted operating profit in the quarter amounted to SEK 20 million for responding to an adjusted operating margin of 7.0%. For the full year, operating profit was SEK 56 million with an operating margin of 5.6%. Order backlog has increased by 13% to SEK 1.044 billion and it corresponds to 80% of the total order backlog. And our new build segment, the smaller segment, but which has increased during the year with our acquisition of Riikku and also strong development in U.K. Here, net sales in the quarter increased to SEK 106 million. And for the full year, it has increased to SEK 418 million.

Order intake in the quarter increased to SEK 75 million. And for the full year, the order intake was SEK 303 million. Adjusted operating profit in the quarter amounted to SEK 3 million with an adjusted operating margin of 2.8%. While for the full year, the operating profit was SEK 19 million, with an adjusted operating margin of 4.5%.

Order backlog for the newbuild segment has increased by 79% to SEK 265 million. And our financial position at year-end, we had equity of SEK 801 million, and our equity-to-asset ratio was 49%. Our interest-bearing net debt, excluding leasing debt in relation to adjusted EBITDA pro forma amounted to 2.7 and it was a small decrease since quarter 3 when it was 2.8. And some update on the sustainability side and now we have full year figures.

Our risk rating according to Sustainalytics was lowered or improved to 17.2 and it means that we are among the 6% with the lowest risk rating in our industry, which is building products and if we look at all companies, we are among the 20% with the lowest risk rating.

Sickness absence in '24 decreased to 3.6% from 3.7%. Employee turnover decreased also to 7.9%. If we look at the accident frequency and for rolling 3 years it continued to decrease. But for the actual year 2024, it increased to 11.4. And here, the increase comes from the acquired companies, which have a little bit different way they reported.

So here, we have also started a training program to increase safety on construction site and also reduce number of accidents. Our carbon dioxide emissions according to Scope 1 and we measure it per work hour. It decreased to 957 grams per worked hour compared to 1,200 last year. And for Scope 2, it decreased to 460 gram per worked hour compared to 509 before. Also recycled waste increased to 80% compared to 76% last year.

[Camilla Ekdahl, executive]

Thank you, Michael. Let's have a very short discussion also talk about the acquisition. And of course, acquisitions are still an important part of Balco Group's growth strategy, and we continue to work with possible acquisition. But as you understand, we are a little bit cautious considering our profitability situation versus our net debt. So when we are looking on it, we are very much sort of say, looking on the strong position in a niche market and profitable well-managed companies. But we have for sure continue to work with acquisitions also.

Some concluding remarks then. The net sales, as you have seen, 2024 was about SEK 1.4 billion and adjusted EBITDA margin of 4.9%. This is, of course, not a margin that we are satisfied with. And therefore, we continue to work with our profitability. We have been working with our profitability during the whole year, the cost situation, but also, of course, to increase the order intake, and we continue to do so also 2025. The order intake was also nearly SEK 1.4 billion. And as I said before here, on the full year, the organic order intake was more or less unchanged, but we can see an increase in the second half year on the organic order intake. And as I said before, we see an increase of the customer activity, especially for our balcony companies that works with the renovation market. And we have also, as I said, a good development both in U.K. and Germany. But there are some challenges still, so to say, on the new building sectors in the Nordic countries and also on the facade side.

Our assessment is that the overall market will continue to improve gradually, but it looks like that, we will not have a return, but we will have a gradual improvement all the time here. But we continue to work with our profitability and to adopt both organization and all companies in the -- for the existing sales and order intake. And all companies, I can assure you that all companies in the group have a very strong focus on order intake, and we also continue to work with cash flow and costs. When we talk about this, how we do this to work with our profitability, of course, integration of Riikku Group is 1 part that we have made, and we have also integrated, so to say, we have moved production from units to better utilize the capacity we have. And this is continue to work also for 2025.

That was all from us today. So please, questions.

[Operator]

[Operator Instructions] How would you evaluate the acquisition of Riikku Group? And will it create value for shareholders?

[Camilla Ekdahl, executive]

Yes, we can say like this for Riikku Group, Riikku was a strategic acquisition, and I can understand that some sometimes people question is, so to say, the timing for it depending on that they were focusing so much on the new building segment before and new building segment have gone down in the whole Nordic countries, so of course, also for them. But Riikku is having a product that is suitable for both new building and also renovation segment in both the Nordic countries and also in other European countries.

So what we are actually doing is that we have also been coating some of the Riikku glazing also into new building projects in Germany, for example. We will -- we have -- as we said, we have taken the Riikku glazing into the renovation market in Sweden by RK Teknik, and RK Teknik have also integrated the total new building segment in them. And I would say that Riikku acquisition, you will not see -- you have not seen the result or the positive results you can have. We will have further Riikku acquisition during 2024, you will see it coming years because that is a strategic important acquisition where we have both got the product, and we have also got the position on the Finnish market. So when market turns then we will get it back to the shareholders.

[Operator]

What are the reasons for the lower gross margins in 2024? Are there any onetime effects involved? Or is it a temporary situation?

[Michael Grindborn, executive]

I would say a little bit both that we have a different cost structure in the companies, both Riikku and Soumen have quite lot different cost structure with a lower gross margin than the old Balco companies. It's also a difference between the markets, but in Sweden, Norway, especially the Balco companies have the highest strongest gross margin, while in countries like U.K. and Germany, we have also a different cost structure with a lower gross margin.

So it will not come back to the old levels that we had in before pandemic that's for sure. But then it's also -- but we have not full -- we have too much capacity for the moment in production and in some companies also slightly too high capacity in the operations side when we have competence, for example, as 1 project managers that we want to keep in the company, and they have not been working 100% with just projects. This year, we have also helped with sales.

[Operator]

And for the Nordics, if possible, could you talk a bit about the competitive situation in various subsegments like customer group, project size, et cetera and also your exposure, your typical share of revenue within the various subsegments.

[Camilla Ekdahl, executive]

I can give a little bit of overview, so to say, of the competitive situation. And if we look, so to say, on different markets, there's a different competitive situation. So if we look from the Nordic countries because that was the question, I think, there, we have a strong competitive situation, I would say, both in Sweden and Denmark, depending on, so to say, very -- quite a lot of companies are doing the same kind of concept.

Balco AB is a little bit unique in Sweden with glazings very special glazings there. So there AB has a unique situation. But otherwise, so to say, the most of the companies are offering the same kind of product and the same kind of, so to say, projects at everybody else. So there's a quite strong competition both in Sweden and in Denmark. And that is value both for the balcony companies and for the facade companies. If we look on the Finnish markets, there are competitions for sure on the new building segment, for sure. If we look on the renovation segment, where our company's [indiscernible] is working, not so many companies are doing exactly the same as they are doing there. It's mostly that there are other kind of companies -- then you come to more of the building companies that are the competitors, not the same facade companies that are doing these turnkey projects.

So there, we are having a very good situation.

In Norway, I would also say we have a good situation with what we are doing there. There, you can see that either you come in to a project from the building side or who comes on the balcony side, and we come from the balcony side. And there, we have some competitors, but we have a very -- we have a good situation there also.

[Operator]

The Danish market remains cautious with strong competition. How do you plan to navigate this? And are there any strategic shifts to mitigate risks in Denmark?

[Camilla Ekdahl, executive]

We are working with the Danish market all the time, how to do it, and I can't say, so to say exactly how we should do it, that is. That will be announced when we are ready with it.

[Operator]

Okay. And with inflation and interest rates declining, when do you expect to see a positive impact on order intake and overall financial performance.

[Michael Grindborn, executive]

Yes, we see it's coming part by part. But as we said, it will not be a quick turn. We hope to see slight improvements or beer, but we I would say for the financial side to see better profitability, it probably would be at the second half of '25 hopefully, latest, I would say, in quarter 4 '25. But it will take until second half of the year anyway because of the lower order intake we still had in '23, '24.

[Camilla Ekdahl, executive]

But we see the -- what is very good, so to say, on the market right now is at least that the interest rates are more or less what we could expect them to be. We can see here that in Sweden, tenant of the association, which is quite good financial situation, they can get alone now for between 3 around 3% -- actually below 3%. And I think -- so the interest rate we have now, now it's more that the consumers need to start to dare also to invest. And we can see it coming in on other things, so to say. So that will come also on the balconies. And we have seen the activity on the market and when we see that, when we get order intake, then we get, so to say, we get it down to the bottom line also because we are prepared really for an increase in the order intake, and then it will come down directly to the bottom line.

[Operator]

And when do you believe Balco will be able to distribute dividends again?

[Michael Grindborn, executive]

Yes, hopefully, for the next year, that's our plan, at least.

[Operator]

And given the improvements in sustainability KPIs and the lower risk rating from Sustainalytics, how do you plan to leverage ESG performance for a competitive advantage and also potential cost savings?

[Michael Grindborn, executive]

Of course, we have it as an important part in our presentation to customers. So -- and we see that a lot of customers think it's important part that you are good working with ESG ratings, but still price is the most important but...

[Camilla Ekdahl, executive]

It would be very, very good. We are looking forward to that it gets more into -- when you go to this official quotations that they are requesting in more information from the companies regarding the sustainability work that they are doing. If they do so, and we are promoting it all the time. But it is, as Michael was saying, quite often, unfortunately, still, so to say, also on, so to say, official, so to say, they come in to the price discussion instead of taking care of about the sustainability targets ahead. But you can see sometimes they ask for it. And then we, for sure, have an advantage.

[Operator]

Okay. We'll take 1 final question here. With a slower market recovery expected, what is your long-term strategy to ensure sustained growth, particularly in the new build segment and also in international markets.

[Camilla Ekdahl, executive]

If we talk about the new build segment, we are doing as we did -- if you talk about, so say, Sweden, here, we integrated the new build segment that we had with Riikku. We integrated that into the same organization as are working with the renovation. It's different markets, so to say, segment, but it's still in the same company, RK Teknik. So what we are doing is that the company that are working -- that have been working 100% with new building, that is actually. It is actually Riikku, the only company that has been doing. So we are making sure that they are together either as we did in Sweden, we integrate them with RK Teknik that has the renovation also. So we can, so to say, split the risks, and in Finland, we are adding on innovation to the new build organization to make sure that they also can split the risks.

When we talk about other markets in Germany, we are working with both new build and renovation already. And in U.K., so far, we can see that the product we have there but is, so to say, so focused on the new build segment, and that is growing so fast. So there, we are actually still focusing on the newbuild segment in U.K. I don't know if that was the answer or...

[Michael Grindborn, executive]

And also product development. We have developed product, as you said, it will be U.K., but especially for new well side and also in Germany, we have a product that is very suited for the newbuild segment.

[Camilla Ekdahl, executive]

But just to -- because I think the question was how to take care of the risks in the new build segment, if I understand the question correctly, Yes. Yes. And that we do by integrating them, so to say, so they are not working 100% with new build. We are working with both.

[Operator]

Thank you very much, Camilla, Michael for the presentation, but also answering all of our questions. And thank you, everyone, who followed this presentation with Balco Group. And I wish all a great rest of the day and thank you very much.

[Camilla Ekdahl, executive]

Thank you.

[Michael Grindborn, executive]

Thank you.