Edited Transcript of BALCO.ST earnings conference call or presentation 20-Feb-20 8:00am GMT

Our operating profit increased by 40%, up to SEK 38 million. And our operating profit margin improved to 11.3% compared to 8.9% last year. Our cash flow was very strong, so the operating cash flow was SEK 100 million in the fourth quarter, and that’s due to improved EBITDA and also reduced working capital. And our Board of Directors proposes a dividend of SEK 2.5 per share, an increase of 25% compared to last year.

Turning to Page 5. A quick summary of the fourth quarter. Order intake increased 15% to SEK 352 million. Revenue increased 10% to SEK 333 million. Order backlog increased 26% to SEK 1.5 billion. And operating profit increased to 40% — by 40% to SEK 38 million, and operating profit margin of 11.3% compared to 8.9% last year.

If we turn to Page 6. We see the development of our 2 business segments, and starting with the Renovation segment. We have a strong order backlog and a very stable profitability. Order intake in the Renovation segment decreased slightly by 8% in the quarter to SEK 260 million, while revenue increased by 4% to SEK 280 million. Our order backlog at the end of the year has increased by 28% compared to the same period last year and is now SEK 1,339 million. Operating profit, a slight decrease compared to the fourth quarter last year, 3% down. So it’s now SEK 36 million this quarter. And an operating profit margin of 12.9%.

Continue to Page 7 and the New Build segment. We have seen that our new strategy in the New Build segment continued to deliver, and we also received a new maritime order. That’s why the order intake had a very strong increase, up to SEK 92 million in the quarter compared to SEK 22 million last year. Revenue also increased by 51%, up to SEK 53 million. And the order backlog is now 19% higher than the same period last year, and it’s SEK 183 million. Operating profit has gone from a loss last year of minus SEK 12 million up to a profit of SEK 3 million this year, and it’s an operating profit margin of 5.7%.

If we look at the full year next page, Page 8, and the summary of the full year of 2019. We had a strong growth in our order intake, also sales growth, improved profitability and improved cash flow.

So net sales increased by 15%, up to SEK 1,221 million, of which 22% was acquired growth, while our organic growth was negative by 6% in the year. The Renovation segment accounted for 86% of our total sales, and the New Build segment, 14%.

Order intake during the year increased by 34%, up to SEK 1,349 million, of which organic growth has been 16%. And the growth in the Renovation segment has been 24% and accounted for 85% of our total order intake.

Our operating profit has increased by 33% in the year, up to SEK 140 million. And our operating profit margin has improved to 11.5% compared to 10% a year before. Profit after tax has also increased by 34%, up to SEK 103 million.

Our operating cash flow has improved to SEK 134 million in the year, and it’s due to better EBITDA and also better development of our working capital. And our operating cash conversion improved to 76% compared to 36% a year before.

If we turn to Page 9. And just a quick summary of the full year: order intake increase of 34%; operating profit increased 33%; a revenue increase of 15%; and also profit after tax increased by 34%. So overall, very good full year of 2019.

Turn to Page 10. We look at our 2 business segments for the full year. The Renovation segment has been solid and showing also a profitable growth. Revenue has increased by 10%, up to SEK 1,044 million in the year, and it’s 86% of our total revenue. Operating profit for the Renovation segment has increased by 15%, up to SEK 135 million. It’s an operating profit margin of 12.9% compared to 12.4% last year. Also order intake has increased by 24% in the Renovation segment and was SEK 1,147 million in the year. And it’s 85% of our total order intake.

The New Build segment, our new strategy in this segment has shown to be correct as we have shown a revenue increase of 60% in the year, up to SEK 176 million; and an improved profit from a loss last year of SEK 11 million, up to a profit of SEK 12 million this year, given an operating profit margin of 6.5%. And also the order intake has increased from SEK 75 million last year, up to SEK 202 million this year.

And turning to Page 11. This gives us a very strong financial position. Our equity-to-asset ratio has improved and was, at the end of the year, 46.5% compared to 41.4% last year. And it’s driven by increased profit and rather low investment in the year.

Our net debt-to-EBITDA also improved and was as low as 0.9x at the end of the year compared to 1.4x last year. And it’s due to a very strong cash flow, especially in the fourth quarter of this year. And if we take away the financial debt coming from lease, our net debt-to-EBITDA was just 0.6x at the end of the year.

Our net profit for the period, profit after the tax, improved by 34%, up to SEK 103 million. And it’s corresponding to an earnings per share of SEK 1.81 (sic) [SEK 4.81] before dilution and SEK 1.76 (sic) [SEK 4.76] after the dilution. And last year, it was SEK 3.67.

And this gives us headroom for acquisitions. Even if we proposed increased dividends by 25%, we still have acquisition headroom because we have prolonged our banking agreement until September 2022, and we have also an acquisition credit restored at SEK 100 million. And we had cash at hand at the end of the year of SEK 119 million.

So going on to Page 12. The financial targets of Balco is that we should reach — have a growth of 10% per year. And in 2019, we have 15% growth. We have a profitability goal of 13%, and we reached 11.5% in 2019, an improvement from 10% in 2018. Our net debt-to-EBITDA should not exceed 2.5 more than temporarily. It’s down to 0.9 at the end of the year. And we have a dividend policy that we should distribute half of our profit after tax to our shareholders, and the proposed dividend is 53% of our profit after tax.

So going to Page 13, and back to you, Kenneth.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [4]

——————————————————————————–

Excellent, Mike. And now you can drink some water.

Sustainability initiatives. Last year, we found out that our lifetime is more than 90 years of our products, and we only need 2 minor service annuities period. And these are documented information. And I’m really happy of this. We know that we have energy savings of our products between 15% and 30% in a flat, and this is also documented and we know exactly why. And we can also how to say it, compare to our colleagues and see the difference and see why we are unique.

With this information, the lifetime, the energy savings, we also now, with the help of our LCA study, that we are climate-positive after 20 years with our solutions. We’re working — this is also documented, but here, we’re working also on certification and environmental declaration. And this will also give us new targets, sustainability targets, how we can improve this even more because we really know what we can affect.

And of course, we also have a reduced maintenance of facade and windows with our solutions.

With this information of how good we are, we will, of course, educate our customer so they realize what an excellent solution they get from Balco. But with this information, we will also help the customers in the selling process to increase the hit rate because they will have the need of the solution. And with this information, we will also go further educating banks of getting longer financing for our customers.

We have succeeded very well in Sweden with 70 years amortization, and it’s a great success. And our focus now is to improve the financing in all other countries that we are in — outside Sweden.

That was the Q4 reporting of Balco. Please, questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) Our first question comes from the line of Kenneth Toll from Carnegie.

——————————————————————————–

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division – Financial Analyst [2]

——————————————————————————–

So you were quite affected by project delays during 2019, especially in the second half. What are — what is the status of that big project that was delayed this year? Have you started working on it? Is everything okay now? And do you see risks for more project delays in 2020?

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [3]

——————————————————————————–

The status now is good, and we can work with all the projects that we have in the plan. And you know we have a budget and prognosis. Also it looks good. But of course, we never know what is waiting for us in Q3 and Q4. But right now it’s an interesting situation where we can use our organization, both in the production, in the operation and so on. And Kenneth, we have been longing for that the whole 2019.

——————————————————————————–

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division – Financial Analyst [4]

——————————————————————————–

Sounds great. Also when we look at the EBIT you say that EBIT was up 40%. And that’s true from a sort of a reported EBIT point of view. But in Q4 last year, you had some costs for the maritime segment, and you had some smaller costs also for the TBO acquisition. So if we try to strip those extra costs for Q4 2018 away, then my calculation says that EBIT was down some 9% year-over-year, adjusted EBIT. Now since sales declined organically some 5%, that might not be strange. But you should also have had some positive effects from the TBO acquisitions that should have contributed to EBIT in Q4 this year but not in Q4 last year. So the EBIT, sort of if you take out all the extras, declined quite a lot. So is it only these project delays that is the reason for the EBIT decline? Or is it — are there other factors?

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [5]

——————————————————————————–

I will start with — not the figures. Michael will take the figures. But I think the major factor last year in Balco AB, because Balco AB was not performing last year, they had a great order stock, an increased order stock, tremendous. But we didn’t have the turnover. We had too little work to do. So the production in Balco, that operation had so little to do. So they moved all kind of resources that they could to TBO to help them with order stock. So they had a great increase of turnover. They had also a very good order intake. I would say that is what happened a little bit for the turnover last year.

So — and then regarding the EBIT, I think Mike can explain that because some of the costs we took under the line in Q4, that was, of course, maritime costs that did not just occurred in the Q4 and also costs before. So I think it’s really difficult to compare. But Mike could try to explain, if you can.

——————————————————————————–

Michael Grindborn, Balco Group AB – CFO, Head of IR & IT [6]

——————————————————————————–

Yes. We took costs for roughly SEK 13 million last year at — onetime adjusted in Q4, but it was cost that occurred also — some of them in the quarter before. And also this year, if we had wanted to, we could have taken some costs as noncomparable costs, but we wanted to show a clear result this year. We could have taken perhaps SEK 4 to SEK 5 million as noncomparable costs.

But then we also have Q2. As Kenneth mentioned, our production was not fully running, also operations. We had extra resources, and we started also to build more sales resources during the last quarter. That will start to contribute in 2020. We’re going down a little bit in sales resources the first half year of 2019 but started to build, and people started to come in, in the last quarter of last year.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [7]

——————————————————————————–

So Michael, that is a good answer because you’re right, that we actually took a decision before the vacation to invest harder in sales — with sales resources in the past. And that cost started in the second half of the year.

——————————————————————————–

Michael Grindborn, Balco Group AB – CFO, Head of IR & IT [8]

——————————————————————————–

Yes. And also operations, we had some new persons coming in just to clear the path (inaudible) which is also 2% of this.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [9]

——————————————————————————–

Yes.

——————————————————————————–

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division – Financial Analyst [10]

——————————————————————————–

Well, that’s good. So you should have much better sort of capacity utilization already from Q1 here when all the large orders are up and running, so to say?

——————————————————————————–

Michael Grindborn, Balco Group AB – CFO, Head of IR & IT [11]

——————————————————————————–

Yes.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [12]

——————————————————————————–

The project is also big, so will have that effect this whole year.

——————————————————————————–

Michael Grindborn, Balco Group AB – CFO, Head of IR & IT [13]

——————————————————————————–

Yes.

——————————————————————————–

Operator [14]

——————————————————————————–

And the next question comes from the line of Julius Rapeli from SEB.

——————————————————————————–

Julius Rapeli, SEB, Research Division – Analyst [15]

——————————————————————————–

I would like to start with the question on the order side in Renovation. I mean in Q4 now we saw slightly weaker orders in Renovation segment, even if you have the TBO in place. So are you focusing now on deliveries of these large projects and not focusing on orders that much? Or is there something else you can elaborate a bit?

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [16]

——————————————————————————–

We can say it like this. Our main focus is always growth in order intake to help our customers. There is no connection between order intake, sales organization and the operation and the production. The operation and production, to have a great capacity during the whole — this year, and we will invest this year in a new factory, where the next year will not affect the cash flow so much this year a little bit more than last year. So we are always, how to say it, 6 months before increasing the capacity. So the sales size is never affected by the operation. And we are, look, confident in the activities with the order intake going forward. Julius, it’s January, February. New year. New year. Only opportunities. No mistakes yet.

——————————————————————————–

Julius Rapeli, SEB, Research Division – Analyst [17]

——————————————————————————–

Okay. Good. Then on this — you mentioned again this financing deals to get longer amortizations. Can you give an update and status on for other countries? And what has the impact been in Sweden thus far?

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [18]

——————————————————————————–

The impact in Sweden is high five for our customers and also for their bank. So that bank is having other meetings with us in different countries where we try to go further. And we give them a chance to deliver. And if we are not happy, we will, of course, go with another bank if they can’t solve all the countries we’re in. And I don’t think they can solve all the countries we’re in, in The Nordic countries, yes, but not outside. But our main target, our main objective here is to increase the financing time outside Sweden. That’s the focus this year, and there is a plan for that and are resources for that. I will not go into detail. So I can’t do that.

——————————————————————————–

Operator [19]

——————————————————————————–

(Operator Instructions) And as there are no further questions, I’ll hand it back to the speakers.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [20]

——————————————————————————–

Excellent. Thank you from me and Michael, and we wish you a really good day.

——————————————————————————–

Michael Grindborn, Balco Group AB – CFO, Head of IR & IT [21]

——————————————————————————–

Yes. Thank you very much.

——————————————————————————–

Kenneth Lundahl, Balco Group AB – President & CEO [22]

——————————————————————————–

Thank you.

——————————————————————————–

Operator [23]

——————————————————————————–

This now concludes our conference call. Thank you all for attending. You may now disconnect lines.