Earnings Call: Q3 2021

Oct 19, 2021

Hello, and welcome to the Bejiraffe Audiocaster Teleconference Q3 2021. Throughout the call, all participants will be in listen only mode, and afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Christopher Nourby and CFO, Maria Reardon. Please go ahead with your meeting. Hi, everyone. Chris Vere, sitting together with Maria and First of all, I would just like to start and welcome you all. And also, This will be my first call. I read the transcript when Per had his last call in Q2. So just a short update on my journey the 1st month and a half We've of course spent a lot of time out in the organization visiting all our countries and businesses, and we'll come back to that in the presentation, but also confirming that I believe Bayer is in a very good position with strong tailwinds Going forward, both from the Green Products side, but also the positioning within a growing segment within HVAC. So I believe it's in a good position, a good strategy, and we'll continue that journey together going forward. So with that, I would like to start and maybe move over to Page number 3 in the presentation. A little bit on the highlights in The quarter, but also comment in a little bit on the year to date development. And as you all have seen in the presentation On the report released here this morning, we did increase sales by a little bit more than 13%. I believe on the organic side, it was a good growth despite the challenges We had, and I'm sure we'll come back to that, a little more explanation in the Q and A, both on the component side, especially affecting our OEM business, but also on the side of challenging closure in markets like Australia and New Zealand, that's big markets for us. So we'll come back to that later on in the Q and A, I'm sure. Then I believe we had a good continued good development in acquisition growth. We can also see, and Maria will come back to that, that acquisitions we do. We have very good leverage on expanding growth and margin indeed as we Continue to more and more integrate this acquisition in our network and in our platform. And we'll also come back a little bit to the, I'd say the latest closing of a fairly substantial acquisition, Ementor, was similar to Sinclair that we did About a year ago, we have high expectations for that. If we look into the quarter, it was a mix month by month With, I would say, a good start to the month and then a fairly weak August and then a strong finish So the month here, as you can see, with 14% growth in September. So that balance out and give us a 6 0.4% growth for the quarter. I can't comment, but still early days in October has started well. So good activity level in October. But of course, we're only a couple of weeks into that month yet, but at least it's continuing on a at good level. Between the Products segment, we had growth in all segments. But what we can see, especially in the OEM segment, is that, I would say only 3% growth in that segment, But the majority of that related to a backlog that's up almost 40% and issues to ship products because of missing components. That's also something we see will continue in Q4 and Q1. We're seeing getting components to some of these critical items. So We at this stage don't have a timing on when that will be flushed out and coming back to normal time. It's, of course, also longer lead time on these products and the only shortage, generally in supply chain, affecting mainly OEM Business. The margin, EBIT margin came to 8.2%. And of course, that's been One of the topics this morning on the EBIT side, I do see that it is affected of challenges, Of course, in the supply chain, as we said, when you are producing products, you have the cost, but you can't ship them. That is an issue. We have closures in markets, especially in Australia and New Zealand that you have all your costs, but we can't sell your product. Then also, as we said, a one off items, which is mainly related to a high level, but also on acquisition Costs that we're closing out the acquisition and some recruitment costs. The way I would describe this is pretty much 1 third each And also, of course, what we see here going forward in Q4, I would say we still see challenge on the freight cost side that we have Align prices, but we do believe it's going to take to Q4 to balance out the very extreme changes on short term on supply chain and freight costs. And of course, on the freight, we're now working hard to make sure we get the products. But we are aligning prices, but I believe we'll have a lag through Q4 on the freight charges as well. On the acquisition side, you can see we came in at 7%, and then we also closed, Some time ago, the inventor from the Competition Authorities, so that will start rolling into our numbers here in October. And also very happy with the development in Inventor during the year and having had a very Strong year, which of course is positive for us, plus some other acquisitions that we will come back to later on in the presentation. So that will be the highlights for the quarter. And then just balancing out on year to date, of course, with a very special 2020, but still, I would say good development on the organic side and on the acquisition side. And of course, including 8 acquisitions so far year to date. And you can have a controlled timing, but we believe there's more to come here also in this year To close-up, I would say a very good year on the acquisition side. All right, let's move to the next page. I've touched a little bit on the external side. I think you heard it from most companies in the industrial side on the shortage. But what we saw was Balancing out pricing on containers in during summer, and then it starts spiking again here during Q3, Where we have to transfer over the pricing to our customers with a certain time lag, which has caught us here in Q3 And also in Q4. So that will continue to be part of our P and L until, I would say, flushing out in Q1. But also fighting hard to get the components, both lead times and missing components in the supply chain. I believe we have a fairly good setup with being Our scale, we can also manage component issues within our regions and within our own supply chain as we can move Things around from Spain, Italy, France, to Sweden, to Denmark, Norway, we're leveraging that to minimize the effect of the issues in supply chains. Then I think you all know copper is a component that we do sell with substantial price increases that we are adding on to the market. Then on the refrigerants, you can see here now a stabilizing pricing Compared to some time back, we do have a slightly negative effect during Q3, But we're also seeing a we expect a slight improvement continue here in Q4 on the pricing of refrigerants from the market, what we're seeing right now. It is going up, but it's not a trend yet. So we'll take it month by month and hopefully have clear news here when we Coming to reporting in Q4. Then we also see that the climate focus continues and accelerates. I know there's a conference on our in UN for UN and the UK with increased ambitions. And we can also see countries, Not only Europe, but also, I would say, a large market for us is Australia, where the commercial side and the supermarkets are accelerating the changeover to CO2, also from a green profile to the consumer, which is, I would say, positive for us. And then you have the lockdown that affected us. We're not completely over it, but it is improving in the Pacific, which is a A critical time for us as in the Pacific, the high season starts now here in October at least through February. So it's important for us that they continue and improve versus closures. All right, let's move over to the next page on acquisitions. We did mention that we did a closure of an acquisition where we also now have a majority ownership In synergy, and I have visited this company, and I think it's an extremely interesting solution for us. And we had some real breakthrough orders Here, when it's an industrial CO2 solution instead of the ones in the market, it's a similar solution on the commercial But of course, with higher outputs on several megawatts, which we also see now will have a potential to be a big Part of our business long term. Right now, we're just expanding it in Denmark where it started, but we see good potential in the industrial side In the next 5 to 10 years. So very happy with that acquisition. Inventor, we talked about. We finally got over the competition authorities. So now it's part of us, and we're working on the integration and the plans for the foreseeable future, both with Inventor and with Sinclair, we now have a very strong portfolio on the HVAC side to continue and integrate in our business. And this is also the market lead one of the market leaders in Greece And I have a very strong market position around that region, which is a market we haven't been in before. So I think it complements us in a lot of ways with a good profitability. And then we had some smaller complement acquisitions in Australia and New Zealand. And I have stated too because the platform in In Australia and Ireland, it's getting better and better, which means we can make smaller complementary acquisition from a product side, which, of course, Gives you a lot of opportunities to increase synergies and sales when you have products in a strong network. So we are right now to acquire sales of around SEK 1,600,000,000. We're around SEK 8,000,000 to SEK 900,000,000 will impact 20 And then you'll have an overflow, of course, from the rest of 2022. So very happy on this side of this. We go to next page. I will not spend a lot of time on this. I've been on a lot of sites and a lot of businesses around, which is fantastic to meet the people And meet the organization. And just wanted to confirm a very strong culture in this company and entrepreneurial, Motivated, focused people and that will continue also do my leadership. So just to confirm if people had any questions around that, I love this kind of organization, and I think it's a fantastic people around there. So But let's move on to that. So the final page on the high level update. And I know you've seen all these megatrends, And I would say they will continue here for a long time. We can see the phase out that's gone into the next level, but also a lot of other countries Around the world looking into changing from these HFC gases, and that will continue And accelerating, I would say, around the world. And then also on the digitalization, we've been spending a lot of time also on how we develop our e commerce, But also saying that we're almost now 10% of our sales within e commerce currently. And we also see here other digital channel, which will Help and support our business long term, but also differentiate us also from some of the competitors how you build an efficient e commerce channel. So I think it's an important part of our strategy going forward. So with those words, I would hand over to Maria to go over some of the financials, and then we'll get into a Q and A. Thank you very much. Thank you, Christophe. And we are now on Page 9. And as Christophe mentioned, we have a sales increase of 13.1% Compared with last year, where it was negative, it's 2.9%. And the split between organic is 6.4%, acquisitions contributed 7%, And we have a limited impact on FX of minus 0.3%. Edista, 8.4 percentage versus last year of 9.2 percentage. And it's important to say that during 2020, we were very good at reducing our costs temporarily, and that has impacted Last year with SEK 8,000,000 including grants that we or subsidies that we get from government. In this year, we also, as Christophe mentioned, we have SEK 30,000,000 that impacts The margin in June 2021. Net sales still a strong balance sheet and net sales EBITDA of 2.1, despite that we have increased debt and pretty sustainable on that ratio. Earnings per share is NOK 0.65 and in line with last year. Moving to Page 10. You can see the organic split. We have organic growth in all our product segments. The organic growth is 6.4%, as I said before. And you can see that the organic growth in OEM is somewhat lower than what it used to be, 3%. And it's due to that we have a good demand and also that the Conversion to green technology is ongoing right now, but we have a shortage of components here. So we have built up a good backlog position for the coming quarters. Day split, we have almost an even split between HVAC And commercial refrigeration and OEM is on 9% of our total fixed for the quarter. Moving to Page 11. We can see the 3rd quarter In a 5 year perspective, we have grown the business year over year, and you can see the dip in Q3 2020. And looking into to the right, you can see also how EBS has performed over the ETFs. And We are now targeting about SEK 1,120,000,000 in enrolling here EBIT. Looking into Page 12, we have a bridge of drop through from From acquisition, and they have contributed with €269,000,000 in sales and €39,000,000 in EBIT. And that is a rough 14% above 14%. 1 need to bear in mind that they will continue to contribute, That's also that they have had good sum amount during the quarter here. FX is almost No impact on the results. And the organic drop through is also impacted by the The SEK 30,000,000 and somewhat lower here. But you also got the explanation from last year when we had these temporary savings of SEK 80,000,000. Okay. Looking into the regions on Page 13, we can see that we have Safe growth in all regions, which is positive, and we have a great increase in Eastern Europe, which is mainly related to our acquisition of Sinclair. I can also mention that in the Nordics, we had a positive sales development, and that is very much related to OEM and HVAC. So we tend to say that the HVAC is growing, and that's true, and also that colder countries Like the Nordics and Sweden are increasing their HVAC penetration, which is very positive. And on the EBIT side, You can see good contribution here. We had some drop in Central and South Europe, and that is also related to with the increased freight charges that we have said as part of the SEK 30,000,000 stake. Okay. Looking into Page 14 of the cash flow. So we had an EBITDA of SEK 366,000,000 versus SEK 353,000,000 last year. And the rolling 12 shows about SEK 1,300,000,000 in EBITDA. The balance sheet is Still strong. Liquidity is good, and we have had a positive cash flow. Even though we have increased our working capital, we are building inventory In the countries where we can, both to be prepared for increased demand next year and also to have stock on hand because that is very crucial on the availability side for distribution and wholesaler like the year. Okay. Finally, we're on the Page 15. We have the net debt, as I said before. We have increased our net debt and done some acquisition, and we Also completed in events over here after the quarter end. So net debt is 2.1. And That has been that for the last 2 years. So we are able to increase the net debt EBIT ratio in conjunction with acquisition, and then we start earning the money, so to say. So It could be so that we will increase that in the future when we have good prospects and opportunities to do additional acquisitions. Okay. Looking on Page 16, I think main message here would be that we focus a lot of having organic growth in our business, and we have been good at that. We had a tremendous organic growth in Q2. So maybe you should look into Q2 and Q3 combined here. You see also that we had a negative organic growth during the corona in Q2 2020. But we were also quick in getting back to business, and I think that is a Strength of our business model that we are not so business cycle been so dependent to business cycles. Of course, everything that's happening in our surrounding impacts us. But the business per se is repair and maintenance and day to day business that have had organic growth and that is also part of our strategy to have both organic growth and also to do a lot of acquisitions, as Christophe mentioned. So looking on Page 17, we have a summary of the 9 months. And we have had year to date the 9 months figures. You can see Growth is 18.6 percent with an organic growth of 15%. It is about 8.5%, which is above the out year. And net debt is the same, of course, and then earnings per share of SEK 1,900,000, which is an increase from last year. So I think it's Good to also see the combined figures for the entire 9 month period. And finally, before letting you in for Q and As, as Christophe mentioned, we are right now in the market That is transitioning to green technology, and we are part of that. And we've got some good help from legislation, Both within commercial refrigeration, but also within HVAC. We have a clear strategy and a focus and a very strong corporate culture with a decentralized organization. But on the same side, we try to work common and unified together within the function where we can benefit from it. And we have performed and have had a stable development over a long time and will continue with a strong owner base as well. Okay. So I think we are ready for questions. Thank Our first question is from Karl Ragnaszam of Nordea. Please go ahead. Good morning. It's Karl here from Nordea. A couple of questions from my side. Firstly, you mentioned that you have Fully €30,000,000 headwind from COVID, freight rates, non recurring items. Could it be possible for you to split Speed up by those factors and also what and explain what the nonrecurring items are related to if it's acquisition costs. Yes. So yes, as I said before, we would estimate it to be 1 3rd each. We have around SEK 10,000,000 on extra freight costs in the quarter, SEK 10,000,000 related to extra costs As in you haven't been able to closing down in Australia and especially New Zealand to be able to sell your products having the cost both in assembly and on the sites. And then EUR 10,000,000 on the nonrecurring, I would say, will be majority on the acquisition side and also finalizing some of the recoupments we had In the past, I would say, tell me in each, and then I would say the EUR 10,000,000 on the freight costs, we expect to continue through in Q4 to be less in Q4. Of course, if nothing unexpected happens, that would close down the markets again In especially Australia, New Zealand, then we would like need to line up. But currently now, the markets are opening up versus Q3, so. Perfect. And could we expect the catch up effect in Australia and New Zealand, or? Yes, I talked to our guys there, and I think it's trending well. And of course, I expect this This is the catch up, but we're still only 2 weeks into the month. So I'm still waiting and see Where that happens and if so, that would be my expectation. But I need to see Q4 first before I can confirm that, that's happening, but that will be the normal reaction. Okay, perfect. And on the component side, you mentioned that you grew 14% organically In September, you also mentioned that you had a good start into the beginning of October. Should we expect a worsening impact From components or flat impact from components on the especially OEM side in the coming months? I would say we could expect a flat, which means it is a complex situation. And I would say it will continue I mean, I don't see right now accelerating, but it is a complex situation in getting the parts In, so I would say, we'll continue on a high level. But right now, it's not accelerating. It's on a high level. And also, of course, related to that is Lead times on special components, which does also that all of our backlog will not be flushed out in Q4 because you also have lead time on the component side. So I would say we'll continue for the foreseeable future right now. And did you have any impact on the other segment? Obviously, we can see that OEM is quite impacted, but on the HVAC side as well? Versus promo renewal. I would say it's less on the HVAC side. Of course, there are I would say the HVAC side is mainly related to A cost issue on freight versus an impact on missing products. Then of course, You have some countries that had not a super warm summer in Germany, Netherlands and somewhat in Brands that affect our business on a seasonality level, but I wouldn't use the missing components as part of HVAC. It's more a cost on freight and HVAC side. Okay. Perfect. And on the backlog side, you mentioned that It's obviously strong. Could you give any flavor on the year over year development or the order intake development during the quarter? Yes. I mean, I can give you some flavor. First, the majority of our business, as you know, on the industrial ref side is a day to day business, But where we don't you sell day to day and replacement and etcetera. So it's mostly looking at the HVAC side And also on the OEM side, and there we can see a backlog that's up about 40% over last year. Thank you. Our next question is from Henrik Milton of Qualia. Please go ahead. Hello. Thank you for very nice report. It's very nice to see that you're up to organic growth again. I have a couple of questions regarding them. 1st, if you can elaborate a little bit about the acquisition in Australia, this ARM core. You can give us a little bit more information about that. Yes. So I think it's more in the general side on Australia, as I said on And a company like Armpo is, as we have over the years built now a very or a good strong national footprint With a good network of selling both the OEM business and the HVAC business in the refrigerant side, This type of acquisition like Armcor is where we're completing the product portfolio as we can see good possibilities and also margin side on having a full offering for the installers, both on everything around in HVAC, from an installation and all the equipment To install it, but also looking at when you work on HVAC on some of these, also on the chiller side. So the strategy there on Encore and acquisitions that we will continue in Australia, continue to build a full offering to leverage our network in a stronger way. I'm not sure that answers your question or is there any other specific Detailed. Detailed. Detailed. Okay. And then regarding future acquisitions then, United States is very interesting for us, Of course, but if you can tell us a little bit about the U. S. Pipeline and what the acquisition stays within your balance sheet is, A large company you can take on without making a right issue, for instance. I'll start with answering on the strategic side, and I'll leave the financials to finish up with Maria. But I think on the acquisition side, we always want to I mentioned 2 things. One is that we still see a good consolidation opportunity, especially on the HVAC side in Europe. And of course, inventory is part of it, but there's more in the pipeline in the European side, a new market in Europe that's very active. Then moving on to the U. S. I would say it's a clear target for us and part of our strategy here going forward, Which, of course, starts with a good mapping of all the targets, discussion with potential Owners and targets, it's a longer journey that has started to find the right targets. And of course, we want to find enough of a platform investment in the U. S. But I would say that the platform investment in step 1 should not be So we need to do a rights issue. I think we have plenty of space in the balance sheet for those acquisitions. But maybe Maria, If you want to comment on that. Yes. So we have said that we can increase the balance sheet immediately with SEK 2,000,000,000 In viability to do additional acquisitions. And then, of course, if we I mean, do a platform acquisition in new markets, We also need to look into future funding possibilities like bond, etcetera. So we think we can manage pretty much growth within our current balance sheet. Okay. Thank you very much for your answers then. Thank you. Our next question is from Karl Bokqvist of ABG Sundal Collier. Please go ahead. Yes. Thank you and Hello. Most of my questions have been answered already. But if I may ask one on I believe you mentioned in the second quarter that There could be a possibility of pre buying and as you say, taking both Q3 and Q2 and putting them together to sort of understand the growth rates. But into Q3, do you think that the component shortages in those sorts of aspects have now So had the impact that the customers were anticipating, I mean, there hasn't been any further pre buying. It's more like The pre buying occurred in Q2 and now there is more of the issue of getting access to or getting availability. I would maintain as you asked the question without knowing, of course, on a factual basis. That's the hypothesis that we're working with as well because we also saw the trend that's closing out Q2 extremely strong And of course, with a fantastic June in that balance and then in July August, there was more muted and then a good strong September, which is now continuing a good level in October. So that's the assumption we are doing as well. And now the main issue is, I would say, I keep saying 2 things, the component shortage and lead times, because of course, if you push out lead times, That's an effect of also on your sales levels on the short term. Understood. And within Refrigeration, Is it possible for you to provide a split between either in general or for the quarter or for the year between industrial and Commercial and how these two segments developed? No. I think at this stage, maybe that's something we can come back with. But I would say that the majority is on the commercial side and then the industrial side is just starting To increase, especially on a technology like the synergy technology. So I would say the majority there is on the commercial side. Understood. Thank you. And just one final thing to understand the dynamics here, but the freight prices that you Have to pay. What are the kind of terms here in terms of do you set the preset freight Level for a specific number of months in a particular region? Or is it done on a transactional basis? I would say it's both. And I would say historically, it's been more long term. But to me, it's not to get that kind of long term contracts now with Freight company is very challenging. So we are working more on transactional basis, but the prices we see now, I would say it's on the top level, and that's what we are repricing our products to the market with. So of course, if they Further go up, which I think they are at extremely high level, then we need to realign that. But right now, we feel fairly comfortable on The price increase we're doing will compensate for freight, but we have a lead time that was that's what we're saying also in Q4 will be affected. Understood. My final one is just, you mentioned plus 14% in September this quarter. Just to understand here, I think Now 6% organic growth, Q3 2021, but minus 2% last year. Were there any particular dynamics Last year within the quarter, you know that July August were very, very strong, but September was weak, something like that? I don't have that top of mind, so maybe I'll come back to you because we have that data, of course. I don't believe that September It was a weak month last year, but we'll get you the numbers. Thank you. Much appreciated. Thanks. That's all for me. Thank you. Thank you. Our next question is from Robert Reddin of Carnegie. Please go ahead. Yes, hi. And just again on those 14%. I mean, if the OEM business still Had its component shortages and so on in September, and you think that would persist in Q4. So the 14%, Was it driven then by the other product areas or how did that look? Yes. I would say it was a good pickup from on the HVAC side in September across All regions, both on the sales side, but also on the order side. So I'd say it was the HVAC side that was on a good activity level in September and also started here in October. All right. Perfect. And then just on refrigerant prices, I mean, I see you have a sort of Q4 price here in the chart. So is that some kind of, yes, Communicate the price level as per now or is there a lag effect there? How certain are those? And is there some other Can you see even further into Q1 on the price trend there? So you can see that from a From perspective that the price areas are going up a little bit after Q3 here. And I think we can also add, I mean, that the prices from the main suppliers Yes. All are coming up, which of course is positive for us. But as I said before, it's I would like more visibility and that will continue here throughout Q4 before we Confirm that this is a trend versus a blip in the market. But right now and right now in time, it Looks like a positive development, but we'll keep you posted. Okay, perfect. Thanks. Those were my questions. Thank you so much. Thank you. We have a follow-up question from Karl Boakqvist of ABD Sundal Collier. Yes, thank you. Just on the acquisition side, the deals that you have made that seemingly have quite good profitability. I was just wondering The synergy potential on those businesses, given that the starting point is a bit higher perhaps than The acquisitions that you made in the past, just to understand the dynamics here. Yes. No, I think you're correct. It's a higher starting point. But I think if we base some of them on the experience with a company like Sinclair, what we see is 2 things. We see How we leverage their product in our network, that's more covering all of Europe, of course, and that's what we can see on the growth of I can't believe that's in clear, which we also expect possibilities with Pimentor. And then also the supply chain where these products are Being bought, we also now can pull our leverage and potentially double the purchasing, which has also give you synergy. So We would say it's early days, but the ambition is to leverage both synergies on the sales and cost side even if they already have A good margin. So I would say that's a positive possibility with a higher base than maybe the historical ones. All right. And my final one is just the longer positive trends that you commented on, where you say that it's estimated that Roughly 30% of shops in the food sector in Europe have converted. Just curious On when that data point was updated, is it quite a recent one? Or was it for full year 2020? Let me ask, as I It's a full year 2020? Yes. Okay, full year 2020. All right. And that's in number of shops, just to understand. Yes. Okay. Good. Thanks. Thank you. There are no further questions at this time. So I'll hand back over to our speakers. All right. Thank you very much for calling in. Of course, if you have any follow-up question, comments Well, other things, we are available also to help you and support you in those questions. But thank you very much for your time. Thank you.