Nordic Waterproofing Holding AB

STO:NWG

Earnings Call Transcript

[Operator]

Ladies and gentlemen, welcome to the Nordic Waterproofing Q4 Report 2019. Today, I am pleased to present CEO, Martin Ellis; and CFO, Jonas Olin. [Operator Instructions] Speakers, please begin.

[Martin Ellis, CEO, President & Member of Executive Board]

Thank you very much. This is Martin. Good morning, everyone. We are very pleased to have you on the call. Thank you for your interest. As you can see on Page 2, we have again delivered a solid quarter, good sales growth and significantly improved financial performance versus last year. Our net sales are SEK 763 million versus SEK 692 million last year, which is an increase of 10% in the quarter, 5% of which is organic growth in local currencies and 3% from acquisitions, the rest being the weaker SEK effect. Our EBITDA increased by 49% versus last year, and the operating profit EBIT increased by 31%. The difference being mainly explained by the new accounting standard application. Jonas might get into a bit more detail on that one. Operating cash flow was strong at SEK 137 million versus SEK 84 million the year before. Earnings per share significantly increased to SEK 2.56 versus SEK 1.03 last year. One contributing factor to this significant jump being the deferred tax losses we have in Finland, and again, Jonas will come into a bit more detail on that one. Moving to Page 3. You can see that we have delivered a good year again, with net sales up 16% for the whole year to SEK 3.1 billion. Again, organic growth and acquisition is the main contributor, 7% in each category, and the SEK effect, 2% again. EBITDA and EBIT increased by 35% and 23%, respectively. Operating cash flow, very strong at SEK 306 million versus SEK 180 million last year. Significant cash conversion and a good control of working capital, which has come down significantly in the second half of the year. Earnings per share at SEK 8.19 versus SEK 6.3 last year. The Board of Directors has proposed an increase of our cash dividend from SEK 4 per share last year to SEK 4.50 this year. Moving to Page 4. We still see strong markets in all our segments, some local variations, of course, but generally, a good demand picture. We have had a positive contribution from the profit improvement measures in Installation Services in Finland, which we kicked off 2 years ago. So we've been able to increase our margins in that business. We've had good sales growth in the prefab elements business, but we still have some profitability challenges. We are currently carrying out the profit improvement program. We should have made some organizational adjustments also. We've had throughout the year favorable bitumen prices because of our hedging agreement. At this point, we have hedged also for 2020 50% of our demand at this point. And we will follow the bitumen, the oil -- the Brent prices closer to use any opportunity to hedge the rest of the quantities for 2020. We have had a number of best supplier nominations in -- with our business merchant's customers in Sweden and Norway. As you know, customer relation is critical in our business, so we are very proud when we win these nominations. We've made one large acquisition in '19, Distri Pond in Belgium in our EPDM business. This company is performing well, very successfully and absolutely in line with what we expected before we made the acquisition. Nynas is -- traditionally has been our main supplier of bitumen. They have filed a company reorganization, and our assessment is that this does not affect our operations. We have had no supply issues whatsoever so far, and we believe that the operation of Nynas will continue regardless of the company restructuring. We also have alternative suppliers, which we are buying from. So we are basically prepared for any event. But we, right now, are confident that Nynas will continue to operate. Moving to Page 5. The market status and the general market environment is unchanged for us overall. So we continue to see some consolidation with those merchants in Nordic countries, which has -- this process has been going on, but this is still active, and this impact our business mainly in Sweden and Norway. The decreased private housing building starts in Sweden have not affected our sales. We've emphasized this in the previous quarters, and we've always explained that it's a relatively small part of our business, and we haven't seen any meaningful effect. We have an active competition in flat roofing. There is no change on that. But we have been able to increase our market shares, both in Norway and Sweden, against our competition. The flat roofing markets generally are quite strong. As you probably know, there's some negative signs in Finland, where there's a consensus that the building and construction market is slightly slowing down. We have integrated that into our forecast for 2020. We have continued strong demand growth in the prefab elements business, especially in Norway. Regarding our raw materials, we see a fairly stable situation, even maybe slightly favorable. The oil prices are volatile, of course. We have seen geopolitical events with a strong increase in oil prices. Now we've seen the coronavirus moving oil prices in the opposite direction. As I mentioned, we are hedged 50%, and we are quite confident we'll have a cost position, which will be somewhat comparable to 2019. In terms of our strategy, no change. We'll continue to focus on organic growth and profitability. Organic growth obviously in all our segments, but especially in the new platforms, with the prefabricated elements and the green infrastructure. In terms of how we proceed in our acquisition drive, we continue to have an intention to increase our product and service offering when there's opportunities. We definitely want to make acquisitions in the areas which have a tailwind from construction with the megatrends, like prefabrication, green infrastructure, sustainability, and we continue to forward integrate when there's an opportunity, especially in the EPDM business. A critical focus for us is sustainability. We believe we're very well positioned already in that respect because we have a significant part of our business in the wood-based prefab elements and the green infrastructure, and we're going to continue to emphasize this. And we've made a small acquisition in the Taasinge Denmark operation where we offer the installation of our own elements, which means that we also get a complete package of designing until the installation of our elements for our customers. Moving on to Page 7. We have a recap of our footprint. No big change there. Sweden is about 17% of our total sales. Finland and Denmark are important countries for us. You might notice that in terms of the renovation versus new build, state of our sales, there's a slight change. So we have now a slightly larger exposure to new build, and again, that's mainly linked to our new businesses. And the legacy business there, there is no significant change. So it's a mix effect in our portfolio. Jonas, over to you. I've finished my part.

[Jonas Olin, CFO & Head of Investor Relations]

Thank you, Martin. Let's look a little bit more detail into the numbers then. As Martin said, we have another good quarter with sales of SEK 763 million, which is up 10%. Very proud to see that this is our best fourth quarter ever. The organic growth was 5%. High activity in the Installation Services business in Finland, but also the prefabricated elements in Norway and also SealEco with the contribution from Distri Pond, which was acquired in 2019. Results increased. EBITDA was SEK 91 million compared to SEK 61 million. Effects from IFRS 16 was SEK 12 million in the period. EBIT increased to SEK 62 million compared to SEK 47 million last year. And this is also very satisfying with the best quarterly -- fourth quarter results ever, supported by good development in Finland, Installation Services, especially, and also the favorable hedge agreement, as Martin mentioned. The continued profitability, the challenges within the profitability in Taasinge and especially RVT is visible. As Martin explained, we have a comprehensive profit and program -- profit improvement program in place. But we've had to make some negative estimates in the ongoing projects during the quarter. If we move to Slide 9, we look into Products & Solutions segment. Sales of SEK 544 million (sic) [ SEK 554 million ] compared to SEK 516 million, which is an increase by 7% compared to last year. Organic growth was 2%, and the contributions from the acquisitions, in this case primarily Distri Pond adding 4% in the quarter. Norway is strong, as I mentioned. Denmark and Sweden, up 3% to 4%, driven by flat roofing and green infrastructure. And then of course, SealEco, Other Europe and Distri Pond is up 21%, of which Distri Pond is 16 percentage units. EBITDA for Products & Solutions ended at SEK 75 million compared to SEK 57 million last year, and operating profit was SEK 51 million compared to SEK 46 million. Continued favorable raw material prices due to the last year's hedges -- hedge agreement that we signed for the bitumen, but at the same time, challenged by the profitability in RVT in Norway. If we look at Page 10, we see the Installation Services segment. Strong sales of SEK 232 million compared to SEK 198 million. Strong organic growth of 13%, coming both from the legacy business and the flat roofing, Installation Services, but also the floor coating business, where a large cruise ship project was finalized during the quarter. Order intake is somewhat lower, a decrease of 36% in the quarter, lowering both roofing and floor coating. And that means that the order book at the end of December was 26% below the high comparative number last year. 16 percentage units actually come from the lower order book in SPT, where we have the cruise ship flooring orders. And this year, at the end of 2019, we have no order compared to large orders at the end of last year. EBITDA increased to SEK 25 million in the quarter, which has more than doubled, while EBIT was up SEK 10 million as well and ended at SEK 21 million compared to SEK 11 million last year driven by the Finnish roof installation services performing very well, as Martin mentioned in the beginning as well. And we also see the Danish franchise units continue to perform and deliver good results and good order books in Denmark. So continued strong effects from the profit improvement program we had in Finland since 2 years back. If we look at Page 11, we have the condensed income statement. We ended the full year at SEK 3.1 billion compared to SEK 2.7 billion last year, very positive development. At the bottom line, net profit was SEK 196 million compared to SEK 152 million. IFRS 16 affected the fourth quarter by SEK 12 million, while we had insignificant effect on EBIT and net profit. And I will come back to the specific IFRS 16 effect for the full year in a second. Net finance items was positive primarily due to positive exchange rate differences on the financial loans as well as where this quarter had a positive net fair value adjustment of acquisition-related liabilities for the remaining shares in -- remaining minority shares in some of the companies we have acquired. You might also notice, we have a low effective tax rate this year ending at 15.8% compared to 20.2%. And this is primarily explained by the significant profit improvements we see in Finland, especially during the fourth quarter. We have no tax costs being recorded in Finland due to earlier tax loss carryforwards, and we have been able to utilize almost all of the tax losses we had going back to 2011 when the group was founded. We also see an increased profit in the Danish franchise companies, which also affect the effective tax rate. So let's take a look at Page 12, the balance sheet. Continued strong balance sheet and continued to strengthen during Q4, especially due to the very strong cash flow and also the increased profit. Capital employed is slightly below previous quarter, ending up to SEK 2.016 billion, which is a slight decrease. At the end of the year for the full year number, return on capital employed was 14.2%, which is above our long-term target of 13%. We have a substantial decrease in the leverage. Net interest-bearing debt versus EBITDA was 1.6 at the end of 2019, which is a decrease of 0.6x compared to Q3, ending at 2.2.The Board proposed a cash dividend of SEK 4.50 per share, which equals SEK 107 million or 55% of the net profit, and that is also a yield of approximately 4.5% of the current share price. On Slide 13, we have the effects from IFRS 16, which has affected us in various ways. EBITDA for the year was up SEK 48 million due to this. It has marginal effect on EBITDA net profit, around SEK 2 million positive effect on EBIT and SEK 2 million negative on the net profit. Net debt end of Q4 increased by SEK 110 million, and that means 0.1x effect on the net debt-EBITDA ratio. Return on capital employed, as I mentioned just a few seconds ago, ended at 14.2%. Without the IFRS 16 effects, ROCE would be 14.5%. So that has affected by 0.3 percentage units. To finalize on Page 14. We see the operating cash flow was very strong in the quarter, improved to SEK 130 million compared to SEK 84 million in the fourth quarter last year. About SEK 30 million is coming from the higher EBITDA, but you should also consider the SEK 12 million coming from IFRS in that case. SEK 30 million is coming from net trade receivables decreasing more than it did last year. So that explains the difference of approximately SEK 60 million. Cash conversion increased as well at a temporary low 65% last year, ended at 83% this year. And IFRS 16 has effect both on EBITDA and on the cash flow by SEK 48 million, meaning that the effect on the cash conversion rate is quite limited. It has affected 3 percentage units. So without the IFRS 16 effect, we would have operating cash conversion of 80%. Martin, I'll leave it to you again.

[Martin Ellis, CEO, President & Member of Executive Board]

Yes. Thank you very much, Jonas. Moving on to Page 15, our financial targets. As you can see, both in terms of sales growth, profitability, capital structure and dividend policy, we are in line with our targets and our benchmarks. Last but not least, our outlook on next year -- on this year, 2020, sorry, is that we expect, based on the comments we've already made about the general market situation and assuming comparable winter conditions in the fourth quarter, that our operating profit is going to be in line with 2019. So that was our presentation. Thank you very much, and we are very much looking forward to your questions. So maybe -- operator, if you, maybe, could start the questioning program or process?

[Operator]

[Operator Instructions] We have a question from Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So you talked a bit about the tax rate that you had some benefits this year, but what kind of tax rate should we look at going forward?

[Jonas Olin, CFO & Head of Investor Relations]

I think the tax rate we have had in the past, around 20% would be appropriate.

[Kenneth Toll Johansson, Financial Analyst]

Great. Then the order book in the Finnish Installation Business is down quite significantly. Are you doing anything to mitigate that effect? Or do you think that you will gain a lot of orders in the first quarter? I mean are you laying off people or -- yes, can you talk a little bit around that, please?

[Martin Ellis, CEO, President & Member of Executive Board]

Yes. I think we had a buildup of orders at the end of the previous year. So I think it's more a return to normal ratios of order books. So right now, we are not concerned with the level of orders we have, and we think we will have enough work to do in 2020 also.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Great. And then you made a lot of acquisitions in the last couple of years. And so how large share of your sales is now related to the bitumen product? And then I don't mean the Installation Services, but rather on the -- yes, of the total group, how much is affected by the bitumen prices, if I put it that way?

[Martin Ellis, CEO, President & Member of Executive Board]

Yes. I think, Jonas, you might have a precise answer to that. I would say, roughly speaking, it's about half of our -- what we are doing now in total. Jonas, you think...

[Jonas Olin, CFO & Head of Investor Relations]

Yes, I would agree.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Great. And what do you believe in terms of your hedges that you have now? I mean last year, they were very favorable and you -- but what do you believe now for...

[Jonas Olin, CFO & Head of Investor Relations]

I think -- yes, as I mentioned, we only have hedged half. So I assume that we can hedge the other half at similar levels, which, right now, seems possible. And in that case, we would be reasonably close, maybe slightly up compared to 2019.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then you haven't had any problems with the supply of bitumen since the Nynas' troubles in Sweden?

[Jonas Olin, CFO & Head of Investor Relations]

Yes. That's correct.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then a final one then. In Denmark, you have had this lawsuit going on. And have there been any new developments there? I think there was a deadline for someone to hand in a revised lawsuit or something.

[Martin Ellis, CEO, President & Member of Executive Board]

Yes. You're referring probably to November last year where, according to our lawyers, there was a limit of validity after 5 years since the initial inquiry. That was sort of our lawyer's position, which obviously didn't seem to be the position of the Danish authority because nothing really happened. And basically, it's status quo. There is no news. And the inquiry has not been officially dropped, but we haven't either received any form of decision.

[Operator]

Our next question is from [ Edward Hoffman ] from ABG Sundal Collier.

[Unknown Analyst]

I was wondering if you could give your thoughts on the outlook for the different countries, especially in Norway and Denmark.

[Jonas Olin, CFO & Head of Investor Relations]

Yes. As you know, we've had very strong demand in Denmark, and there has been a few signs of a slowdown very much in the beginning of the cycle. So architectural [ bureaus ] have laid off a few -- their employees. For example, that has already happened 1 or 2 quarters ago. We are relatively late in the cycle, and we don't have any concern as far as demand for our product and services is concerned in 2020. And I think the general agreement is that if there is any sort of slowdown in Denmark, it's quite soft. Normally, we don't see any negative indications. So we are at, I would say, normal to good level of demand, and we haven't had any signs of the slowdown in payout, which means that the only country where there's probably consensus there is that there will be a bit of a slowdown in Finland.

[Operator]

[Operator Instructions] At the moment, there is no more question. I'll pass it back to the speakers.

[Martin Ellis, CEO, President & Member of Executive Board]

Thank you very much. Yes. Once again, thank you for your interest and participation, and we look forward to our next call in -- when is-- do we have a date, Jonas?

[Jonas Olin, CFO & Head of Investor Relations]

[indiscernible]

[Martin Ellis, CEO, President & Member of Executive Board]

Yes. Okay.

[Jonas Olin, CFO & Head of Investor Relations]

Yes.

[Martin Ellis, CEO, President & Member of Executive Board]

Okay. Thank you very much. Goodbye.

[Jonas Olin, CFO & Head of Investor Relations]

Thank you.