Earnings Call: Q3 2020

Nov 12, 2020

Thank you. Welcome to the Q3 reporting of Balco. We'll start with Page 2. Balco helps customers which have problem with the existing balconies. And our solution is to take away the old balcony, put up a bigger, in most cases, glazed balcony. We are focusing mainly on the renovation segment. We have a unique selling process helping the customer through the whole process. Page 3. Q3, strong financial position, but quarter affected by COVID-nineteen. We had an improved EBIT margin, but negative COVID-nineteen impact. Net sales was SEK 258,000,000 compared to SEK 292,000,000 last year, operating profit SEK 29,000,000 compared to SEK 31,000,000. Operating margin improved to 11.2% compared to 10.7% last year. COVID-nineteen. The second wave of COVID-nineteen with increased spread of infection in most countries has transformed Balco's order intake in the Q3. We have a lot of activities. We're working with the customers and we can do most of the work, but people are cautious about the need in groups. And in the last process, then we had the meeting physically, where people meet and then they both. Here, we are working with other solutions, though, and we have some digital voting that happens. And we are also now evaluating quick tests, COVID-nineteen quick tests. And I think we have chosen one supplier now. So we will actually offer all our customers quick tests. And the people who have corona, they can give power of autonomy in the voting process. So we are working with different solutions so that the customer really can have the routing because we have a really good, what we say, piling up of possible orders, but we have to solve the last part of the process and help the customer then. Customers have moved the final vote in our products in Q3 for value of more than SEK 250 1,000,000. Possible orders are piling up in Q4 and Q1 2021. But the weak order intake since March will negatively affect sales and earnings in the coming quarters, mainly Q4 and later in Q1. Then a strong financial position. Operating cash flow of €35,000,000 in the quarter and operating cash conversion of 91% in the quarter. Equity assets rate is 49%. The bulk no dividend in 2020 due to acquisition opportunities. Banco evaluates various acquisition opportunities. And in the light of this, the Board of Directors confirmed its previous decision not to pay out dividend in 2020. Neikhen, next page. Yes. And some more financial highlights for from the Q3. We had strong cash flow and improved our operating margin. Net sales, as Kenneth mentioned, amounted to NOK 258,000,000 down from NOK 292,000,000 last year. The renovation segment accounted for 94% of the sales and Renewables segment, just 6%. Order and take amounted to SEK 142,000,000 down from SEK 199 NOK. The other renovation segment accounted for 87% of order intake in the quarter. Our order backlog at end of September was SEK1.3 billion, down from SEK1.56 billion last year. Operating profit accounted amounted to SEK29 million, down from SEK31 million last year. But our operating profit margin improved to 11.2% from 10.7% last year. Cash flow was strong and improved to €35,000,000 minus €1,000,000 last year, mainly due to reduced working capital. And our operating cash conversion was 91% in the quarter, and cash and cash equivalents at the quarter end was SEK 181 1,000,000. Turn to the next page. Just a summary of the Q3. Order intake down 29% to 141,000,000. Order backlog reduced 17% to €1,300,000,000 Revenue down 12% to €258,000,000 and operating profit down 8% to CHF 29,000,000 with an improved operating profit margin of 11.2%. Turn to the next page and let's get to the development of our business segment and start with the renovation segment. Also here, order intake was down 24%, down to 124,000,000. Order backlog reduced by 23% to DKK1.1 billion. Revenue reduced 5% to CHF242 1,000,000 and operating profit was reduced by 6% to CHF29 1,000,000. But we have a stable operating profit margin of about 12% in the quarter. And if we turn to the next page and look at the newbuild segment, here the order intake was very low, just EUR 18,000,000 and also revenue was reduced quite a lot by 57%, down to €60,000,000 Revenue was a lot effective of the maritime business, which has slowed down a lot. They tried to they have not canceled any orders, but they have postponed the fulfillment of their running projects. So they have been postponed in time. So still the order backlog is digital last year, dollars 205,000,000, 45% more than we had last year. And operating profit was affected by the low sales, just €1,000,000 profit in this quarter, but stable operating profit margin of about 4%. Turn to the next page and look at the 9 month period. And in the 1st 9 months, we have had net sales growth and improved profitability and strong cash flow. Net sales has increased by 5% in the 9 months period to SEK 931,000,000. Renovation segment has accounted for 91% of the sales and New Deal segment, 69%. Order intake has amounted to NOK 703,000,000. Werber Renovation segment has accounted for 86% of the order intake. Our operating profit has improved by 10% up to SEK113 1,000,000 and operating profit margin has improved to 11 12.1% compared to CHF11.6 percent last year. Operating cash flow has improved to €125,000,000 compared to 30 €4,000,000 last year, and it's booked due to better EBITDA and also better development of our working capital. The operating cash conversion in the 9 month period was 89%. And if we look at the last 12 months, we have had 119% operating cash conversion, so really strong cash flow. Turning to the next page and look at summary of the 1st 9 months order intake. It has been down by 30% strongly affected by the COVID-nineteen. So it's down to NOK703 1,000,000. Revenue has increased by 5% to CHF 931,000,000. Operating profit increased by 10% to less €113,000,000 with an improved operating profit margin as well. And our earnings per share has increased by 7% and is now SEK0.382 per share. If we turn to the next page and look at the development for the 2 business segments. In the 1st 9 months, our renovation segment, we have seen an improved revenue by 11% up to €850,000,000 in place and also an improved operating profit by 10% to NOK 109,000,000. With the operating profit margin of close to 13%. The newbuild segment has been affected a lot mostly by the maritime segment slowing down. So we have reduced revenue by 30 3% to €82,000,000 and also reduced operating profit by 27%, down to €6,000,000 But we have improved our operating profit margin, so it's now above 7% for that segment. Turning to the next page and let's get our balance sheet and our strong financial position. The equity to asset ratio is currently at 49% compared to 45% last year for the same period, and it's driven by the increased profits, low investment and of course also no dividend this year is affecting this. Our net debt to EBITDA is down at 0.4. And if we take away also with leasing debt, it's just 0.1. So we have really low debt for the moment. Our net profit for the period, profit after tax has increased by 8% to SEK83 1,000,000 and it corresponds to earnings per share of SEK3.82 per share. And we are really prepared for acquisitions. We have an acquisition headroom. We have the banking agreement until September 2022. We had an acquisition credit of €100,000,000 and we had cash and cash equivalents at quarter end of SEK 181,000,000. And then we have also amortization to issue shares to finance acquisitions. Turning to the next page and look at our financial goals. We have a group target of 10% per year. Currently, the last 12 months, we are down now at 6%, affected by the COVID-nineteen in the 3rd quarter. Profitability, we have agreed to reach 13% of profit margin. And looking at the last 12 months, we are now up to 11.9%. When it comes to debt, our net debt to EBITDA should not exceed 2 point times and currently are just at 0.4. And as I mentioned before, without the leasing debt, just 0.1. And our dividend policy is that we should distribute at least 50% of the profit after tax to our shareholders, but due to some uncertainty of the COVID-nineteen, but mostly affected by all the possibilities we see with some acquisition targets. We have decided not to have any dividend for this year. Now we turn to next page and summarize by Kennen. Excellent, Mikael. Page 13, our sustainability initiatives. We know that our lifetime is of our glazed balcony solution is more than 90 years. We know that the lifetime of our Balcosite balconies are that lasts for more than 70 years. And now that our energy savings of our glazed balcony solution is between 15% to 30% depending on products and conditions. We know that our solutions of balcony gas solutions are climate positive between 30 to 50 years depending on the solution. Here, the new goals to reduce this within another 5 to 10 year, and this is already in action. And I will say that we will reach this goal in the beginning of 2021. We are increasing our sustainability focus. We know that we have climate positive solutions, but we're also working with a sustainability focus in the whole group. And our goal here is to be bring rate in sustainability in the beginning of next year. And this is one of our top priority projects we're going to do in at Barkadur. Okay. That was the end of the presentation. Please questions, and we will try to answer. Thank you. Our first question comes from the line of Kenneth Tull from Carnegie. Please go ahead. Yes. Thank you. So I'm a little bit worried about the order intake. And you say that, well, there are postponements due to COVID and so on. But now the COVID is spreading faster or quite fast at least and this situation might last until the summer or something like this. So are you preparing yourself for a period now, maybe a year ahead of lower sales volumes and so on? Are you trimming your costs? Or how are you meeting this period? We're still optimistic about the possible orders coming in. So we don't because it's piling up and we are we have been order intake, and it looks not as bad yet. And we have more and more solution of digital voting solutions. Now we will offer all our customers which want a quick test, COVID-nineteen, takes 50 minutes to get an answer. And at a low cost. At a low very low cost. And after that, the people have the corona. They can make, how do you say, what's called it? Power of of attorney building because the customer really want. They want to have solution. They want to solve that. And there are difficulties. So we are not in that stage. But of course, as you say, Kennen, you never know if the corona would be really increasing and gets even more dangerous, we never know what kind of decision the government takes. But we don't feel that now I would say we're still pretty optimistic. The orders are piling up. So even if half of the orders were postponed, there are still orders coming in. So it's not like dead. We are more trying to find solutions for our customers so we can have the meetings. Of course, we are prepared. EPC should not patent, we are prepared. And the answer to your question, we are not yet in any position that we cut costs in a no, we don't see that need yet. And so if it would be needed, we can do that instead. Yes. I guess and the beautiful thing, just with the balcony. Kenneth, a question to you. If you look at the increased sales cost this year, the sales cost is still increasing. So it's not that we are not yet changing anything in our strategy. I would say opposite in our strategy will be even more aggressive. So we have no plans to reduce our sales force. We have increased the sales cost this year with I don't know how much is it. Yes, €15,000,000 €15,000,000 So that's not we increased our sales COVID EUR 50,000,000 in the corona crisis. So we are Kenneth, we're not there yet, still optimistic. That's good. And the beautiful thing with balconies is also that if you don't renovate them today, they're still in need of renovation. So it could just be a soft spot and then the demand is still out there once we're through it. Yes. We are working our sales force are working, and there is a mutual need both from Balco and both from the customer to solve this. But of course, in the process, you have 3 meetings where you meet a lot of people. You have a lot of meetings. But you have a meeting in the mini fest, you have a meeting in the tent show, and you have a meeting in the voting process. And there are different nice solutions. But of course, when a government in Germany says that you're not allowed to meet more than 7 people, then it affects so it gets more difficult. So it has it's most difficult in Germany and Denmark. Okay. Thank you very much. Kenneth, no cost cuts yet. Okay. That's clear. Thank you. And the next question comes from the line of Julius Rapley from SEB. Please go ahead. Yes, good morning. Thanks for the presentation. Maybe one question relating to order intake and the outlook for Q4. Quite harsh from the pandemic. So you quite harsh from the pandemic. So you briefly talked about it already, but what's your outlook for Q4? And what should we expect regarding orders here? Regarding orders, it's piling up in Q4 and Q1. So we are optimistic, but you never know what decision will be taken tomorrow with different government. That is the case. And what will affect us in Q4 and Q1, that's the turnover, because of the low order intake the last 6 months. But there are a lot of products we are working with. And if you ask me today, we are optimistic regarding order intake in Q4 and Q1. It's also piling up a lot in Q1. But what will happen tomorrow? And yesterday, Julius, we were not allowed to go and drink alcohol after 10 in Sweden. So what will happen tomorrow? I see. Makes sense if it's really unclear for everyone what comes to the near term. But thinking about the looking at the declines in orders, you had around 30% year over year declines in Q2 and Q3, this expectations you have in going into Q4? Or do you think it will improve? Julius, in Q3, we believe that we would build our order stock. That is what we believed. So if I say to you that we believe that we will build our order stock in Q4, yes, that we have been That's what we believe today. That's what we believe today. But we are not writing that because last time we said it, it didn't happen. But if you ask us today, yes, we believe that we will be in order stock in Q4 and a lot in Q1, but we didn't write that anywhere. Okay. Perfect. Then regarding maybe delivery side, Q2, you had quite decent deliveries despite the pandemic. Has the impact been harder now in Q3 and Q4 on your operations? Turnover wise, you will have a big effect in Q4 and Q1. It has affected some in Q3. Okay. Okay. Perfect. Thank you. Maybe one question regarding M and A. You mentioned it again in the presentation. Any update on that front? We believe next year will be the best year ever for Barco. Yes. That was the answer to that question. Okay, clear. Thank you very much. We have one more question from the line of Will Sall from Canaccord. Please go ahead. Hi, there, Kenneth. I was just wondering, in terms of building permits, has what's been the effect in Q3? I mean, has there been more delays? Or are they still functioning in terms of issuing permits at a normal rate? No, I would say it's a normal rate. But we have actually, due to the COVID-nineteen, been able to start with both building commissions and some of the work before they have had what we call the building. So that's one of the few positive effects of COVID-nineteen that we are allowed to work with projects even before we have the orders. Every time before, we have not been able we have not been working with building commissions before we have had a voting process. So this is new and this is something we will keep also after the COVID is over because it is possible. Yes. And it has the turnover. You can start with the products earlier. When you get an order, you can start with the products earlier. Yes. Okay. And this $250,000,000 stack of projects that have the delayed voting, are you expecting the votes to be made in Q4 for those? Q4 and Q1. Okay, all right. So those projects, once they've been voted, I'm assuming they're approved. I'm assuming you've got the building permits or you're in the process of getting the Not everyone, but some of them, David, you can actually start very quick. Yes. Okay. And so then you'll recognize, what, 50%, 60% of the revenue because you've already got the permits or pretty much got the permits in hand? You can it will be quicker than it has been the last 2 years. If we look at average the last 2 years, it's the order backlog has taken 1.2 year to be revenue. And perhaps we can reduce that to 1.1 or even 1 due to this. Okay. Thanks. And as there are no further questions, I'll hand it back to the speakers for closing remarks. [SPEAKER JEAN FRANCOIS VAN BOXMEER:] Excellent. Thank you, everyone, and we wish you a safe day. Thank you.