Nordic Waterproofing Holding AB

STO:NWG

Earnings Call Transcript

[Operator]

Good morning and welcome to the Nordic Waterproofing Holdings Conference Call. We have with us Mr. Martin Ellis, CEO; and Mr. Per-Olof Schrewelius, CFO.

[Operator Instructions] Please note that this event is being recorded.

I would now like to hand the conference over to Mr. Martin Ellis, CEO. Please go ahead.

[Martin Ellis, executive]

Okay, thank you very much. And good morning, everyone. Thanks for calling in.

Happy to be here on our second quarter call. We have reached a sales milestone of SEK 4 billion. And I would say, more importantly, we've been able to improve our bottom line also, as you'll see, so a reasonably good quarter, we believe.

And turning to Page 2, where we have some figures about the sales and profit performance. So we have increased sales by 18% in the quarter versus last year, and 11% of that is organic and 13% is actually price increases. So we have a very slight reduction in volume which comes from the Installation Services. We have a 4% sales increase from acquisitions and 3% currency effects.

EBITDA has been improved by 13%, which is SEK 216 million in the quarter. Operating profit, up 13% also. And cash flow has been relatively limited at SEK 38 million versus SEK 114 million last year, and we'll get into that. It's mainly obviously the effect of inflation, of sales price increases in a quarter where we have strong sales and build up accounts receivables and inventory.

Earnings per share is SEK 5.82 versus SEK 4.80.

Turning to Page 3. Demand has so far remained stable, but obviously there are signs of slowdown coming and especially in new builds. And we've seen a few projects being canceled. And we certainly expect an impact, a negative impact, in terms of new build demand in 2023, but so far we are relatively late in the cycle, as you know, in construction. And we've seen a very good level of business in roofing, waterproofing products. And we also have a strong order book in Installation Services, in the contracting part of the business.

We have double-digit growth in both the bitumen-based product and the SealEco synthetic rubber. We've had a flat development in prefab elements with good a development in Denmark but a slightly lower activity level in Norway. We've had a very nice turnaround in our green infrastructure business with a strong organic growth. And in Installation Services, we've seen a slight decline, 5% decline, versus last year; and as you know, most of that business is in Finland for us.

Moving on to Page 4. The input cost inflation obviously has been dramatic and it has also affected Q2, but we have now seen a flattening off of this input cost. And in some instances, we've seen price reductions also, so it's very difficult to make a forecast, but we believe we have probably reached a sort of a stable plateau now in terms of our cost inflation. We've been able to absorb this cost impact in our products and solution segment. And in Installation Services, we are still in the process of absorbing the price increases, but we are confident that we will ultimately be able to do that.

We have increased our market share again, I would say, especially in Sweden, in the waterproofing market. We have received additional customer interest. And the same is true also in Denmark. And we probably increased our market share in the green infrastructure business, where we had some aggressive competition last year and where we've now been able to claw back the market share we lost.

Our acquisition drive continues to be active. We've acquired a Finnish contractor in the northeastern part of Finland, which basically allows us to cover the whole of the country now with contracting and service providing to the roofing and construction market. We've also bought out the remaining minority shares in SealEco in Holland and in Voutilainen in Finland. And we continue to have an active pipeline [ and that we might well ] make additional acquisitions during the [ third ] quarter.

Moving on to Page 5, some information on VKP, the contractor in Finland. We have 75 new colleagues in VKP, an annual turnover of EUR 9 million. We acquired 70% of the shares. And management has continued to have a minority ownership, which is a model we've used before which usually works very well. And we now, as I mentioned, have a complete coverage of the contracting business in Finland.

With that, I pass it on to you, Palle, for some additional information on the financials.

[Per-Olof Schrewelius, executive]

Thank you very much, Martin.

And then moving to Slide 6 and looking more into the numbers here. As we said, we were 18% up in sales in the quarter. And we passed the SEK 4 billion milestone here with an organic growth of 11% and volume development then minus 2%, where price increases stood for the part of 13%. Also, acquisitions helped with 4% here.

EBITDA as well passed SEK 200 million for the first time and came up to SEK 216 million. And the operating profit, EBIT, came out on SEK 180 million versus SEK 160 million same quarter last year. The EBITDA margin decreased in the quarter to 17.2% and -- versus 18% in second quarter last year. On a rolling 12 basis, we're at 14.3%. And as you can see in the graph to the right, we've been basically just about 14% for the last 2 years here. And the drive or the development of EBITDA is within Products & Solutions, where you can say Installation Services is basically flat in the quarter compared to last year.

Then moving on to Slide 7 and looking at the income statement here, we see that gross margin for the quarter was slightly below last year at 30.2% versus 30.6%. And on a rolling 12 basis, we are at 28.2%. And here as well we've been fairly stable in the range 28% to 29% for the last 2 years. EBIT margin 14.4% and rolling 12 months 10.7%.

And if you look at the net financial items. That is [ a low ] negative value, and that's driven by a revaluation of the debt for outstanding options that had a positive impact in the quarter.

Then moving to Slide 8 and looking at the balance sheet. And I will say we have a continued strong balance sheet with the net debt-EBITDA ratio at 1.7x, so slightly higher when compared to last year; also interest-bearing debt a bit higher than last year at SEK 976 million. And it's worth noting that, in the quarter, we utilized part of our [ facility B ] in our credit arrangement with -- where we borrowed SEK 160 million from -- for a short-term loan here.

And then moving on to Slide 9 and looking at the top here where we can see our ROCE continues to be at a high level at an all-time high of 17.9%, unchanged from previous quarter. And the improvement is basically driven by the improved operating results, but we can also see there is an increase in capital employed driven by higher costs and higher prices and as well from the acquisitions.

The cash flow from operations in latest 12 months decreased to SEK 215 million versus SEK 461 million a year ago. Cash conversion decreased to 37% compared to a high 92% 12 months ago. This decrease in cash flow is mainly explained by, I mean, accounts receivable increasing, but I will say that, that increase is pretty well aligned with the growth in sales as well, whereas we see an increased inventory. And we do that to secure our capability to deliver to our customers, yes, but we can say the increase in inventory is -- basically half of that is driven by cost inflation. 1/3, I would say, comes from volume to secure capabilities to deliver. And about 10% [ implication of that ] comes from acquisitions and currency impact.

Then moving to Slide 10 and looking into the segments; and starting with Products & Solutions, where we had a sale of above SEK 1 billion. And [ it can be ] first time that we were above SEK 1 billion in a single quarter for this segment; and organic growth 15%, which is basically price. And I would say that there is a good and strong development from the roofing business on -- in all markets where we are present. The good growth in the rest of Europe outside Scandinavia is mainly our SealEco business.

If we look at EBITDA that increased to SEK 212 million versus SEK 190 million a year ago. And the margin decreased a bit to 20.8% versus 22.3% a year ago, and on a rolling 12 basis, we're at 18% here. And basically the -- holding up EBITDA is a consequence of us managing price increases and input materials in a proactive way.

Then moving to Slide 11 and Installation Services where we had a growth of 18% and sales of SEK 291 million. And I will say basically half of that comes from acquisitions, and almost half of that comes from prices and currency impacts for us. And looking at a rolling 12 basis, we're a few million short of SEK 1 billion to -- after the second quarter, [ yes ].

EBITDA is on the same level as last year, SEK 16 million versus SEK 17 million. And the EBITDA margin is at 5.6%. For the [ latest ] 12 months, we're at 3.7% now for Installation Services.

So with that, I move to Slide 12. And back to you, Martin.

[Martin Ellis, executive]

Yes, thank you very much, Palle.

Just a quick reminder of our targets: sales growth, profitability, capital structure and dividend policy. We again tick all of these boxes, of course. And we are well within the capital structure of 3x debt over EBITDA. And obviously we are significantly above our ROCE threshold of 13% [ here ], which we want to hold during the whole business cycle. And obviously we're going to pay a dividend [ of the group at ] 50% of net profit. There's no reason to -- [ sort of not many ] difficulty of doing that.

So thank you very much for listening. That's our presentation and we very much look forward to your questions now.

[Operator]

[Operator Instructions] First questions, from the line of Adrian Gilani from ABG.

[Adrian Gilani Göransson, analyst]

It's Adrian here at ABG and standing in for Max today. A few questions on my end. First of all, have you received any signals from your customers that demand is slowing down? I'm thinking particularly for Products & Solutions but also installations.

[Martin Ellis, executive]

Yes. I think, from our customers, not really directly, but we obviously hear about especially new build projects which have been planned and which are basically in some cases delayed. So we haven't seen any sort of outright cancellation of these projects, but clearly a delay might have -- ultimately mean that a project might not happen. So we've started to see it but on a pretty marginal basis, but on the other hand, obviously the cost inflation for construction has increased so much that it's clear that some people won't find it attractive to carry out projects which they might have done in different circumstances. So we clearly expect some impacts in 2023 and maybe also in the second half of this year to a smaller extent.

[Adrian Gilani Göransson, analyst]

Okay. And regarding the cash flow from operations, you mentioned that it's mainly explained by the fact that dividends from associated companies haven't been distributed. Can you just elaborate on sort of how much of an effect that had [ if you're able ] to quantify that?

[Martin Ellis, executive]

Yes. I don't think it's a major effect. I think the cash flow picture is really, like Palle described, mainly due to inventory buildup and just the cost inflation which obviously increases accounts receivables further, but Palle, please comment.

[Per-Olof Schrewelius, executive]

It's -- in the quarter, it's about SEK 30 million; SEK 31 million, I think, to be precise.

[Adrian Gilani Göransson, analyst]

Okay. And also, regarding the working capital buildup, is this partly a reversible effect? Or do you expect the coming quarters to be similarly high working capital?

[Martin Ellis, executive]

No. I think we will reduce inventory in the future. We've built up a significant buffer in terms of finished products to be able to deliver. And we feel now a bit safer than 3 months ago in terms of getting the raw material we need, so it's we are more confident in sort of being able to deliver even with a slightly lower finished products inventory. That obviously can change again in the future. Nobody knows what, yes, especially the Ukraine situation will mean, but right now we think supply chains have become a bit more solid again, so we'll certainly try to reduce our inventory.

[Adrian Gilani Göransson, analyst]

Okay. And also, regarding the price increases, obviously these were -- what explain the organic growth in the quarter. Is it possible to say when these were carried out? So were the majority of the price increases in the beginning of this year or towards the end of last year? It's just for us to model the coming quarters' price increase...

[Martin Ellis, executive]

Yes. It's been actually a pretty constant move. And we've had price increases in each country, I would say, at least once a quarter. And so it really means throughout the group, [ every month, somebody of our ] operations increase their prices. And we might still have some price increases also in August, not totally sure, but it's been a pretty -- I think the best assumption [ is it's just a constant, regularly ] -- move.

[Adrian Gilani Göransson, analyst]

Okay. And also, regarding demand, is it possible to say anything about sort of month-to-month demand within the quarter, if it was -- if you saw any changes between months; and how you can sort of extrapolate that into July as well...

[Martin Ellis, executive]

Yes, nothing -- I would say, nothing dramatic, so yes, no -- really quite stable, I would say. July should be in the same type of forecast basically, yes, so if there's no external shock coming in, we should expect a [ reasonable stable situation now ].

[Adrian Gilani Göransson, analyst]

Okay. And a final question from my end, regarding the EBIT margin in Installation Services. We saw fairly [ sort of drastic ] decline year-over-year. Can you just talk a bit about what drove that and also if you expect improvements on the margin in installations in the second half of the year compared to the first half?

[Martin Ellis, executive]

Yes. So the reason is really the much higher degree of fragmentation in this market. There are still obviously a lot of players and price discipline is not that strong, so that's sort of the underlying reason, but that's not really new. But of course, in case of input cost shocks, that -- this actually [ comes to the -- to fore ]. And we are continuously working on clawing back the margin levels and we think we have some additional room to do that, so in principle, yes, we should see a slight improvement in the second half over the first half.

[Operator]

[Operator Instructions] The next question is from the line of Sofia from Carnegie.

[Sofia Sörling, analyst]

Let me start with a follow-up question on the last question in Installation Services division. Would you say that we're seeing a positive trend shift now in the Installation Services division from this quarter and onwards? Or what is your take here? That's my first question.

[Martin Ellis, executive]

Yes. I mean I think it's going to be a reasonable stable picture. What you will see and what we have seen to some extent is some bankruptcies. Obviously, if the installation service providers have quoted a job and have not included a cost inflation clause to be able to adjust their sales prices and -- obviously they're in trouble. And that has led to a few bankruptcies, so we've seen that already. So I would expect that to continue to some extent in the second half. On the other hand, as and when input cost inflation reaches a plateau, like we think it's happening right now, that effect should reduce. I mean then these sort of misquotes will disappear basically. So that's a positive effect which [ might come as effect ].

[Sofia Sörling, analyst]

All right. And in Products & Solutions, given your significant price increases, are you comfortable keeping this higher price level for your products and solutions going forward even when material costs are stabilizing? Or even if they might come down, will you adjust your prices downwards, or will you keep the high prices...

[Martin Ellis, executive]

That's an interesting question. Historically we've been able to keep our prices for a few months, so a bit of a windfall. This time around, there is no reason not to expect that, but we have seen a few instances where a customer will sort of ask us to reduce prices. And [ we've tried ] to be [ as proactive ] as possible without changing the big picture. And there might be [indiscernible]. In general, we've seen the opposite. We've really been able to gain market share in our legacy business in both Sweden and Denmark's, obviously also Norway, but yes, we have a large number of customers. And we've seen one instance in Denmark, for example, where a customer has decided to switch away from us because of the price level, but it's a very extremely marginal effect.

[Sofia Sörling, analyst]

All right, okay. And let's see: You mentioned the market share improvement in the report and now as well. And is this within waterproofing when you say, or green infrastructure or the prefabricated wood elements? And if you can give us some color on what is -- the main reasons behind this market share improvement.

[Martin Ellis, executive]

Yes, yes, yes. So in the -- it's mainly the legacy business. And the reason for that -- I mean there is probably 2 effects now. One is [ BMI ], who's our key competitor. They still have some internal issues, and there has been a number of their customers who've asked us to deliver to them. That's probably the largest effect. The other one is linked to transport costs probably. So we see a bit less competition from continental Europe because of increased transit costs. Green infrastructure, we've basically been able to claw back market share we lost last year to, [ especially, a Norwegian ] competitor. And we believe that's going to hold.

And in terms of prefab elements, we have a strong sort of macro trend tailwinds, but we've also seen some projects being canceled because of the cost situation type of things, so it's a bit of a mixed bag, I would say, in prefab elements. And you have seen that we haven't grown our sales that much in the quarter in that business.

[Sofia Sörling, analyst]

Okay, all right. And a final question, on your M&A, yes, agenda, if you can give us some color on your current pipeline and if we could expect some more acquisitions in 2022; and also if you -- if this M&A agenda has changed given the new macro environment with increasing interest rates.

[Martin Ellis, executive]

Yes. We haven't really seen the latter effect, so far. It's probably going to come. Multiples certainly haven't increased anymore, but we haven't seen sort of [ a back floor yet ]. In terms of our pipeline, as I mentioned, we have a good pipeline right now. And I would certainly expect some acquisitions to happen in the second half.

[Operator]

[Operator Instructions] Sir, we don't have anyone in the question queue. Would you like to make any closing comments?

[Martin Ellis, executive]

Yes, okay. Well, thank you very much. Thank you, everybody, for participating. It's been a pleasure, and we look forward to talk to you soon [ with the ] next quarter. And have a great day. Thank you.

[Operator]

Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.

[Martin Ellis, executive]

Yes, thank you so much. Bye-bye.

[Per-Olof Schrewelius, executive]

Thank you very much. Thank you everyone.

[Martin Ellis, executive]

[indiscernible] yes, thanks. Bye-bye.

[Operator]

Thank you, [indiscernible].