Ladies and gentlemen, welcome to the Bravida Q3 Report 2019. Today, I'm pleased to present CEO, Mattias Johansson, and CFO, Åsa Neving. For the first part of this call, all participants will be in a listen-only mode, and afterwards there'll be a question and answer session. Speakers, please begin.
Thank you very much, and good morning, everyone, and welcome to this presentation of Bravida's Q3 report. This is myself, Mattias Johansson, and CFO, Åsa Neving, who will present and answer your question today. We start immediately on the next slide 3, and the business highlights. Bravida, as you all know, is the premium multi-technical service provider in the Nordics. We are represented in more than 160 locations, with up to 300, close to 300 different branches, and we have more than 55,000 customers. Top five customers represent only 30% of the sales. After Q3, we have an LTM sales at SEK 20.3 billion, LTM EBITA at SEK 1.24 billion, and we are today more than 11,500 FTEs.
This all is the base for the low risk in our business model, as diversified end markets, low customer concentration, and small average contract size. Turning to slide four and the summary of this report. We can summarize that we have a very strong order momentum. Order backlog is up 35% year on year, and the order intake in the quarter is actually up 25%. Very strong figures. We have continued high M&A activity, four acquisitions completed in the Q3 quarter, and approximately SEK 1 billion in acquired sales year to date. Service is growing 10% and is now 47% of the total sales. We have improved margin in Norway to 5.9% due to tender selection and the margin over volume focus, and overall stable margin at 6%.
We have a strong cash flow generation, above 100%, if we look at the old way of measuring it. We have a solid financial position at net debt at 1.8x EBITDA. We are very well positioned for continued profitable growth, both organically and through M&A. On the next slide, I just want to clarify due to the press release from this morning regarding the planned restructuring in Stockholm. I think it's important to mention that it's not Stockholm as whole, that we are struggling with profitability. We have many branches that is profitable, but we have, for quite a long time, have experienced negative earnings, and that has, of course, affected the margin in Sweden as well as the organic growth, of course.
To improve the earnings in Stockholm, parts of Stockholm, a number of measures have been taken. New leadership, as you know, we changed the head of Stockholm earlier this year, and we have also changed branch managers as well. We have been working with restructuring, greater emphasis on project management and control, and we have been training and trying to educate the personnel as well. In Q3, we have closed a couple of unprofitable departments, and I think it's important to mention that closing is of course, always the last option, but in some cases, we really have to do it, but that's something we always try to avoid. Even if we have done all these things, we have not seen any improvement in the business in these areas, in Stockholm as expected.
We still see a good demand in the market, and in order to have a competitive position going forward, we have decided to restructure, and this has resulted in a plan calling for layoffs. The management estimates of the total cost is SEK 60 million, and that is something that will affect the fourth quarter of 2019. On the next slide, the highlights for the quarter. The sales grew 5%. We had negative organic growth, and M&A contributed 7%. We had growth in Sweden, Denmark, and Finland, and service sales growth was 10%, which is, of course, very positive. The order backlog, again, at record high level, 14 and a half billion, up 35% year-on-year, and a continued good momentum in the order take as well.
A very high order intake, +25%. We have a strong ordering pace in Sweden, Denmark, and Finland. EBITDA increased by 3%, and the margin is unchanged at 6%. EBITDA margin is improved in Norway and was unchanged in Denmark, but lower in Sweden and Finland. The margin in Sweden is lower due to the project write-downs in region Stockholm, and Finland has a lower margin due to lower volume in some branches and some write-downs in project as well. The cash flow is, depending on the season, very good, SEK 65 million, and the cash conversion is 104%. Working capital, -SEK 640 million, and the net debt at -SEK 2.7 billion, 1.8x adjusted EBITDA.
We have done four acquisitions in the quarter, so far 16. Actually, after the Q3, we have done another one. In total, 17 acquisitions so far in 2019, we still see a pipeline, we can, we think that we can continue to do acquisitions going forward as well. On slide six, I will guide you through our view on the market. Overall, we still see a stable market and a good demand for our services. In Sweden, Norway, and Denmark, we still have a good market and a stable market in Finland. In Sweden, the main drivers are public investment in buildings and infrastructure. In Norway, the market drivers are mainly public investment and energy efficiency projects. In Denmark, the construction of residential healthcare and education buildings are driving the volumes.
In Finland, a stable market that actually is driven by refurbishment and public investment at good level. Continued strong market, and on the next slide, you will see a slide regarding sales and the EBITDA development. To start with, sales development, as I mentioned before, we expect the period with slightly lower organic growth, depending on things I mentioned before. We have been very thorough regarding what kind of business we have been taking in Norway, in the Oras acquisition, and we are also seeing that that is actually affecting the business in a positive way now. The margin in Norway is up, and we can see that the Oras acquisition is contributing in a positive way in the third quarter this year.
We have been very selective regarding projects and customers in Finland and Stockholm as well. This together with that some of the big projects are in slightly less busy phases, we have impacted the organic growth as well. We have a really strong position going forward regarding the order backlog and the order intake we had in the quarter, so positive in that perspective. Sales growth 5%, 5%-7% from M&A, negative organic growth at 3%, but we have sales growth in both Sweden, Denmark, and Finland, and organic growth in Denmark. EBITDA plus 3% and margin unchanged 6% and improvement of the margin in Norway, very much depending on better performance of the Oras acquisition.
Slightly lower in Sweden due to the challenges we already have mentioned, mainly in Stockholm region. In Finland, I have mentioned the reasons as well. Overall, growing business, and I think it's quite strong evidence that we can actually keep the margin at the same level as last year, even if we have taken some costs regarding the challenges I already have mentioned as well. The backlog is shown on the next slide, that means slide eight. We had a very strong order intake in the quarter, up 25%, as I mentioned a couple of times, and actually 21% year to date. The order backlog increased with SEK 600 million in the quarter, and we had an increased order backlog year-on-year in Sweden, Denmark, and Finland.
In Norway, it's a different type of projects we are actually working with in now, because there are some kind of partnering projects where they are in phase one, where the design and cost is calculated, and many of these orders will turn into production and coming to the order backlog in phase two. I would say we look at the quite positive to the Norwegian position as well regarding the order backlog. One large order in Denmark, a multi-technical installation in a public building. Very interesting to see, because I think we are the only player in the market that actually can act like a one-stop shop, like we did in this case.
We have signed a contract regarding all installations in the building, and that's not only a ventilation, plumbing, and electrician, it's also sprinkler, and building automation. By the acquisition we did last week in Denmark, we are also number one in the cooling industry in Denmark. We are really strengthening our position in Denmark to be a one-stop shop for the customers going forward. On slide 9, on the next slide, we will talk about the acquisitions. Four acquisitions done in Q3, adding SEK 265 million in sales. Actually, so far this year has adding SEK 960 million twice sales.
Five acquisitions completed in Denmark, 10 acquisitions completed in Sweden, and one acquisition completed in Finland. Norway is not on this list, but they have been working with the Oras acquisition, as you know, and when we can see that Oras is actually turning into contribute the phase that where they are contributing to the in a positive way to the profit and loss, we also think that Norway can start to continue their acquisition journey as well. We still see a strong pipeline to attractive multiples. Now we will talk about the financial performance for the different countries. Now over to you, Åsa.
Thank you, Mattias. I will then guide you through the financials in the countries, and I will start with Sweden on page 11. As you can see, if you start with the top line, we can see that our sales has been growing with 6%. This is all due to acquisitions in Q3. We have had a negative organic growth of minus 1% in Q3 and also year-to-date. This is due to the fact that we have a lower growth in the Stockholm area. As Mattias said, it is because we are very, very careful, and we're not taking on projects in this Stockholm business where we are having problems. We have reduced volume there, and that is leading to a lower growth in total.
It's also leading to a decreased margin. We had a margin on 6.3% in the quarter, compared to 6.7% last year. This is also then due to the problems that we have in Stockholm. The Stockholm business has not contributed at all in the quarter. It had a 0% margin. That has then had the effect, impact on the total margin of 6.3%. All in all, we still believe that it is a good market in Sweden. We have a strong order intake, +23% year-on-year, and a very strong order backlog on +61% year-on-year. We also have had a good growth in service of 8% in the quarter.
Moving on to the next slide, in Norway, we can see that we had a declined sales by -5%, and that is also a decline organic growth of 5%. This is due to a lower, to a, yeah, that we are being very selective when we're taking on projects in the Oras business. We have been careful with the tender selections, and that this has led to a lower growth, and but it has also led to a improved margin. The EBITDA margin has improved to 5.9% compared to 5.6%. Since we are, we believe that margin goes before volume, this is very good.
We can also see when we look at the, only at the Oras part, that the margin has improved a lot in that area. If you look at the order intake and order backlog, we have a negative order intake, 1%, and a negative order backlog of -9%. This is also due to that we are being very restricted on taking on new projects in the Oras business. It is, as Mattias just said, we believe that we have a positive future in Norway, and that there are a lot of projects coming in now from this partnering contract, and they are going into the next stage. Moving on to Denmark, page 13. This is where we have the highest growth. We have a sales growth of +20%.
A lot comes from M&A, but we also have an organic growth of 3% in the quarter. This is only an increase in service, which is positive. EBITDA also increased. We had a stable margin at 5.6%, at the same level as last year, a very high order intake and a very high order backlog. We have gotten one large project in the order intake this quarter, as Mattias said, SEK 350 million. Otherwise, it's this, you know, normal small and medium-sized projects coming in. Looking at Finland on page 14, we have a sales increase in Finland in the quarter of 4%. The organic growth was negative. It's the same here that we have been careful on tender selection in the quarter.
In some parts of Finland, we still have been struggling with the profitability and volume in Finland for some time, and this is due to the first acquisition that we did in Finland, that we still are struggling to improve. Where we have the lowest volume and the lowest profitability is in the Tampere area. It is improving. It's not going fast enough, but we are slowly getting there. Yeah, the margin for the quarter was 1.8%, so... Sorry, 0.5%, lower than last year. Moving on to the financial position on page five, we have a solid financial position, very strong. We have a net debt on SEK 2.7 billion, compared to last year was SEK 2.1 billion.
In the net debt this year, also the financial leasing is included with SEK 922 million. This leads to a net debt EBITDA ratio of 1.8, compared to last year's 1.7. If we would exclude the financial leasing, it would be 1.4. The comparable figures is 1.4 to 1.7. A strong cash conversion of 104% compared to 98 last year. As Mattias said, we have gone back to the old calculation on cash conversion, where we're not including IFRS 16, because that's a bit misleading. We have also concluded a new financing. It's in place from October 14th. It's a financing package of SEK 2.5 billion with 3 banks.
We are right now using or drawing SEK 600 million on that facility. We have a average interest rate on this is five plus 19 basis points. Maturity in October to 2022, and then it's including an option one plus one year. We are very happy to get that in place. I think let's go to the next page of the financial target, just to repeat our financial targets for you. We have now we're on page 16. We have a sales target that we should increase the sales growth with more than 10%. It should be 5% organic growth and 5%-7% from acquisitions yearly. This will, of course, vary from year to another, but over a business cycle, we should be there.
We have a target of more than 7%. It is a margin. We are not there yet. We don't believe that this is impossible, and we are getting there, hopefully not too far away from now. We have a cash conversion target that we should be above 100%, and we have a target of paying out dividend of at least 50% of the net profit. We also have a target of a net debt EBITDA ratio of around 2.5, which we are fulfilling. I think that was it, Mattias. You want to continue?
Yeah, thank you. That takes us to the, my favorite slide, 17. I think this really shows the best side of the business model we have in Bravida. We have a low risk, we can generate a lot of cash. I think we can continue to grow this business both organically and through M&A. The cash we are generating actually allows us to do acquisitions at the same time as we take down the debt and also can pay out dividend to the shareholders. This is, yeah, shows the history, and we think that we can continue this journey for a while as well, supported by the business model we're having and the demand in the market.
To the last slide, I just want to summarize once again. We have a very stable performance. Sales increase is 5%, driven mainly by acquisitions. The installation order backlog at record level, SEK 14.5 billion, and continued good business momentum for service. That actually grew 10% in the quarter. That will altogether support the growth the coming quarters as well. The order intake, up 25% in the quarter, is very strong. The margin, stable at 6%. The margin is improved in Norway. M&A execution on track with a healthy pipeline. 16 acquisitions completed so far in 2019 until last of September, adding SEK 950 million in sales.
We have a net debt at 1.8x EBITDA, and a strong operating cash flow, on SEK 1.4 billion. Cash conversion above the financial target of 104%. As you can see, we're continued with acquisitions in the quarter as well. Overall, a stable quarter. As I said to you before, we are in a period with slightly lower organic growth, but we are quite confident, I'm quite confident that this will turn, not the coming next coming months, but, after that, we will see a period of growth again, supported by the strong order backlog we're having. With that, thank you very much, and I think we can open up for questions. Let's see what happens. Do we have any questions?
From Stefan Andersson. Please go ahead, from SEB. Your line is now open.
Thank you. A few questions from me then. If we start with Norway, and Oras, we see margins are improving, now. Where are we when it comes to, problem projects, running at low margins? Are we out of that, or is there more easy, margin improvements to come? That's the first question. Secondly, you know, if you exclude that portion of the margin ex-expansion, how quickly do you think, Norway could come back, so to speak, or us could catch up to the other Norwegian business?
Thank you. First of all, I think we see that we have a much better portfolio project in the Oras part in Norway. It's definitely a clear difference. How fast it will go, it's of course hard to estimate. Without mentioning any specific margins, we can see in the quarter, in the Q3 quarter, that the margin is trending upwards in the Oras business, in a positive or even in a quite positive way. Regarding the project you are mentioning, those are finalized. There could be a small risk that there will be some kind of disputes after the project, but that's nothing we know about today. The project is finalized.
The last moment of assembly has been done, so to say. It's the timing is hard to answer about, but it's definitely trending in a positive way.
Yeah. You did have some projects running in Q3, or?
Yeah, of course, we have projects in Oras running in Q3, definitely. That's
I mean, projects with, I mean, these problem projects, did they affect Q3 or is Q3 clean of that?
No, I think that it's not clean, very close to clean.
Okay
From that. Yeah.
Yeah. On Stockholm, just, so I understand this correctly, I understood it, that you had some issues with loss-making in some units, electrician units, maybe, and that you were to do restructuring. Now, you said that you already closed a few units. I'm a little bit confused here. Maybe you could give me a little bit more information on what you're doing.
Yeah. First of all, the model of the business in Bravida is that we are hiring new people, and we are actually having layoffs where the market is shifting somewhere. That's the way how we treat the demand in the market. You can say today we are hiring more than we actually. That's good, of course, that we have to actually get rid of. In Stockholm, we have had experience quite long time of low profitability. And already in Q3, after the summer, we closed a couple of branches because we have actually tried to do the same, shifted the branch managers, more project control, tried to educate, train people, and the last option is always actually to close down branches. That's correct.
We closed some branches in Q3 as well, and the cost for doing that is already in the P&L. That hasn't affected the Stockholm business enough in a positive way. That makes us take the decision to continue this actually is a question of call for layoffs in more branching, actually. Yeah, I don't want to say more about that because we're discussing with the unions, is going on right now. We closed some branches in Q3, that could happen in Q4 as well. The estimated cost for this, all together with the different types of costs we're having in a process like that, is estimated to SEK 60 million.
Yes. If I understand, just to go, the SEK 60 million, it's not a broad-based Stockholm restructuring, it's more it's a few branches, that you have defined, that it's relating to?
Yeah. We have branches. You can say we have a mix in Stockholm. We have today two regions regarding electrical. One of them is profitable. We have a plumbing region who is profitable, we have other businesses that are profitable as well. This electrical branches that you are actually asking about is not profitable, and we actually need to do something more about that. Unfortunately, we have to close down one branch and do some other things in a couple of more branches. The cost-
Oh, sorry.
The cost that we estimate to SEK 60 million is, of course, different types of costs. We have to finalize some projects, We have some premises we actually have to pay for, et cetera, et cetera. That's an estimate.
Yep. Okay, good. I don't know if you're going to give me this, but if we, the margin drop, I guess you're given two explanations. One would be that the difference is project write-downs, and then the other one, I mean, I don't say it's different explanations, it's just the same. It's two different ways to say the same thing. Project write-downs was one comment made, and then you said that the Stockholm, I can't remember now in the presentation here, but, that you had some branches in Stockholm creating the difference.
Focusing on the projects there, project write-downs, is it fair to say that if you did not write down projects, would you be on a similar level of margin in Sweden, or?
Yeah, I think you can say that. I think you can say that. I think I just want to add something to the Stockholm. I think what we have actually seen is that we haven't been competitive enough on the market as it is today. We still think we have a strong demand in the market, but if we can't make money with certain circumstances, in certain teams in the market we're in today, then we will face even bigger problems in the future. We still see strong demand, but if we can't make money in this market today, then of course, there are something that is not good enough.
Yeah. Okay, moving on to M&A. If you look at the pipeline, you touched on it, that Norway might be back on the agenda. You know, where do you see the largest potential? I mean, we never know what you close, of course, but if you look at the pipeline, on the four regions, which countries do you think would be on top next time we discuss or a year from now?
Thank you for that. Of course, it's not very easy to know which one we close. If you look at it from another perspective, I think that we had the opportunity to continue to do acquisitions in four countries we are in. From the perspective that Denmark has been quite busy this year, as well as Norway had been quite low in the M&A market because of the big acquisitions they did, I think we can expect maybe the same from Denmark for a while. The opportunity is there in all countries. I think we will continue to do in Sweden, some in Finland maybe, and Norway, and maybe few in Denmark, but not because we can't do it, more because we want to take care of the acquisitions we have done this year.
Yeah. Then on Finland, a little bit struggling for a long time with that unit. If you look at the underlying margin there, are you willing to mention anything about that? There were some big write-downs again in Finland, what are the?
Yeah, I think you can say Finland has improved to some extent because now we are. The challenges we're having is isolated to the Tampere area today. The acquisitions we have done contributes in a okay way to the P&L in Finland, but we have isolated the problems to Tampere. That's actually coming from the very first acquisition we did four-five years ago, and that's something we actually is, yeah, shifting out personnel culture that has taken some time. Except for Tampere, we are definitely moving in the right direction in Finland, but it's not seen yet.
The reason is, of course, that last year you had a big write-down in Q2. Then that was probably made too large, too big, then you released that. You had a 6% and 5.5% margin in Q4. Now we see some write-downs again. I'm just, you know, trying to understand if we should see a release in the end.
The dynamic in Finland is slightly different because that's quite small division. Write-downs to some extent is part of our risk model, and we normally price it in a good way. When you have a write-down in that small division, that's visible immediately. I think we still need to grow the business a bit in Finland to get stable enough so we don't get that impact in the margin from that type of happenings.
Yes, the first half is more relevant than Q3 and Q4 last year than anything else, I guess, then. The performance you had in the first half of 2019, I guess, is more.
Yeah, I would say like this: we are not satisfied with the performance in Finland for the moment, but we think we have an isolate the challenge we need to take care of.
Yeah. Yeah. Okay, final question for me. Just remind me on the old financing that you I guess partly are replacing with the new financing. What was the interest cost on that?
It was a little bit less. It was SEK 2.3 billion, and the interest rates on this debt ratio where we are now, was 1.25%. STIBOR plus 1.25%.
Okay, good. Thanks. Thank you.
Thanks.
Thank you. As another reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. We have a question from line from Karl-Johan Bonnevier from DNB Markets. Please go ahead. Your line is now open.
Yes, good morning. Just coming back to the reservation you're doing in Q4 to start with, is that including project reservations and drive, particular write-downs, or is it just for, say, restructuring the operation as such, looking at manpower and so on?
Good morning, and hi. It's a combination because we have some projects that we have to finalize in those launches, and we really don't know how that will be finalized and what way. That's just an estimation, combination of layoffs, projects, premises, cost, et cetera.
Looking at the SEK 60 million, you think that is, sufficient to do those finalization as well, so?
Yeah, we think so. I think that's an investment we are doing because, again, if you're not competitive in this market, then, of course, there are something that is not really helping.
Excellent. Just to give me a little slightly better feel as well on the Stockholm operation, these three units you have, you are now highlighting for closing. How much of the Stockholm operation did they represent? Just to get a feel for, say, how the remaining operation or the ones that you're now focusing on is really contributing.
This part of the Stockholm business is very small because we haven't taken on new projects in this for some time. It's actually only a handful of projects left in this area, and they are at the end of the production phase, so it's not a lot of production. It has been a low volume in the quarter.
Good. When I look at the short-term outlook for, say, organic growth, staying at a modest level, I understand that this is driving you into to 2020 to some extent. Mattias, if you just could give me a little better feel for it. Obviously, your service operation is growing very nicely. You have a nice order back, or is this just a timing effect of that order backlog really starting to kick in on sales again?
That's not very easy to actually answer, because w e see that yeah, first, the order backlog is, as you understand, really strong. The timing and the character of the project is slightly different because we are working today slightly more on the partnering type of project than we did a year ago, which actually means that the designing phase is slightly longer, and we are entering into the project slightly later. I will guess that we will have the organic growth kicking in, as you said. My estimation is that sometimes in Q1, that will, I don't know if I should say definitely happen, but let they happen. That's my estimation.
Perfect. Then just looking at Q4, obviously with the modest organic outlook, and you say you're working more towards partnering projects, does that have any implication for these kind of end of projects, finalization effects that you normally see in Q4?
No, I think-
Looking at profitability timing, so.
Yeah. I think that's more about the starting phase, that we haven't started the project. I think that we try always to be a bit conservative in the forecast regarding the projects. I would say that shouldn't be a very big difference, this Q4 compared to last Q4.
Excellent. Thank you very much.
Thank you.
Our next question comes from Lukas Fuhrmann from Deutsche Bank. Please go ahead. Your line is now open.
Morning. I have just one question. When you speak about project selection, can you explain a bit more, kind of the issues you have? Is it more competition or is it coming from client, maybe putting a bit more pressure on prices if maybe the demand environment is not as strong? What is exactly causing that? Thank you.
Is that regarding the Stockholm you actually is asking about?
Yeah, yeah. When you're saying in the press release that project selection is impacting organic growth, I think.
No, I would say that it's not that. This is not related to the market at all. This is not company specific, I would say. It's more branch specific. It's our own capability to produce in the environment. We are not productive enough. We can't handle the contract good enough. We are not planning the project good enough. Because we can see that we have two regions of electrician in Stockholm. One of them is profitable, and they are acting on the same market. That's only connected to the teams in the branches, both blue collars, project management, branch manager, all together, how efficient and productive they are and their possibility to actually make money in the same market as the other one is making money.
I wouldn't say that the competitive landscape has changed. It's not tougher today. This is a strong market, so this is not related to external factors. This is just our own poor performance.
Perfect. Thank you.
Thank you.
As there appear to be no further questions, I'll return the conference to you.
Okay. Thank you very much. good questions, and we wish you a great day, all of you. Thank you very much.