Earnings Call: Q3 2021

Oct 19, 2021

Hello, and welcome to the Beijer Ref audiocasted teleconference Q3 2021. Throughout the call, all participants will be in listen-only mode. Afterwards, there'll be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Christopher Norbye, and CFO, Maria Rhedin. Please go ahead with your meeting. Hi, everyone. Chris here, sitting together with Maria in Malmo. 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. Just a short update on my journey the first month and a half is, 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. Also confirming that I believe Beijer is in a very good position with strong tailwinds going forward, both from the green product side, but also the positioning within a growing segment within HVAC. I believe it's in a good position, a good strategy, and we'll continue that journey together going forward. 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 a little bit on the year-to-date development. As you all have seen in the presentation, or 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 with more explanation in the Q&A. Both on the component side, especially affecting our OEM business, but also on the side of a challenging closure in markets like Australia and New Zealand, that's big markets for us. We'll come back to that later on in the Q&A, I'm sure. I believe we had a continued good development in acquisition growth. We can also see, and Maria will come back to that, but the acquisitions we do, we have very good leverage on expanding growth and margin in these as we continue to more and more integrate this acquisition in our network and in our platform. We'll also come back a little bit to the latest closing of a fairly substantial acquisition in Inventor, who's similar to Sinclair that we did about a year ago. We have high expectations for that. If you look into the quarter, it was a mixed month by month, with, I would say, a good start to the month, and then a fairly weak August, and then a strong finish to the month here, as you can see, with 14% growth in September. That balanced out and gave us a 6.4% growth for the quarter. I cannot comment, still early days in October has started well. Good activity level in October. Of course, we are only a couple of weeks into that month yet, but at least it is continuing on a good level. If we enter the product segment, we had growth in all segments. What we can see, especially on the OEM segment, is that, I would say only 3% growth in that segment, but the majority of that related to a backlog that is up almost 40% and issues to ship products because of missing components. That is also something we see will continue in Q4 and Q1 on getting components to some of these critical items, we at this stage do not 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, not only shortage, general and supply chain, affecting mainly OEM business. The margin, EBIT margin, came to 8.2%. 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. You have closures in markets, especially in Australia and New Zealand, that you have all your costs, but you can't sell your product. Also the, as we said, 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, it's pretty much one-third each on the supply chain, on the freight cost, and the one-off items for your guidance. 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 aligned prices, but we do believe it's going to take through Q4 to balance out the very extreme changes on short term on supply chain and freight cost. Of course, on the freight, we're now working hard to make sure we get the products. We are aligning prices, but I believe we'll have a lag to Q4 on the freight charges as well. On the acquisition side, you could see we came in at 7%. We also closed, some time ago, the Inventor from the competition authorities. That will start rolling into our numbers here in October. 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. That will be the highlights for the quarter. Just balancing out a year to date, of course, with a very special 2020. Still, I would say, good development on the organic side and on the acquisition side. Of course, concluding eight acquisitions so far here to date. You can have a controlled timing, but we believe there's more to come here, also in this year to close out, I would say, a very good year on the acquisition side. All right, let's move over to the next page. I've touched a little bit on the external side. I think you heard it from most companies on the industrial side on the shortage, but what we saw was balancing out pricing on containers in during the summer, and then it starts spiking again here during Q3, where we had to transfer over the pricing to our customers with a certain time lag, which has caught us here in Q3, and also in Q4. That will continue to be part of our P&L until, I would say, flushing out in Q1. 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 to France to Sweden to Denmark and always we're leveraging that to minimize the effect of the issues in supply chains. 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. On the refrigerants, you can see here now a stabilizing pricing, compared to some time back. We do have a slightly negative effect here in Q3, but we expect a slight improvement to 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. We'll take it month by month, and hopefully we have clearer news here when we come into reporting in Q4. We also see that the climate focus continues and accelerates, and I know there's a conference on for UN in the U.K. with increased ambitions, and we can also see countries, not only in Europe, but also I would say a large market for us is Australia, where the commercial side and supermarkets are accelerating the changeover to CO2, also from a green profile to the consumer, which is, I would say, positive for us. You have the lockdowns that affected us. We're not completely over it, but it is improving in the Pacific, which is a critical time for us as in the Pacific, the high season starts now, here in October, at least through February. 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 Infenergy. I have visited this company, and I think it's an extremely interesting solution for us. 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 as on the commercial side, but of course, with higher outputs on several MW, 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. Very happy with that, with the acquisition. Inventor, we talked about, we finally got over the competition authorities, 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. This is also one of the market leaders in Greece, and have a very strong market position around that region, which is a market we haven't been in before. I think it complements us in a lot of ways with a good profitability. Then we had some smaller complement acquisitions in Australia and New Zealand. I have to say that, too, because the platform in Australia now and New Zealand is getting better and better, which mean 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. We are right now to acquire sales around SEK 1.6 billion, where around SEK 800 million-SEK 900 million will impact 2021, and then you have an overflow, of course, on the rest of 2022. Very happy on this side of the business. You can go to the 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 during my leadership. 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. Let's move on to the final page on the high-level update. I know you've seen all these mega trends, and I would say they will continue here for a long time. We can see the phase out has gone into the next level, but also a lot of other countries around the world looking into changing from these HFC gases. That will continue and accelerating, I would say, around the world. 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. We also see here how that digital channel 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. I think it's an important part of our strategy going forward. With those words, I would hand over to Maria to go over some of the financials, and then we'll get into a Q&A. Thank you very much. Thank you, Christopher. We are now on page 9, and as Christopher mentioned, we have a sales increase of 13.1% compared with last year where it was negative with 2.9%. The split between organic is 6.4, acquisitions contributed 7%, and we have a limited impact on FX of minus 0.3%. EBITDA 8.4% versus last year of 9.2%. It's important to say that during 2020 we were very good at reducing our cost temporarily, and that has impacted last year with SEK 8 million including grants or subsidies that we get from government. In this year, we also, as Christopher mentioned, we have SEK 30 million that impacts the margin June 2021. Net debt, still a strong balance sheet and net debt to EBITDA of 2.1, despite that we have increased debt and pretty sustainable on that ratio. Earnings per share is SEK 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, it's 3%. 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. We have built up a good backlog position for the coming quarters. Sales split, we have almost an even split between HVAC and commercial refrigeration. OEM is on 9% of our sales mix for the quarter. Moving to page 11, we can see the third quarter in a five-year perspective that we have grown the business year-over-year and you can see the dip in Q3 2020. Looking into the right, you can see also how EBIT has performed over these years. We are now targeting above SEK 1.12 billion in rolling here, EBIT. Looking into page 12, we have a bridge of drop-through from acquisitions. They have contributed with SEK 269 in sales and SEK 39 in EBIT, and that is above 14%. One need to bear in mind that they will continue to contribute, but also that they have had a good sum amount during the quarter here. FX has almost no impact on the result. The organic drop-through is also impacted by the SEK 30 million and somewhat lower here. You also got the explanation from last year when we had these temporary savings of SEK 80 million. Okay. Looking into the regions on page 13, we can see that we have sales 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. 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. On the EBIT side, you can see good contribution here. We had some drop in Central and South Europe, that is also related to the increased trade charges that we have said as part of the SEK 30 million. Okay. Looking into page 14, on the cash flow. We had an EBITDA of SEK 366 million versus SEK 353 last year, and the rolling 12 shows about SEK 1.3 billion 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 wholesale at Beijer. Okay. On page 15, we have the net debt. As I said before, we have increased our net debt and done some acquisitions, and we also completed in lent or here after the quarter end. Net debt is 2.1 and that has been that for the last two years. We are able to increase the net debt ratio in conjunction with acquisitions and then we start earning the money, so to say. 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 the main message here would be that we focus a lot on having organic growth in our business and we have been good at that. We had a tremendous organic growth in Q2, 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. 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 dependent to business cycles. Of course, everything what's happening in our surrounding impacts us. The business per se is repair and maintenance and day-to-day business that goes quarter by quarter. In the long run, we 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 Christopher mentioned. 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% with an organic growth of 15%. It is the 8.5 which is about last year and net debt is the same of course and then earnings per share of SEK 1.9 which is increased from last year. I think it's good to also to see the combined figures for the entire nine-month period. Finally before letting in for Q&A, as Christopher mentioned, we are right now in the market that is transitioning to green technology and we are part of that. We 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. On the same side we try to work common and unified together within the function where we can benefit from it. We have performed and have had a stable development over a long time and will continue with a strong owner base as well. Okay. I think we are ready for questions. Our first question is from Carl Ragnerstam of Nordea. Please go ahead. Good morning, it's Carl here from Nordea. A couple of questions my side. You mentioned that you have roughly SEK 30 million headwind from COVID, freight rates, non-recurring items. Could it be possible for you to split it up by those factors and explain what the non-recurring items are related to if it's acquisition costs too? Yeah, as I said before, we would estimate it to be SEK 130 each. We have around SEK 10 million on extra freight cost in the quarter, SEK 10 million related to extra cost, as in here we've 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 site. Then SEK 10 million on the non-recurring 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 it's SEK 10 million each, then I would say the SEK 10 million on the freight cost we expect to continue through in Q4 as those prices are aligned but will flush through Q4 to get it into the market. Then on the closure we expect that to be less in Q4. Of course, if nothing unexpected happens that would close down the markets again in especially Australia and New Zealand, then we would need to line up. Currently now the markets are opening up versus Q3. Perfect. Could we expect a catch-up effect in Australia and New Zealand or? Yeah, I talked to our guys there and I think it's trending well and of course I expect it to be caught. We're still only 2 weeks into the month, so I'm still waiting and see where that happens. That would be my expectation, but I need to see Q4 first before I can confirm that's happening, but that will be the normal reaction. Okay, perfect. On the component side, you mentioned that you grew 14% organically in September. You also mentioned that you had a good start into beginning of October. Should we expect a worsening impact from components or a flat impact from components on the special OEM side in the coming months? I would say we could expect a flat, which means it is a complex situation, and I don't see right now accelerating. It is a complex situation in getting the parts in. I would say it will continue on a high level, but right now it's not accelerating, it's on a high level. 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. I would say it will continue for the foreseeable future, right now. 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, or is it primarily? I would say it's less, on the HVAC side. Of course, I would say the HVAC side is mainly related to a cost issue on freight, versus an impact on missing products. Of course, you have some countries that had a not super warm summer in Germany and Netherlands and somewhat in France. That affects our business on a seasonality level. I wouldn't use the missing components as part of HVAC. It's more a cost on freight on HVAC side. Okay, perfect. 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? Yeah, I can give you some flavor. Of course, the majority of our business, as you know, on the industrial ref side is a day-to-day business. You sell day to day and replacement et cetera. It's mostly looking at the HVAC side, and also on the OEM side. There we can see a backlog that's up about 40% over last year. Sounds quite promising. Okay, perfect. That's all from me. I get back in line. Thank you. Thank you. Thank you. Our next question is from Henrik Milton of Coeli. Please go ahead. Hello. Thank you for a very nice report. It is very nice to see that you are up to organic growth again. I have a couple of questions regarding them. If you can elaborate a little bit about the acquisition in Australia, this Armcor. You can give us a little bit more information about that? Yeah. I think it's more in the general side on Australia, as I said on my call, and a company like Armcor is, as we have over the years built now a good, strong national footprint, with a good network, of selling both the OEM business and the HVAC business and 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 an HVAC, from an installation and all the equipment to install it. Also looking at when you work on HVAC, on some of these, also on the chiller side. The strategy there on an Armcor and acquisitions that we will continue in Australia is to continue to build a full offering to leverage our network in a stronger way. I'm not sure that answers your question or any other specifics detail. It does. Okay. Regarding future acquisitions, U.S. is very interesting for us, of course. If you can tell us a little bit about the U.S. pipeline and what the acquisition space within your balance sheet is? A large company you can take on without making a rights issue, for instance. I'll start with answering on the strategic side, and I'll leave the financial steps to finish up with Maria. I think on the acquisition side, is we always want to mention two things. One is that, we still see a good consolidation opportunity, especially on the HVAC side in Europe. Of course, Inventor is part of it, but there's more in the pipeline on the European side and new markets in Europe that's very active. 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. Of course, we want to find enough of a platform investment in the U.S. within the refrigeration, or HVAC business to start the business. I can't disclose at that time what the size is, but I would say that the platform investment, in step 1 should not be that we need to do a rights issue. I think we have plenty of space in the balance sheet for those acquisitions. Maybe Maria, if you want to comment on that. Yeah. We have said that we can increase the balance sheet immediately with SEK 2 billion in viability to do additional acquisitions. Of course, if we do a platform acquisition in a new market, we also need to look into future funding possibilities like bond, et cetera. We think we can manage pretty much growth within our current balance sheet. Okay. Thank you very much for your answers then. Thank you. Thank you. Thank you. Just as a reminder, if you wish to ask a question, that's 01 on your telephone keypad. Our next question is from Karl Bokvist 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. Into Q3, do you think that the component shortages and those sorts of aspects have now 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 the issue of getting access to or getting availability. I mean, same as you asked the question, without knowing, of course, on a factual basis, that's a hypothesis that we're working with as well because we also saw the trend at closing out Q2 extremely strong and of course, with a fantastic June in that balance. In July and August, it was more muted, and then it got a good, strong September, which is now continuing a good level in October. That's the assumption we're doing as well. 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, it has an effect of also on your sales levels on the short term. Understood. 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. 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 Infenergy technology. I would say the majority there is on the commercial side. Understood. Thank you. 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. I would say historically, it's been more long-term, but today to get that kind of long-term contracts now with freight companies is very challenging. We are working more on transactional basis, but the prices we see now, I would say is on the top level, and that's what we are repricing our products to the market with. Of course, if they further go up, which I think they are at extremely high level, then we need to realign that. Right now, we feel comfortable on the price increase we're doing will compensate for freight, but we have a lead time that's what we're saying also 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, compared to minus 2 last year. Were there any particular dynamics last year within the quarter? That July and August were 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 was a weak month last year. We'll get you the numbers. Oh, thank you. Much appreciated. Thanks. That's all for me. Thank you. Thank you. Our next question is from Robert Redin of Carnegie. Please go ahead. Yeah, hi. Just again on those 14%. If the OEM business still had its component shortages and so on in September, and you think they will persist in Q4. The 14%, was it driven then by the other product areas, or how did that look? Yeah, I would say it was a good pickup on the HVAC side in September across all regions, both on the sales side, but also the order side. I'll say it was the HVAC side that was on a good activity level in September and also started here in October. All right, perfect. Just on refrigerant prices, I see you have a sort of Q4 price here in the chart. Is that some kind of communicated price level? As per now, or is there a lag effect there? How certain are those, and can you see even further into Q1 on the price trend there? You can see that from a trends perspective that the prices are going up a little bit after Q3 here. I think we can also add, that the prices from the main suppliers. Yeah are coming up, which of course is positive for us. As I said before, 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. Right now in time, it looks like a positive development. We'll keep you posted. Okay, perfect. Thanks. Those are my questions. Thank you so much. Thank you. We have a follow-up question from Karl Bokvist of ABG 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. Yeah, I think you're correct. It's a higher starting point, but I think if we base some of that on the experience with a company like Sinclair, what we see is 2 things. We see how we leverage their product in a network that's more covering all of Europe, of course, and that's what we can see on the growth of a company like Sinclair, which we also expect have possibilities with Inventor. Also the supply chain where these products are being bought, we also now can pool or leverage and potentially double the purchasing, which will also give you synergy. 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. I would say that's a positive possibility with a higher base than maybe the historical ones. All right. 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? It's full year- 2020? Yeah. Okay. Full year 2020. All right, that's in number of shops, just to understand? Yes. Yes. Okay, good. Thanks. Thank you. Just as a final reminder, if you wish to ask a question, that is 01 on your telephone keypad. There are no further questions at this time, so I will hand back over to our speakers. All right. Thank you very much for calling in. Of course, if you have any follow-up question, comment, or other things, we are available also to help you and support you in those questions. Thank you very much for your time. Thank you.