Fasadgruppen Group AB (publ)

STO:FG

Earnings Call Transcript 2024-Q1

[Adrian Westman, executive]

Good morning, everyone. Welcome to the presentation of Fasadgruppen's Q1 results for 2024. With us today, here we have our CEO, Martin Jacobsson, who will present the results. And also in the room we have our CFO, Casper Tamm, and myself, Adrian Westman.With that, I hand over to you, Martin, for the presentation.

[Martin Jacobsson, executive]

Thank you, Adrian. So some highlights here for the first quarter of 2024. It's a clear low activity here in the first quarter. It's a typical low season for us. And this is then connected to our services, which is mainly produced on the outdoor of the building and in a colder environment. This affects clearly the activity levels. I would also like to highlight here that new production levels were quite much lower this quarter than compared to last year.Moreover, I would like to highlight here that the competition in Sweden is still tangible, but I will not say that it has worsened compared to latest couple of quarters here. I'm pleased to see that we've had healthy organic order backlog growth. And in this environment, I will say that this is a clear positive that the demand is holding up so well for our kind of services and that the customers continue to trust us. In the quarter, we've also completed 2 acquisitions of Elenta and Alument, which we spoke of in the last conference call.So moving over to net sales development, we have a clear negative organic development here of 12%, and that is mainly then due to the development in Sweden. I would like to highlight, as I mentioned in the start here, that we've had a low project activity, unfavorable weather conditions and also an early Easter, which was in March this year compared to April last year. And in -- this is -- as I mentioned earlier as well, the new production levels is quite clear down, I will say, in the portion of some 40% of our new production companies compared to last year.Looking at the EBITA level, we have a weak margin here of 1.9% compared to 6.5% last year. Also here, the results are affected by the low activity levels. But in honesty, we could say that we are more seasonally affected than we were last year. This combined with a large -- larger overhead in comparison to the project activity makes up for the weaker results.But you can look in the chart to in the bottom right here. You can clearly see the darker blue bars indicating the first quarter of each year. So I would still not say that I'm very worried about '24, in that sense the results, due to the weakest, I will say, seasonality affect here for the first quarter.Looking at the order backlog development, we have a positive organic development of some 4%. And the clear positives here are the markets in Denmark, Norway and Finland, which are all growing. Somewhat muted growth here for Sweden. I will say that a positive here is that the order backlog margin is actually somewhat up in the quarter here, indicating at least that we are able to win orders at healthier margins.Moving over to cash flow. I will say that the cash flow follows our typical seasonal pattern. We see an improvement in the working capital of some SEK 7 million compared to a negative of SEK 7 million last year. I would also like to highlight here that the investment levels in CapEx was some SEK 35 million compared to SEK 10 million in the first quarter of '23. So we are poised for future growth in that instance. That is then connected, of course, to what we see in the activity levels in the market and our positive order backlog developments.Looking at our financial capacity and our net debt, we first of all see that the interest rate here in the first quarter was around 6% compared to 4.6% in the last quarter. We have a very short interest rate period of 1 to 3 months. So in the case of a lower interest rate environment, we will adapt quickly. In terms of our net debt to adjusted EBITA, it was on a non pro forma level 2.7 and on a pro forma level 2.6. I will say that I'm not worried about these debt levels. We are eager to continue to acquire companies and to continue our growth journey.Speaking of our growth journey, we are here presenting our 2 latest acquisitions, which I also mentioned in the last conference call. And what I would like to highlight here is the special setup for Elenta, which we only acquired 60% of the company. It was an option then to acquire the rest, which is a new take, not done before, which is another tool that we're adding to our work belt here in terms of acquisitions going forward. And I will say, all in all there's still plenty of M&A opportunities out there.Then an update on the Energy Performance of Buildings Directive, which has been finalized, which some of you may have heard. And I will say that this is a clear market trend there, positive for us. And all in all, I would like to highlight that the building stock by 2050 in the European Union would be a zero emission and we are eager to help our customers in achieving that.We also see that there's coming strict requirements from financing institutions. And to take advantage of that, we've also initiated a collaboration with SEB Bank, a larger bank here in the Nordics, in order to take advantage, in order -- helping our customers in the tenant-owner associations so that they can achieve both then financing and advice as well as the project execution from us and SEB.With that, I would like to highlight here the concluding remarks. I will say that at first glance you could absolutely see a big difference here in the results of Q1 '24 compared to last year. Then bear with us that the results last year was unusually strong, I will say. And it is clear that on a -- when it's a lower new production level, that is hindering us in achieving greater results in the first quarter. So I will say that there's plenty of disadvantages with new production per se, but the clear advantage is that it often is producing during Q1. Often it can be that if you have a deadline where you will move in, let's say, in Q1 or Q2, where the customer wants that the building is finalized, it is new production stage. Then you make that so that you work even in during Q1 even if it's cold outside.However, on the renovation side, that is not the case, I will say. Renovation is then more starting up during spring. So in this instance, I will say that our high season compared to low season is then in, let's say, from April to December depending then on weather. I'm also positive here with the order backlog growth, indicating future healthy growth, and also then that the margin in the backlog is stable to positive.So with that said, I will say that we are still positioned to capitalize on our long-term market drivers and eager to assist our customers in helping them.And with that said, I also like to highlight that we have a Capital Markets Day here on the 2nd of September, 1:00 p.m. in Stockholm. So I hope to see you all at that stage.And with that, we open up for questions.

[Operator]

[Operator Instructions] The next question comes from Max Bacco from SEB.

[Max Bacco, analyst]

So the first one on your comment there that the margins and order backlog stable to slightly growing here in the quarter. Could you specify growing compared to what? Is it the margin and the order backlog last quarter or is it compared to the EBITA margin that we have seen during the last 12 months or something like that?

[Martin Jacobsson, executive]

So to give some more flavor on that, it is then compared to last quarter. And with that said -- I mean, it's usually that the order backlog is poised for growth in the first quarter, and it was so this year. But what was interesting was to see that the margin development was also positive in that sense. And where it stands out, I will say, that it's growing in Sweden. And that is a clear positive because we've had, as you know, the competition pressure, especially in Sweden, I will say.

[Max Bacco, analyst]

And is it possible to say, I mean, the margin and the order backlog have thus -- compared to the actual EBITA margin for the last 12 months or for 2023 perhaps, is it stable compared to that or is it also on that comparison base slightly up?

[Martin Jacobsson, executive]

I will say it's stable towards -- compared to the EBITA margin. But note here, Max, as we usually say that when we get an new order, it usually grows by 20%, 30% in extra work. And that is not then affected in the order backlog growth if it's -- I mean, up until it's finalized and approved by the customer. And in a harsher environment compared to competition, then these kinds of extra works going back a couple of years, I will say, was better than it was in these latest quarters here. But hopefully, that -- with an eased competition, hopefully, soon that would also mean better margins in the extra work. So that is also a factor you have to take into consideration. So you cannot only look on the order backlog margin.

[Max Bacco, analyst]

Yes. Understood. And then on your comments that, I mean, Q1 is perhaps more titled towards newbuild than the rest of the year. I mean you normally say that you have a split of 8 to 20 between renovation and newbuild. Is it possible to specify how it usually looks during Q1 isolated?

[Martin Jacobsson, executive]

Yes. I mean, Q1 stands out that it's much, much more, of course. But in the ballpark -- I will say maybe if you just take the Q1 compared to full year, so to speak, maybe that's -- it's 40% newbuild in Q1 usually. But I mean then, of course, it stands out this quarter due to the low activity levels. But I will say -- I mean you have to go back here. We'll go back to 2022. The market around new production was still okay for us, if you understand what I mean. And then you have lag effects going into then Q1 of '23, which we saw then in the activity levels. Remember that the organic growth in Q1 '23 was 25%. And that also, of course, affected the results in a positive way in Q1 '23.

[Max Bacco, analyst]

All right. Yes. And you mentioned this yourself that you are not that worried about 2024 as a full year despite quite weak performance here in Q1. And I mean, as you highlight yourself, the order backlog improved year-over-year organically. Hopefully, we will have better weather going ahead in the coming quarters and the ongoing quarter. We have more working days and, of course, then less dependency on new building in the following quarters. Should we expect that -- and of course, the comparables are also easier for Q2 and forward? Should we expect, I mean, adjusted for seasonality that Q1 was the low point and it will look better year-over-year for the coming quarters?

[Martin Jacobsson, executive]

I mean low point is always hard to tell exactly in that thing. But I mean what we see is clearly this weak performance in Q1. I will say, hopefully, an outlier in the future. And that's our best take, I will say.

[Max Bacco, analyst]

Yes. And if I may, 2 very quick questions to perhaps Casper relating to the financial details in the report. I mean it was quite large deviation looking at financial -- net financial items of SEK 25 million in the profit and loss and then in the cash flow analysis. You have interest paid off SEK 52 million. What explains that deviation?

[Casper Tamm, executive]

You mean between interest paid of SEK 16.7 million compared to the SEK 52.2 million? Is that your question? Or...

[Max Bacco, analyst]

If I look at -- I mean, in the -- yes, exactly. I mean, interest paid SEK 52 million, exactly. And then in the profit and loss, you have net financial items of SEK 25 million.

[Casper Tamm, executive]

I mean that's the increasing interest rates that we have seen between [ first ] quarter 2023 and first quarter 2024.

[Martin Jacobsson, executive]

I will say, Max, that we managed to pay later. That's -- I mean some of those interest rates were -- timing...

[Casper Tamm, executive]

Cash flow wise also, yes...

[Martin Jacobsson, executive]

Cash flow wise. I mean we've had -- when you pay it -- or if you pay it in December or in January, that is a...

[Casper Tamm, executive]

It's a combination, of course of both. I think we had -- the terms of the loans were between 1 to 6 months first quarter 2023. And it's now we are down to between 1 to 3 months. So that's also [Technical Difficulty].

[Martin Jacobsson, executive]

Remember, we made a new financial deal with the banks in the summer of '23. There were some new terms in these -- you could say, in these 2 quarters here when the payments is due, so to speak.

[Max Bacco, analyst]

Understood. On the same topic then perhaps the same answer also. I mean tax paid here when looking at the cash flow, SEK 60 million, which is almost close to the full year tax paid during 2023, is that also a timing effect?

[Casper Tamm, executive]

I mean it's mainly -- the difference between 2023 first quarter and this year is mainly residual tax coming from actually the income year 2022 here, which was one of worst years ever income-wise.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A few questions. Firstly, looking at the organic growth in the quarter, negative 11.5%. I mean, you had pricing deflations in the past quarter. Could you give us some flavor on what sort of deflation on raw material was in the quarter? Yes, let's start there.

[Martin Jacobsson, executive]

So if we took -- take a look at the raw material impact, we've seen that the prices in general are going down, which is -- I mean, it's a positive effect for us. So then, of course, affecting us in terms of negative organic growth. But it differs compared -- I mean, we have a wide variety of materials that we're using. So it varies between different materials here. But in general, I will say a negative development for the prices for the materials.

[Carl Ragnerstam, analyst]

So on an aggregate level, what would you say it's?

[Martin Jacobsson, executive]

How much it -- I mean I will say in the ballpark of 5% to 10%.

[Carl Ragnerstam, analyst]

Okay. So volume-wise, it's maybe down low to mid single digit, perhaps?

[Martin Jacobsson, executive]

Yes. And I would say that in especially Easter effect is something you should take into account, which should affect April in a positive way.

[Carl Ragnerstam, analyst]

And if you look at the margin in the quarter, I know that Q1 is seasonally low but you mentioned a few effects here during the quarter. Obviously, the long and cold winter, the Easter effect also, I guess, a fierce pricing environment and also a bit of a sluggish market. Could you help us rank these effects in a way?

[Martin Jacobsson, executive]

I mean the rank #1, I would say, is the low new production activity in that sense. As I mentioned, it was down somewhat. If we take a look at our pure-play new production players, the revenues for them was down somewhat in the ballpark of 40% in Q1. So that is, of course, affecting. And then I would say, I mean, unfavorable weather, Easter effects. If I rank them 1, 2, 3 in that sense.

[Carl Ragnerstam, analyst]

Okay. Very clear. And if you look at the start here in April demand-wise, obviously, you have a tailwind from the working days. But how is it April looking so far? I guess the weather has clearly been at least better.

[Martin Jacobsson, executive]

Yes, absolutely. I mean, this is when the services start in the new renovation cycle to a large extent. So absolutely, the high seasons have started well. I'm pleased with the development so far in April activity-wise.

[Carl Ragnerstam, analyst]

And also, you mentioned on the margin here in the backlog. I mean, how do you ensure that the margins are sort of healthy and taking at the right level? I guess the project margin often tend to look quite healthy once taken, but then it's up to project execution and other factors that comes into play as well. So have you done any changes in the way you price your projects? Is it more or less fixed price project? Or is it, yes, any other way making you certain that the margin in the backlog will look better, I mean also when actually being delivered?

[Martin Jacobsson, executive]

I mean, of course, we are working, as you know, with fixed prices. That is our strategy where we see creating the most value. But I would say that we have an internal metrics on how large a contract one, let's say, project manager and then subsidy CEO going up to various levels can approve. So more diligence there, I would say, that's one effect from new organizational structure that's from the 1st of November last year. So I would -- but we have to also be clear that the order backlog margin is -- I mean, we have not followed that closely what we've done now, let's say, in -- before the IPO. So we have not a huge amount of data in that sense. But of course, it's obvious here that it's stable to positive in the development, which is all else equal help for us.

[Carl Ragnerstam, analyst]

Okay. Very clear. I mean also on the cash flow side, a bit softer in Q1, leverage is trending upwards. But you also said that you're eager to continue to acquire companies. How does that square? Is it -- then you must have pretty big good outlook for the cash generation for the year '24? Or are you willing to take up leverage a bit further given that is maybe a trough year? Or how do you look at the capital allocation here?

[Martin Jacobsson, executive]

So it's a multitude of factors affecting that, of course. One factor is then, as I mentioned, with the Elenta acquisition, you can be using your tools in a more efficient way where you don't have to acquire 100%, which we have done historically. And you can, I mean, enter into agreements with these acquisition targets in various, let's say, acquisition matters in that sense. So I'm comfortable around that and we are also comfortable, of course, around cash flow generation in that sense.So I mean, various amount of factors and also, of course, multiples paid. It's not to be forgotten there, the price of the actual targets. So I mean in '23, if we go back to that year, I think we've mentioned that before to you, Carl, that we're actively taking the multiples paid into account, into that sense that we were more cautious around multiples paid. But I would say the start of the buyers' market, which I referred to earlier, was absolutely in '23 and we see that ongoing as well.But of course, there's always a discussion with the sellers around price. So with that said, even though we have multiple opportunities, I would say that it takes two to tango, if you understand what I mean. And I'm certain that we will reach agreements here with plenty of opportunities -- acquisition opportunities going forward as well and not worry that -- in that instance around the current debt levels.

[Carl Ragnerstam, analyst]

Okay. Very clear. And the final question is around the cost levels or SG&A. You mentioned that you've taken out some costs here. Is that fully materialized during the quarter? Could you elaborate on any of these? You've taken out, including perhaps, I mean, both temp workers and sub-suppliers as well -- or some contractors, sorry, and if you plan to do more here?

[Martin Jacobsson, executive]

Yes. So we in -- we mentioned that in last year that we've made some, you could say, adjustments to the workforce in the ballpark of 100 people, which is then affected by this, you could say, lower activity levels compared to our workforce of around 2,000. So that is in terms of how many affected. But I would say that with the positive order backlog development, we have actually kept more than that were announced to be affected in that sense. They announced it was more in the ballpark of 200. So that I mean all else equal, that is positive for us where we see that we can -- we hire people here during the spring due to the demand for our special and renovation services.

[Operator]

The next question comes from Sofia Sorling from Carnegie.

[Sofia Sörling, analyst]

That's a great question from previous speakers. So I have an additional on the -- regarding the order book. Could you say something more about the order trends during the quarter in terms of January, February and March and in comparison to previous, not only last year, but previous Q1 quarters? That's my first question.

[Martin Jacobsson, executive]

Yes. So I mean, if you take the larger trends for us, I would say that in the first half of the year, it's a positive where you build up the order back and you execute it more or less. Then you say that Q1 was no exception. We saw strengthening in all 3 months here, actually in the first quarter or January, February, March, all months, in that sense. So yes.

[Sofia Sörling, analyst]

And also can you give some more details around the different services and the demand regarding your different products and services during the quarter? Have you seen then quite significant differences between them?

[Martin Jacobsson, executive]

You mean in the order backlog?

[Sofia Sörling, analyst]

Yes.

[Martin Jacobsson, executive]

Yes. So what stands out is renovation is the positive. If you just take out renovation versus new production, it's the renovation orders that are growing fairly. Remember here then that Sweden is the country where we have the most new production. And I would say that most affected is the current market environment that's in the Nordics for us at least. And we also mentioned here that positive development are in the countries outside of Sweden for us.

[Sofia Sörling, analyst]

All right. And no differences between the different type of services and products?

[Martin Jacobsson, executive]

I mean I would say no, in general, it's a healthy demand whether it's masonry, plastering, roof or windows.

[Sofia Sörling, analyst]

Okay. And you mentioned about the competition, and that it's continued to be quite fierce during Q1. But should we interpret that this fierce competition will ease already in Q2? Or is this something that you see will continue all through Q2, Q3? Or what is your expectation?

[Martin Jacobsson, executive]

I would say it's too early to tell. And we are following things such as amount of bankruptcies in Sweden, as an example, and where we've been -- if you take it -- we can take that back -- look at that historically, if you go back to 90s crisis, then the amount of the construction companies that went bankrupt was in the ballpark, 94, somewhat, 5% of all the construction companies bankrupt in the 94 in Sweden. Then that eased off and it was around a low of 1% going between the years, say, 2005 to 2023. But then our '22, then in '23, '24, is doubling that so, let's say, in the ballpark of 2% of all the construction companies bankrupt here in '23.But with that said, there's so much more companies now compared to the 90s. That is, I would say, an interesting part of the puzzle here going forward where we look at closely and all else equal with a larger amount of bankruptcies. The fewer starts of new players in that sense would be positive for us in the competition-wise. I would also say that if you take a look at order backlog development, the customers are choosing us for a reason. They see us as a safer player and quality customers in upgrading their buildings, which we are eager to do, of course.

[Sofia Sörling, analyst]

All right. And, yes, pretty soon, we will have a new decision about the interest rate from the central bank here in Sweden. So I'm curious about how is the discussion with your customers? Does this matter quite a lot for you if they will keep it unchanged or decrease it or in the short-term, positive-negative impact, would you say, no?

[Martin Jacobsson, executive]

Yes. I wouldn't say that it's -- that's a super huge importance because renovation demand is there whether the interest rate is high or low. So in that sense, of course, I mean, if it can increase the sentiment, as I mentioned, around the new production levels, that is, of course, a positive. And on the renovation side, it's not that important, I would say. But of course, all positives are positive for us. So we would welcome, of course, an interest -- lower interest rates from these levels.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Adrian Westman, executive]

Yes. We have received a few written questions as well. I think we have covered some of them, but we can go through and see what is there. So first off, I think we touched upon it, but is it possible to quantify the negative impact from seasonality compared to last year?

[Martin Jacobsson, executive]

Yes. So I mean, last year was then, as I mentioned, clearly positively affected by the higher new production levels. I mentioned that earlier in the ballpark. If we take our pure-play new production players, the sales development for them in Q1 '24 was somewhere around 40% down compared to Q1 '23. So that is a quantification around that, I would say. But of course, Easter is also a negative for Q1 in that sense, I would say that around 4 working days or somewhere around that. And that is then obviously especially negative for Norway and Denmark, I would say, where they have somewhat longer Easter holidays than in Sweden.

[Adrian Westman, executive]

Do you expect a lower margin in coming quarters due to low levels of new construction/new buildings?

[Martin Jacobsson, executive]

So we don't give any guidance around the margin in that sense. But of course, I mean we are positive around the future.

[Adrian Westman, executive]

Great. And on somewhat the same theme, what do you expect in regards to personnel costs in the coming quarters?

[Martin Jacobsson, executive]

Yes. So I mean, personnel cost is, of course, this is clear, I mean, seasonal thing for Fasadgruppen. We have an overhead which is fixed in that sense around the year. And this has been the factor Fasadgruppen companies for a large amount of years. So in Q1, you can say that we have 2 large overhead. It depends on how you see on things. But, of course, when the productions ramp up in the spring, then I would say you're almost undermanned in that sense. So that is a balancing act that we have to take into account each year. So this is not a new phenomena in that sense around personnel costs. So I'm not worried around the personnel costs per se. That's just more of a fact that our seasonal company is affected by the Q1 due to natural causes such as temperature.

[Adrian Westman, executive]

And then 2 more questions on the margin in the backlog. I think they are a bit on the same theme. So we'll go with one. Just to confirm, your adjusted EBITA margin in the backlog is stable compared to the adjusted full year '23 EBITA margin.

[Martin Jacobsson, executive]

That's why I mentioned that in Max's question, yes, and it was, I mean, if you refer to quarter-over-quarter in the backlog margin.

[Adrian Westman, executive]

And then last one. Does it exist any economical help by the government in order to achieve the objectives of reducing emissions?

[Martin Jacobsson, executive]

Well, of course, it depends on which government you are referring to. We are acting on 4 different markets here. But I would say -- in Sweden, I would say maybe stands out. It's not that many financial aids in that sense compared to, let's say, Denmark and Norway, which have more of those. But of course, I think it's a combined package that the market needs in order to reach the future emission targets. And I think that the state is -- in all of our countries, the states there are prone to assist in whatever way.So I think that the renovation wave that is coming, we'll have 2 severe factors taking into account on how we can assist the customers in achieving all of these greater emissions, as I mentioned before, and that is the workforce. There will be a lack of workers when the renovation wave truly sets in. And it also will be a question of capital, who will pay for all these upgrades that's coming. And if you can get some financial aids from the states, that would be, of course, be beneficial. And it varies between the states. But we would, of course, welcome more of those aids.

[Adrian Westman, executive]

Excellent. So no more written questions? Any concluding comments?

[Martin Jacobsson, executive]

Yes. So I think we've given you the clear answers that we could here. And hope to see you again in the next conference call due in August. So thank you very much, everyone, for today. Have a great day.