Nordic Waterproofing Holding AB
STO:NWG
Earnings Call Analysis
Summary
Q3-2023
Despite a challenging market, the company maintained stable sales year-over-year. Net sales grew 7%, but organic growth fell slightly with a 4% reduction, indicating a challenging demand environment including a slowdown in Scandinavia and Europe. EBITDA remained flat, and while net debt decreased, it still stood at SEK 985 million. The company faced aggressive competition in its EPDM products but contained the pricing impact to a specific product segment. Looking ahead, the outlook is stable in the short term, but there's risk of further market weakness in 2024. The company didn’t meet its 13% ROCE target, highlighting areas for operational improvement. Dividend policy remains consistent, distributing at least 50% of net profit. Although managing input material price inflation and some unsatisfactory profitability in certain segments, the firm is executing turnaround strategies to enhance performance.
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So good morning, everyone, and welcome to the Nordic Waterproofing's WebEx after the third quarter in 2023 now. Let me remind you and point out that this presentation is being recorded and also that the participants' names will be disclosed and are visible. Having said that, let me hand over to our President and CEO, Martin Ellis to start up the presentation. Over to you, Martin.
Thank you very much, Palle, and welcome to all of you. Thanks for joining our webcast. We have been operating in a somewhat challenging market but has been able to realize stable sales compared to the same quarter last year. and also an EBITDA which matches last year's quarter.
Moving on to the first -- the Page 2. We have had a net sales increase of 7% in SEK from SEK 1,132 million to SEK 1,212 million. 4% of that comes from acquisitions, 7% strong effect, obviously, from the weaker SEK and a slight minus 4% organic development, slightly compared to previous quarters. And volume was all of that price basically stable. The EBITDA, as I mentioned, is at SEK 159 million versus SEK 162 million last year, so almost equal. Operating profit EBIT decreased from SEK 128 million to SEK 115 million and cash flow from operating activities was SEK 149 million compared to an exceptionally strong SEK 244 million last year. And net debt is now less than SEK 1 billion, again, SEK 985 million, and it was SEK 912 million at the end of last year, and we basically expect to equal or even beat that number by the end of this year. On the next page, we have a few highlights and comments on our results. Demand is impacted by some slowdown, I would say, a slight slowdown in commercial new builds. And I'm talking mainly about Scandinavia. Europe is -- Continental Europe is weaker than Scandinavia right now. Renovation has been stable and residential new build has continued to be depressed like in previous quarters. Bitumen-based waterproofing operations are also stable in the quarter and at the same level as last year with a few minor variations from one country to the next. EPDM products are still impacted by an aggressive competitor from Saudi Arabia, who sells at lower prices. The market share gains of that player, I think, have now stabilized, but obviously, we still have an impact compared to last year. Prefabricated elements, wood-based elements, which we produce in Denmark and last year. have a high exposure to residential new build and have seen sales reduced because of that in Denmark. But we did achieve positive top line growth in Norway, where we also produce and sell this element.
Profitability continues to be unsatisfactory. We've made the management change, which we already mentioned in the last quarter report, and we're looking to actively turn this business around. Our green infrastructure business has had a good development both in sales and profit. Installation Services in Finland, which is a large part of our business has further improved over last year. You might remember that we've had turnaround story here for the last 4 to 5 years, which continues to be successful. Our business in Norway, which we acquired 3 years ago, continues to face some operational issues with weaker sales and profitability. And also here, we have a recent management change to turn the operation around. Order books for installation services in general continue to be on par with the previous year in Finland and Denmark, while slightly weaker in Norway, mainly because of our internal reasons.
Moving on to Page 4. There has been obviously a strong input material price inflation, especially last year and to address this, and the slight demand problems. In general, we have put into place contingency measures to mitigate the consequences of both of these trends. And as you can see, reasonably successfully. We continue to see slightly deflated cost in the quarter for most of our input materials compared to the previous quarter. Cash flow from operations was good in the quarter, and we have continued to reduce our inventory levels as planned. That being said, we have additional potential versus the -- looking at the end of the year in that area, we still think we have slightly higher in return levels. In the high interest environment, which we all know, we have sharpened our focus on our debt level and also have adjusted the multiples we are prepared to pay for acquisitions.
Last but not least, as you know, our largest shareholder, Kingspan Group PLC has made a mandatory offer recently at SEK 160 per share, and the expected acceptance period is from 23 November to first of February. Moving on to some more details, I hand it over to you, Palle.
Yes. Okay. Thank you very much, Martin. So as mentioned, our net sales in the quarter was just above SEK 1.2 billion up 7% from last year, organic minus 4%. And as Mark said, price is unchanged and all coming from volumes being down, which is significantly better than the double-digit negative numbers we had in the first 2 quarters this year. acquisitions, 4% and currency were very much exposed to euro markets and the weak Swedish krona has put the currency impact at 7% in total. EBITDA basically flat at SEK 159 million versus SEK 162 million, and as we said, operating profit decreased to SEK 115 million from SEK 128 million the EBITDA margin decreased a bit 13.1% instead of 14.3%. And on a rolling 12 basis, we're now at 11%, as you can see in the graph to the right year.
Move on to the full income statement here. We see gross margin continue to be weaker than the same quarter last year, so now at 25.3% versus 28% last year to a large extent driven by the EPDM business and the challenges they had in the market, but also some variations between the different markets we have. EBIT margin for the quarter was 9.5% versus 11.3% last year. And on a rolling 12 basis, we are now at 7.0% for that. And then as we can all assume the increased interest rates had a negative impact on net financial items. Last year, we also had some positive effect from revaluation of debt for our outstanding shares.
Okay. And then moving on to the balance sheet. I'm going to say we have a continued solid balance sheet, allowing for selective acquisitions we would like to do the interest-bearing net debt has increased during the year to SEK 940 million from SEK 844 million at the beginning and which is typically following a seasonally weaker cash flow we have in the first half of the year and also the distribution of dividend we did in May. But as Martin said, we expect during the fourth quarter, the net debt to come closer to where we were at the beginning of the year year. Equity asset ratio at 44.8%, which is somewhat above the 42.7% we had a year ago. And the net debt-to-EBITDA ratio that is at 2.0 versus 1.6 which is important since it's one of our covenants for the financing agreement.
Then moving on to ROCE, where we were at 10.8% currently on a rolling 12 basis, which is below the 16.6% we were a year ago. And we've seen some increase in capital employed from both the weaker currency and acquisitions. But the main reason for the decrease is the lower operating result. And then we can say that the cash flow from operations and cash conversion has been fairly stable with the cash flow from -- on the rolling 12 basis from operation as SEK 341 million versus SEK 358 million in the previous 12 months. and cash conversion stabilized in around 70% and in the high 60s year. But of course, going forward, as we mentioned, we believe we still have some potential to reduce inventories. And of course, in the current business environment, we monitor our operating receivables very closely.
Looking at our 2 segments, then Products & Solutions, up 3% in sales in the month, organic developments, same as for the group minus 4% price flat and volume driving the minus 4%. Acquisitions contributed with 3% and the impact from currency was 5% here. And then we have some variations on the different markets here with Sweden being positive at 11%, while Finland and Denmark is likely negative. On a rolling 12 basis, this business is running at SEK 3.3 billion in sales. EBITDA same here flat in the quarter at about SEK 134 million versus SEK 135 million last year and the operating profit EBIT decreased slightly to SEK 102 million versus SEK 111 million. EBITDA margin decreased to 15.6% versus 16.3%. And for the latest 12 months, we are now at 12.8%, which is then below the very high 17% we had a year ago.
And finally, looking at installation services as well, where we had an all-time high sales in the quarter here. at SEK 398 million increased with 18%, driven by the small extent prices where we see an increase with 2% when volume drops to, and then we also have an impact from acquisitions with 7% and a large impact from currency with 11% since this is basically all being received in euro countries. It's the main part of the activity is in Finland. EBITDA you can say it's flat or decreased slightly from SEK 37 million to SEK 35 million, and the margin decreased to 8.8% versus 11% last year. For the latest 12 months, we're at a strong 7.7% we think that's a -- it's a good margin for this type of business where we see a lower margin than in the Products & Solutions area. The activities in Finland where we have the main part of this business maintained a good level on gross profit and EBIT. And while we saw a reduced result in Norway, as Martin mentioned. Also, we have a franchise network in Denmark where we see a continued good result on level with last year. Good having said so, I'll hand it back to you, Martin, again.
Yes. Thank you very much, Palle. So our traditional financial targets. Sales growth, you've seen we've ticked that box, but obviously mainly due to currency effects, but still we all know that the environment has become much more difficult than a couple of years ago. So you could argue it's sort of a fair performance. Profitability, we have not reached our 13% ROCE target. So there's room for improvement there. And I would say that if we achieve the turnarounds, we are working on, then we probably would have been very close to 16%, but that's -- that remains to be done. Capital structure, as Palle mentioned, we are way below the 3x debt on EBITDA and dividend policy, as you know, we have always distributed at least 50% of net profit. So that is our presentation to you. And now we very much look forward to your questions.
Yes. Thank you very much, Martin. Yes, then I open up for questions, and there's a couple of different options here. [Operator Instructions] I'll start up with the the first one here. Adrian Gilani, I'll unmute you and I think you need to unmute yourself as well to come in and ask your question.
Can you hear me?
Yes.
Yes.
Welcome.
Okay. Yes. Perfect. Martin and Palle, a few questions from my end. I guess, starting off with the volumes that are now only down 4%. Do you expect this to sort of flatten out at low level in the coming quarters? Or should we expect further volume declines from here?
Yes. I would say in the short term, so looking at the fourth quarter and maybe the first quarter next year, we see a stable outlook. But after that, most people in the industry expect a further downturn. So we'll see how that goes for us. But that definitely remains a risk that '24 will show some further weakness.
Okay. And then on prices, you did mention some price pressure in the EPDM business or the rubber business. Have you had to lower prices to compete with these new players on the market? Or are you keeping prices stable even if that means losing some market share?
No. It's a combination. I would say the competition is in 1 sort of specific subsegment type of material, which has a type of installation, which is peculiar it's what we usually call the American type of EPDM versus the European, which is our main business. So in our main business, there's hardly any price impact. And in the American segment, we definitely had to adjust our prices. And that explains part of course, of the lower results.
Okay. But is it fair to say that very small part of the business and it -- we shouldn't be seeing any major price decreases on group level?
Yes. That's what we expect right now. I mean it might be wishful thinking. We'll see about that. But as I mentioned, we see this market share gain sort of leveling off, which would mean if it happens that prices could remain stable, unless there's a dramatic further reduction demand, that obviously can have an impact on all segments.
Yes, of course. And then on the margin side, if we look at some of your main problem areas like tossing and the rubber roofing to an extent, are these sequentially still getting worse? Or have we started seeing some improvements compared to sort of Q2 last quarter on profitability?
Yes. I think they have remained stable, unfortunately. And it's a bit early to to announce victory. That's for sure because we've recently made management changes and obviously, then that takes a little while to have an impact on the P&L. So I wouldn't expect any further downside. And just as a reminder, we talk about the elements of tossing. We talk about big Partner Norwegian contractor, which uses our material. So if you look at the full picture of the material we sell to that contracting company versus the past where they were not part of our group, there's obviously a positive impact in Sweden. And thirdly, the photovoltaic business in Finland, where we also had, as you know, a very volatile demand situation with huge increases. And then drop, and that has been a bit too much for our organization. So we are working on that. And basically, I can't see any further downside on that one. I think demand will remain reasonably strong and gradually, we'll get our act together in terms of serving an.
Okay. That's very helpful. And then finally, I have to ask since you released a press release a few weeks ago saying that the Board will submit its opinion on the Kingspan bid quote well in advance of the expiration of the acceptance period. Can you give sort of any more specific time line on when we will get the Board's opinion on the bid?
Yes, short answer no. But I think the statement remains valid.
Okay. I had to try. In that case, that's all for me, and I'll leave some questions for Karl.
Thank you very much.
Thank you very much, Adrian. And Karl, I have unmuted you on my side. I think you need to do it yourself to ask your questions.
Yes. Hello, guys, can you hear me?
Yes.
Yes, loud and clear.
Yes. So I'm filling in here for Sofia Sörling. I think Adrian covered some of my questions. Just a bit of a follow-up there on on the rubber side, do you see any price pressure related to green infrastructure or fabricated buildings element? Or is it solely within the waterproofing business, you observe any of these issues?
Yes. I would say as soon as demand drops, there usually is some impact on prices. So it's difficult to predict when it's going to happen. We haven't seen much of it so far. And part of that obviously is linked to our legacy business having really good market shares which is a bit different, obviously, in the Elements business and the contracting business, which is much more fragmented field. So if there's dramatic demand downturn next year, which some people expect, some people not, then there will be some pricing patent. But I mean we've been in the legacy business, reasonably successful in avoiding that so far.
All right. Very clear. And just a question on the cash flow. Are you worried in somehow regarding the receivables here related to working capital? Or are you confident that you will still get paid, et cetera.
Yes. That's an interesting question. I mean you have to touch wood. Basically, we haven't almost seen any bankruptcies of our customers, so which maybe been lucky, we've managed it well, but that obviously can happen in the future. to a large extent. We have insurance against that. So the impact will be limited. But clearly, again, some people expect increasing bankrupt in the construction market in '24.
Thank you very much, Carl. Then I'll just say that I haven't seen any questions in my emails or the Q&A feed. Are there any more questions from participants in the meeting here. Otherwise, I thank you, everyone, and I hand it over to you, Martin, to wrap up.
Yes, yes. Thank you very much, Palle, and thank you all for participating. It's a pleasure and look forward to talking again in a few months' time. And have an excellent day.
Okay, thanks. And with that we close the meeting here. Thank you.
Thanks, Palle.