Earnings Call: Q3 2020

Oct 20, 2020

Okay. Good morning, everyone. Maria and my self here, we will try to guide you through the Q3 report and tell you something what happened during the quarter and also small outcome what we believe over the rest period of the year. So if we start and go to Slide number 3, we could see how we want to do it. 1st, I will take you through some highlights in the quarter, not so many highlights, but something has happened. And also give you some idea about the market trends. And then Maria will take you through the financials. And after the financials, we will have some Q and A. We expect around 20 minutes for this presentation. We proceed to Slide number 4, and this is at the glance. You see a year to date on a rolling 12 months. As you can see, it's slightly below last year. And the reason is you know the main reason for this, that is COVID-nineteen. That was a minor impact this quarter, not at all as last quarter. And we will come through we will discuss this later. Slide number 5, we see the key highlights this year, and it's not so many, but I think what I would point out that we have e commerce is still growing very fast for us. It's the same level as last quarter, but it's much more than last year. And we think here it's a combination of a COVID-nineteen impact and also that we, of course, launched more and more countries on this. And we strongly believe that the target we have for 2023, 12%, that we will exceed that we will reach that target before 20 23 on e commerce sales. Also, when we talk about our computer, we have transferred now in the APAC region. All companies in the APAC has transferred to a new cloud based ERP system. And it's fantastic. It has been very, very easy to do comparing to change ERP systems from upgrade from one system to another system. So we more and less have used the same system we had in New Zealand. So we have and this is the idea here is also to start to install this kind of installations in Europe and bit by bit go more and more common E and P system in the whole world. Unfortunately, also we had a cyber attack in France in September that prevented us from invoicing in 1 month in 1 week. And it also took some time to repair everything today. It's up and running again. This cyber attack did not destroy any backups, but it was impossible to invoice and run the business for 1 week. And the impact here was around CHF 25,000,000 in sales. What I think I would like to mention as well is our main major shareholder carrier has divested 9,200,000 shares in placing in the market in September. We think when displacing took place, it was very easy to place it. And the interest to buy BayRev shares was very high. That made us very confident and happy that so many was interested to buy BayRef shares. So as you can see, the Kari holding today is less than 30% of the equity and around 26% of the building. If we move on to Slide 6, you could see this is how Q3 looked like. And here is these numbers, if you compare with the rolling trend, we think that Europe corresponds to approximately 70% Asia Pacific, maybe 21% or 22% and Asia Africa, 8% in rolling 12%. Okay. Slide number 7. I will remind you a little about these megatrends. We have been we have gone through a very tough quarter in Q2, and we have seen a nice recovery in Q3. We will tell you much more about Q3 later on. But we have some megatrends that gives us long term tailwind. And if you look at this Slide 7, I want to mention in particular right now, what you see on the right, the phase out scheme on Refrigerant, you see that we are coming to a new breakpoint. 1st January 2021, this will go down from allowed 65% allowed volume 65% of 2015 year's volume will go down to 45%. So that is in practice around 28% allowed volume. You all remember what happened in 2018. We don't expect the same impact on the prices on refrigerants, but I will come back to talk about the refrigerants later on. But we hope or we that maybe also estimate that this price decrease that we have had for 9 quarters will smoothly pay it out. I will talk a little more about this later on. Digitalization is also, as I mentioned before, it's increasing a lot. And if you look at the growing middle class and the organization, I think that is one of the explanation for the nice organic growth we have on the air condition HVAC business that is growing close to 9% organic growth in the quarter. And then we have more and more efforts on our environment and ESG solutions, and we put a lot of resources to improve and really try to come up with new green products. And this is mainly in our OEM business. If we look at Slide number 9, this is a slide we never disclosed before, but we have had this question so many times, so I will try to take you through what we are showing here. You see the addressable market for refrigeration. This is an estimation for current year 2020. And you look at on the left side, you could see how much is food retail and how much is oriental business. Business. The reason why we want to show this is that we think that the business who maybe suffer most from COVID-nineteen impact is, of course, the Horika business. And that is on our addressable market, it's about 1 third of the total market in 2020. And if you look I will also remind you about this is 60% of our business we have, this is refrigeration business. It's Refrigeration including the OEM business. But if you look on the right side here in the source of demand, you can see also that maintenance and repairs is still 20, a big part. System upgrades and new installations is not so big and replacement and retrofits not so big. And when you look at this, what's going on with the phase out, our estimation is that the green if you look on the right side, the green and the gray field will grow bigger the coming years due to the gas regulation. All right. If we try to do our next slide, Slide 9, to give you a guideline also on the addressable market for HVAC, how it looks, business numbers we have from last year. And if you look here, on the left side, you can see that single split, this is the small units you can have in your residential living mainly or in a small shop with 1 normally 1 outdoor unit or 1 indoor unit or maybe 2 or 3 indoor units. This is our main business here in the addressable market. And you could see that the blue field is the biggest in this business. And it's also when you see the number of the markets, I want to mention for you that if we look at the full addressable market for us on HVAC, it's around €7,500,000,000 in size. But we are addressing the market in 2 different channels. We have it through our distribution business, and our expectation here is that and for us, it's around 50% of the HVAC business. And remember, the HVAC business is around 40 plus our total business. And half of it is through our distribution. And here, we believe our addressable market is around €3,600,000,000 And the other half we address is also when we go more direct, it is especially for the Toshiba business, it's EUR 7,500,000,000. And you could also see here that the commercial one is big both in product type and the construction segment. All right. And you also remember, if I go back just to Slide 9, this business increased 8.5% organic in Q3 for us this year. Coming back to give you an idea about the development of the refrigerants. As you can see on this first of all, I will tell you this is now on purchase pricing. We normally measure it on both purchase and selling prices. Due to this cyber attack we had in France, we were not able to really to make the selling prices in we can't really analyze it yet. It would come up sooner. But if you look at this slide, the bulk price, I look quite similar with different curves. But you could see here from the blue chart is the traditional refrigerant, the phase out refrigerant the price has gone down a long time. I would say 9 quarter in a row, we have been struggling with declining prices here. But you could see that the curve fell down. So next Q4 2020, you will compare with the level Q4 2019, and you will see the difference will not be so high as it has been the last time. So having that said, we still believe that we will suffer from a decline in prices due to the fact that the comparison price 1 year ago is still on a higher level. But we will not suffer so much as we have done the last 9 quarters. And if we continue to Slide number 11, we just try to take you through the impact here in the result. If you see, we had 245,000,000 tonnes in decreased sales, and that is around just below 3%. But if you look well of refrigerants and well of currency, you can see that is more than SEK 300,000,000 that has impacted for us in negative way. And when you see where of COVID-nineteen and ARPA, there is a plus, and this is due to the increase we have in HVAC. But if we take what has impacted negative and these ones, I will say that a rough estimate is what we have around SEK 50,000,000 in top line sales is COVID-nineteen, another SEK 25,000,000 is due to the cyber attack we had in France in September. Also, we mentioned something about the savings, and this was for us a positive number that we had SEK 80,000,000 in realized savings in Q3. And remember, in subsidies, it's total SEK 50,000,000, but in Q3, it was only SEK 5,000,000. So out of this savings, SEK 80,000,000, it's only SEK 5,000,000, but it's subsidies from government. How much is how much we will have in the future, how much is temporary, we don't really know. But we think it should be a mix about fifty-fifty. We have to wait another quarter to show how much is temporary. But this savings, who has which has impacted the P and L, is for us also positive here. All the savings, I would say, around SEK 50,000,000 is personnel costs. All right. Slide 12. Also to give you an idea, Q3. As I also wrote in my statement in the Q4 year ago, July 2019 was a huge heatwave in Europe. And then the comparison month is the best ever month for BAREF, and it was a very, very tough comparison number. If you go and look, we had a growth in August and September. Also remember here, we had the cyber attacks. So we had organic growth both in August September, and July was very tough comparison. So this is the speed we just now are in, and we when we talk about a little about the future later on. If we take Slide number 30. So before I will let Maria take you through the financials more in detail, I will just tell you this is our future focus area, and this is what we really are working with. Just to mention about acquisitions, we have for the moment opportunities. If it would be a deal or not, this is we don't know because it's always you have to agree with the seller. But due to the COVID-nineteen, we think opportunities have come up to our visibility and also to negotiations. So we hope and we are cautious, optimistic that we can do an acquisition in Q4 or Q1. Okay. Maria, I hand over to you now to Slide 15. Yes. So as Per mentioned, we had a sales decrease of SEK 2,900,000,000 and that consists of positive acquisition impact of 3.3. We also had some negative currency impact of 4.5% and then organic growth of minus 1.7%. Remarkable though is it's important to say that HVAC really had an organic increase of 9%. And as I mentioned, we also have the fiber attack and also lower prices on refrigerants. That is the main drivers to the sales decrease in Q3. Operating profit, we had SEK 4,500,000 in change. And consider the cyber attack, we would have been more in par with last year. The margin is 8.9% versus 9.1% last year. So adding the cost for the cyber attack, we would have been on par on the ROTH. Q2 and Q3 are our strongest quarter when it came both to sales and EBIT creation. Equity ratio is also high, 38%. And as you can read in the report, there will be no additional dividend during 2020. If we look into a little bit more about the organic sales growth, we can see that HVAC is really increasing here. So now it's 44%. Last year, it was 38%, which is a high increase. And commercial refrigeration has gone from 52% to 47%. So we can see that HVAC is really growing here. And OEM that varies between 9% to 10%. If you look into the organic growth to the right on Page 16, you can see that the 1.7 percentage, you can also see that the HVAC has grown with 9%, OEM5% and also the commercial refrigeration with minus 9%. It's important to say that about 6% units here is related to refrigerant. We also have that in our Q3 report. If we look into 5, 3 quarters in a row, you can see what I said that Q3 is a strong, both sales and EBITDA ratio quarter. And Ruling 12 shows sales of about SEK 14,000,000,000 and EBIT about SEK 9.75 billion. So of course, we will have a hit of the COVID here, and what we lost during Q2 is still there. But for the remaining part, we are trading according to last year. If you look into the segments that we have on Page 18, you can see our home market in the Nordics. It's only 11% of our sales, but very profitable. And that is due to that Nordics are pretty much ahead of technology And also, we have a high strong market position here, enabling us to have a high ABG margin. Central Europe and Southern Europe is also big markets for us, and they are also very profitable despite also the cyber attack that we have said before. Eastern Europe is our smallest region and with good margins, but with a sales decrease this quarter. So it's pretty sensitive to changes in the macroeconomic, I would say. Africa tends to be about 8 percent to 10%, but is now only 6% in this quarter. And that is all related to currency. Otherwise, they would have been on par with last year. And APAC varies between 16% to 20% of our total business. And as you know, we have a lower EBIT margin in this region. But we have also efforts in place to increase the margin. We are right now planning to move to one location and we also have some other synergies coming out from also the ERP implementation as Per mentioned in the beginning of this call. Looking into sales bridge on Page 19, you can see what I just mentioned here that, of course, we have a hit of that goes for all regions. And Africa being the biggest part due to currency and also APAC. They are green here because they have the acquisition from ACD that we actually performed before the corona this year. And handing over to Page 20, one could see that the Eres bridge, it follows the same pattern here. And we have a drop in EBIT in the Nordics, mainly related to refrigerants. And in the Southern Europe, 8 out of the 6 to 13 is related to the cyber attack. Positive thing here with the cash flow is that we have been able to manage the cash flow pretty well during COVID, and we took some actions during Q2 in the beginning of the quarter and that has really paid off. And we have when looking into the cash flow, we had a positive cash flow of 4.55 versus 5.83 last year. And I think you should look into both Q2 and Q3 to see like an average here because we had some positive cash flow already in Q2. Normally, we tie up capital in the first half and released during the second half. Okay. And looking into the liability side, we were able to do a refinancing during this COVID during Q3 and during the COVID. So we have now spread out the maturity structure of our limits. We have the same limits in place, meaning that we have about SEK 1,500,000,000 in utilized headroom and that is for future acquisitions. And you can also see that the net debt is onetime low, which is positive in this regard. And we are able to increase the net debt ratio to be above the 1.6 that you can see here now. So all in all, pretty good cash flow managed through the COVID situation. And I leave for Per to say something about the Yes. On Page 22, it's a pity to show you that we had a negative growth also in Q3. But I want to mention, it was despite we have a COVID we think we have a COVID impact around SEK 50,000,000. The cyber attack was SEK 25,000,000. And we had also 1 less invoicing date in France, but it gives another €75,000,000 to €100,000,000 if we should make these adjustments. And we also remember, we had the toughest comparison quarter ever, at least in July, the toughest comparison month ever for us. So when you take all this into consideration, we can think that we are have had some issues in Q3 that we probably has overcome. So we are with these adjustments, we have had an organic growth. And also remember the big impact from the decline in prices in Wurvedilgrands that we have been suffering for 9 quarters in a row now. We go proceed to Page 23. I showed this slide before, but this is also to give you an idea. During the IT price and during the financial crisis, we were able to do acquisition that was very successful for us. We really hope that we can do it again. There are opportunities for us. And then we have that for us. Thank you. Questions? Thank And we've got a few questions in the queue so far. The first is from the line of Karl Ragnostam of Nordea. Please go ahead. Your line is open. Good morning. It's Karl here from Nordea. I have two questions. Firstly, it is regarding the monthly organic growth, which you visualized in previous slides. I mean, I might have missed it, but what I see is that since September had slightly lower organic growth compared with August. So would you say that it is a function of the fact that you sort of had pent up demand that was already delivered or that the it was due to basically the cyber attack? I would say it was basically due to the cyber attack. Attack. We think the impact was around SEK 25,000,000 on the top line in September. Okay, perfect. And do you still see pent up demand for AC products? Or is it sort of normalized now? Or what do you see? What do you mean with normalized? You mean normalized with underlying organic growth. We think that October has started more or less in the same level as the quarter ended. And then you can adjust for the cyber attack. Okay, perfect. And also, you saw flattening declines in refrigerant prices. So I guess you referred to year over year because if we look sequentially, it looks like the decline is all is actually accelerating. Yes, that's correct. But still, if you want to compare quarter by quarter, it's year to year. They are not on the same level as they were 1 year ago, even if the price will start to increase. We have not seen that yet, but it's flattering, as you said. But in any case, we don't think that we'll suffer so much. You could also see the impact on the top line. I will have a slide for that. So we are cautious, optimistic that the worst for us in terms of declining prices is over and then but probably still a negative impact next quarter. And would you could you probably try to quantify the prices? What you see currently in October, is it down 10% year over year? Or are we looking more than 10%? Yes. I think it's 3% in the quarter or something like that. You have the slide, if you look at this, then you can make your own calculation. Yes. But so far in October, what can you see in terms of decline in refrigerant prices? Are they down 10% year over year? No, it's on the same level as at the end of Q3. We have not seen any decline in prices in October yet. Okay, perfect. All from me. Thank you. Thank you. And our next question comes from the line of Andreas Bok at Koelik. Please go ahead. Your line is open. Thank you. Just two questions for the management, please. One is the OEM business. Could Could you talk a bit more about that and how that has been affected by the corona? And also about the ramp up in the OEM business, how is that going? Has that been affected? Are you basically at full capacity right now? And you need that capacity expansion? My second question is on the cyber attack. Could you say something more of what kind of cyber attack? And what has that meant for you overall when it comes to IT security for the firm? Thank you so much. Okay. Then I will take you try to give you about the OEM question. OEM is the business where we have a backlog and we have an order intake and we have a were almost closed down in Q2, we didn't have also the order intake went down quite dramatically. And that decreasing order intake, that is the impact you could see in invoicing in Q3. So that is the reason why we have a negative sales on OEM business. But we have during Q3, we have seen that the order intake has increased again. And we are I think we had So we are very, very confident that this will So we are very, very confident that this will go on. It has to go on due to a FCAAS resolution. And we are have also a lot of ideas and wait for a new factory that we hopefully will start producing the beginning of next year. Q1 is the target to start production in that factory. Was that answer on the OEM question? Yes, exactly. So now I understand more with the order back. I mean, conceptually, with the stimulus programs in Europe and the focus on the USG, that I mean, that business should be is really well positioned. So I'm happy that next I mean, the expansion goes in line in Q1, so I think it will be needed. That's excellent. And then on cybersecurity, can you say a bit more, I mean, without telling the whole world exactly how your IT systems work? A bit more about the cyber attack and how I mean, are you spending more money now on cybersecurity, etcetera? So I think that's both for the entire group that IT security is crucial for us. And we are also strengthening the control over our systems. So that goes both for the I mean to get into the systems and also to have procedures in place for restoring back up and also to do dry runs on how to restore the back up and also to work with password management to make it harder for these kind of attacks. So I think the cyber attack in France gave us some lessons learned and we implement that also in the entire group and focus a lot of that. We have continued webinars with our finance managers and we are one of the topics here. The last call was IT security on an overall level. And as a parent company, we have done the same exercise with our providers. Excellent. Thank you. And then final question. In Africa, you said basically that EBIT margin was hit because of the FX exposure. Is that because you're importing and there is this lag with buying and selling? Or why is FX so important for the FX business? On the margins? Okay. Yes. So I mean, our biggest currency is, per se, euro, of course. And there we have, of course, exposure to the sales, but we also have costs in Europe. So that is the best hedging, I would say. And for Africa, it's more isolated, and they have got a hit on their currency this quarter. So that's why. Fair enough. Thank you so much. Excellent. Thank you. Thank you. And we've had one further question comes through. That's from the line of Anders Knutsen at SEB. Please go ahead. Your line is open. Yes, good morning and thank you for taking the time. Could you talk a little bit about 2021 in terms of if you get more normalized growth, how should we think about cash flow? And how much capital will you be tying up in working capital? And also in terms of CapEx, how is that looking in terms of planning by now, please? Well, first of all, normally, we are CapEx is a quite low number for us. We don't have so much machinery in factories, etcetera. So CapEx is not a big investment cost for us. In terms of working capital, of course, if the market increase, we need to also have to have more working capital, but we have done a lot of efforts to reduce it, as we have done this year. So we think that that will more follow an expected growth on revenues that we need to have a little more in inventory, mainly in inventory. So I think you can expect that it will increase. But if you take the return on operating capital, of course, the target is that it will increase. But is the as a rule of thumb, if you were to grow €500,000,000 or €1,000,000,000 in terms of revenue next year, how much would that tie up working capital, do you think? So that would tie up about 30% of the sales increase. Okay. Perfect. Yes. And also as Per mentioned, normally CapEx is not we are not so capital intensive. CapEx normalized to be equal to depreciation. And then of course, we have the IFRS, our rental contract that could vary, but that is not cash flow in that regard. Yes. Perfect. Thank you very much. Thank you. And as there are no further questions at this time, I'll hand back to our speakers for the closing comments. Okay. Thank you very much, Maria and me, and hope to see you soon. Thank you. Bye bye. Bye.