Earnings Call: Q2 2021

Aug 23, 2021

Good afternoon all, and welcome to today's Fagerholt Group Q2 2021 Investor Webcast. My name is Lydia, and I'll be coordinating your call today. If you've joined us via the webcast, please click the questions tab above the slides. I'll now hand you over to your host, Michael Brewer, to begin. Michael, please go ahead when you're ready. Thanks, Lydia, and hello, everyone, and welcome to the presentation of Fagerholt Group's Q2 Reporting 2021. My name is Michael Boeler, responsible for Strategy and Communications and Fagerholt Group, and I will be the moderator here today. On the call today, we have our President and CEO, Bodil Sonnesson and our CFO, Michael Wood. The presentation will be outlined similar to our last call. Paulus will start with a brief update on the second quarter and half year numbers and then give an update on some exciting initiatives we see across the group. Mikael will then continue with more details about the numbers for the group and the separate business areas, and Bodo will conclude with a brief recap and afterwards, we will open up We will first allow for questions from the conference call and then we will allow for questions from the webcast. You can post questions there in the chat window on your screen, and I will read them out for both of Michael. Before we start, let me also remind you that today's session is recorded and Will be available on our homepage later today. With that, I hand over to you, Bodil. Please go ahead. Thank you, Michael, and welcome, everyone. So I will start with a short summary of Q2. We've had a lot of positive news. We saw a clear acceleration in the recovery compared to prior quarters With a strong order intake during the quarter, we still see some differences between regions with effects related to COVID. But I think in overall, the construction market is getting more used towards the situation. We've also had Much more face to face customer interactions than we had before, which is good for project work even though we're very used to working with Ipswitch 2 nowadays. We saw very good uptake in Southern Europe, in all the Southern European regions as well as in the UK. We also saw very healthy operating margin, thanks to good GP margins, increased market activities And good cost control as a result of all the activities we initiated last year. And that good cost control is continuing. And with all these numbers being positive, we, of course, also posted a very strong EBIT number. We are dealing, which I think everybody is doing today, with overall supply chain challenges. They are time Assuming, but I would say we're very resilient and they're well dealt with by the team. And therefore, they have caused very limited effect on net sales in the Q2. On group strategic topics, we have defined A few ones like connectivity, sustainability and core values. We took a step forward in all of those. We see the very positive trend continues in connectivity and we see new markets emerge in both smart buildings and in smart cities. And I will give you a few examples later on the presentation. I will do the same in sustainability where we see a lot of activities in the different brands. And I will also give you a sneak view of the launch of our internal group call value. So with that, let's look at the concrete numbers through Q2, but as I said, we're all positive. If we put them just into comparison context from last year, we actually had our best quarter last year in net sales in Q2 and 1st quarter for order intake. And this year, we increased net sales in the quarter with 12.2 percent And organic order intake were up a healthy 35.3%. And EBIT would reach CHF 208,000,000 which represents an EBIT margin of 11.3%. And earnings per share was SEK0.78. And Michael will come back to you later With some more detailed information on the numbers. But also let us look at the half year numbers, Which, of course, also showed a clear comparative increase in all positive news compared to last year. So from a half year number, we increased order intake with 11.3% organically and net sales with 9.5%. EBIT is a substantial increase from SEK 164,000,000 last year to SEK 3.65 CHF 61,000,000 this year, that represents 120% increase, ensuring that we are actually back to pre COVID levels in EBIT, Which has been achieved by a lot of hard work done by many people in the organization. So I will leave the numbers here. And as Michael said before, I will move into the more market oriented background Focusing on what we see happening around us. And I think that we all know the challenges that COVID has meant for society. I also believe that this has meant that we have understood further that we need to change our habit as humans, especially with regards And this is also very true for the construction industry. Buildings are responsible for about 40% Of total energy consumption in the EU and the majority of the European building stock is aged and roughly 75% of the building stock that we have today is energy efficient. And around 90% of those buildings will still be in use in 2,050. So accelerated renovation is the only economical way to meet time and targets in the building industry. And EU is intended to fuel the demand for energy efficient solutions over what you've all heard about the Green Deal and the renovation wave initiative. And the estimation today is that the renovation wave initiative should double the building renovation rate in the next 10 years. For lighting, we know that LED has helped a lot for energy efficient because we use modern technologies. But also here we are dependent on renovation because today, only 30% of the installed base has leadified in the last 10 years. So if we do more renovation, we will get more energy efficient LED lighting in place. And if we add connectivity to those lighting solutions, we can bring an additional 70% of energy savings. And I think when we look into the connectivity technology, it's very rapidly becoming affordable, enabled by reduced component costs, Low cost to data transmission in cloud computing. So everything is talking that the market will move in that direction, and we also see that. I will give you a few examples of activities and success, both in sustainability and connectivity. And here is the first example. This is from you all know our Fagerholt brand. They're one of their best sellers with a product called Multi Loom. And they have, during Q2, launched a completely new concept called ReThink that is reducing climate impact Significantly by using innovative materials and products designed. I think this is really an example of thinking outside of the box. And the first product is a new version of this high selling multi lume. And the multi Multilum Resync has a Luminar body made of 100% recyclable cardboard, the completely new material that we're using And that is reducing the weight of the Luminar by 32%. Also, the packaging concept has And by printing instructions directly on the lumina, shipping volumes have reduced by 30% And no plastics is needed anymore in the packaging. So these products are also equipped with organic response in order to make them very easily to be connected And to gain those extra 70%. And in total, these changes have reduced the total climate impact by 83 which I think is really impressive. And it's also been very well received by the market after launch. And if you want to learn more, There is a lot of material on the website of fagerholt.com. So if we then take another example, you know that Working with World Cast Manufacturing and Industry 4.0 Transformation. And many steps have been taken over the last year and Continued also during the COVID period last year. And in Q2, they were awarded 1 of class manufacturing branch levels. And to continuously strive for improved quality and efficiency is central and free up resources to new product design and more customer focused activities. And similar to the world class manufacturing award, ecosine has also been awarded EcoVadis Silver for their sustainability work. And both these are awards that are valuable acknowledgments of focusing work at Didipinas. And Very positive is that this process driven work that the whole organization is very used to, thanks to the many years of work with Industry 4.0, Makes the shift to focus on processes that drive sustainability much easier. And a special side on the connectivity solutions where we as I said, we continue to make progress. And we have the 2 solutions within the group, organic response for indoor and Seneca for outdoor. And both solutions are based on the same basic principle, Presence protection to reduce energy consumption. And for organic response, we see continued progress. For the first Half year, the volumes increased again 60% compared to last year. And we also see a lot of partnerships Evolve and being launched, which adds new functionality and making use of the sensor data from the Luminess, which in addition to reducing energy, Also brings safety, other efficiencies and the sense of well-being for the users. Two examples are the Virgil alarm integration with Securus that I presented last time And an indoor positioning system with Sony. And then we acquired, as you know, Seneca in Q2. And there we continued the integration and implementation of So with that, let's look at an example here as well. This is an example from the Hickman Building in London, which is showing the possibilities of connectivity. We were involved in the project from And have delivered more than 1300 organic response enabled luminaires to the project. And all the luminaires are connected And via cloud API integrated to the building management system. So based on this integration, there is a specific building app Developed that combines all the features from different systems and offers the tenants control over their working environment. Within this area, we see a lot of activities happening in the market, and that opens up the new partner possibilities for our connected technology. And the Hikmann Building has actually been acknowledged as one of the smartest building in the world during Q2, Which also shows that an increased focus is going on in terms of smart buildings from the whole construction industry side. With that, I said a sneak view on our core values. We have, as you know, worse than this during 2020. This is important from us from a company culture perspective. It's been a good progress, a very inclusive work, It's just been taking a lot of positive energy already before launch in the group, and we have involved more than 1800 colleagues across the group. And this work, we have considered not just who we are today and what we do well, but also looked into what is important for us in the And based on this, we have developed a new set of core values. We will launch them during the fall. And that will be a strong base for us for our very people based culture. And what you see in the picture here on the slide It's actually an internal teaser that we are using ahead of launch and we will launch during September With the actual core value. And with that, with the picture, which is the Krijansstad Golf proof in Aarhus, where you can see all indoor and outdoor lighting is from Atelier Lichtens from their home area. With that, I will hand over to Michael for some more financials. Thank you, Bodil, and thank you, Michael, for The early introduction and a very good afternoon, and welcome to all listeners from myself as well. We see the financial summary slide, which is a regular kickoff point for this part of the presentation. I'll take you through several slides forthcoming. The recovery from the impacts of COVID-nineteen in the Q2 Accelerated sharply ahead of the steady start that the group made during the Q1. As we state in the report, all key measures from order intake through to operating margin recorded strong growth and strong improvement. At SEK1845 million, quarter on quarter net sales were positively ahead of last year, almost 7%, Increasing to just over 12% on a like for like organic basis. Growth was recorded across most geographies And almost all product segments that we operate. At SEK 82,000,000, currency headwinds remain strong. It's got a little less strong than we saw in the Q1. And as we entered the Q3, we expect this trend to continue for the rest of the year. The operating profit of CHF208 million delivered a very healthy 11.3 percent operating margin, Mainly driven, as Bodrum mentioned earlier on, by increasing the volumes, steady gross margins and continued good cost control. Profitability for the half year is ahead of that in 2019. I think people do use 2019 today The benchmark reference point rather than the COVID hit 2020. Development of earnings per share and operating cash We're also positive, but I'll come to more of that later. When we look at sales development, No longer do we see a decline or even a leveling off in the 12 month rolling net sales. In the second quarter, the trend was plus 2% positive And now approach is close to SEK 7,000,000,000 on the rolling 12 month basis. The trend is even more positive Looking forward when adjusted currencies and disposals, and we expect this trend to continue into the future. Next slide now is margin development. Firstly, let's just remind ourselves that you see the 2 light gray bars in Q3, Q4 last year. They were adjusted for the group's exit from the South African business. I remind us because we shall make comparisons to these quarters and these numbers as we go through the remainder of the year. Going back to the Q2, the operating margin of 11.3% It's ahead what we see of the market. We should be pleased with that and compares well to Q2 last year and the Q1 this year. The rolling 12 month operating margin is just over 9%, 9.2% to be precise, shows continued good recovery over the last 6 quarters that we operate. Business area collection. The business area is a very strong order intake and a solid operating result in the Q2. You can see the numbers there, 35.2 percent organic growth and an operating margin of 9.8%. The Q2 of 2020, Just reminding us, it was positively impacted by the catch up of the Gazini following the factory reopening following a forced COVID closure. For the year to date, profitability in the business area is significantly improved compared to last year. The business area entered the second half year with an increased order backlog position and good control of the cost base. We now begin to see some results of the collaboration. Collaboration is a word that was used several times in these Webcast Seminar. And recently, there has been a joint win of a healthcare project in Italy between the Fagerholt And also, there has been strong project quotation activity with new inquiries and new opportunities in Denmark Collaborating between Acelia Lictan and the Gazine. So good work coming through the strategy development process in Business Area Collection. If we move to premium, in premium business area, we do continue to see mixed results across the European markets With the Western countries, including the UK for this explanation, being quite positive And the northern countries generally having a lower level of activity. That was reported for Q1, And we saw that continuing into the Q2. Activity in the retail segment is high as retailers catch up for lost time and lost time regarding improvements to their estate during the pandemic closure period. But we do see good activity in the Retail segment. The quarterly organic order intake was also very strong, 26.2 percent, And the business area operating margins continue to develop well, increasing to 13.7% in the quarter compared to 8.3% a year ago today. Here we see again an improved order backlog carrying us Forward into the remaining part of the year and the start of next year. Going now to Business Area Professional. Last quarter, we did report a strong start to the year, And this started increased further in the Q2 with a further acceleration in Business Area Professional. 28.2% was the net sales growth and a double digit operating margin for the first time since mid-twenty 19. So this PA is beginning to recover properly at the pre COVID level. The order backlog position is good. The forward looking trajectory looks positive and the activity level and the results in the UK is particularly strong. When we come to Australia, it's pleasing to see the completion of the rebranding project in Australia and New Zealand And the businesses come together as one brand created a more powerful force in the region. Finally, to finish off on the business area slide, when we come to business area infrastructure, as Mentioned 90 days ago, more or less, the infrastructure situation is caught up to a slow start of the year For the Q1, but now in the Q2, the situation is improving. The results of the Q2 were good And order intake, net sales and operating margin all improved, and we're fairly pleased about the remaining parts of the year within infrastructure. Point out that the organic order intake growth of 65% was very, very significant, but just pointing out But during that quarter, there were 2 large project wins, which boosted the order intake by approximately CHF 50,000,000. But regardless, Even without these 2 large project wins, order intake was still positively strong at the organic level. Most significant growth opportunities remain here in Europe with Business Area Infrastructure, and we continue to work on our go to market approach for the 3 brands To grow our market share. Operating cash flow. Operating cash flow remains positive for each The first and the second quarter achievement, as you can see there, is very similar to what was achieved in 2020. The rolling 12 month cash flow remains at full SEK1 billion despite SEK170 1,000,000,000 investment in inventory In the half year, to combat and support our customers to combat the supply chain challenges that we see around the globe. And we do this to provide to continue to provide a high level of service to our customers. We will continue our focus in cash flow and cash management And as we head through the 2nd part of the year. When we come to net debt, it Paul, Trey, it's a very pleasing picture that we see there. But just again, another quick reminder that the chart Our net debt is adjusted for IFRS 16 accounting, and the chart for net debt EBITDA ratio It's also adjusted for IFRS 16 and acquisitions and or disposal. We report a closing net debt to EBITDA ratio of 2.31, which now matches the position at the end of 2018. So why is this significant? Because that was the final quarter before the large acquisition of the Gazini. So the group and its profitability and cash management Competencies has restored the ratio now to just before the Igloo Union acquisition. The adjusted net debt on this basis It's just under SEK 2,100,000,000 and liquidity in the group is at a good level. Finally, earnings per share. Again, remember that the earnings per share stated For Q4 2020 benefited from the new Italian tax decree, and you should refer to the Q4 and annual report for details of this. The EPS in the quarter at $0.78 per share Was not only ahead of the measure for 2020, which most people would expect, but also importantly ahead of the SEK0.74 For the Q2 of 2019. So again, the work that's been done puts us in a position while some of the metrics We're now at pre COVID levels, and we look forward to these things continuing into the future. Whilst the EPS continues to improve Again, it is not yet at the level of our ambition. We strive for greater things in this regard. I now hand back to Bodo for closing. Before we take Q and A session. I'll just leave you with a picture of the cube building in Berlin, an installation that was lit by We do like our beautiful pictures, don't we? Because when you have a vision statement, which is a world enhanced by life, It's a very good way of illustrating that. So I would just allow slide for conclusion and recap. And as I hope you've seen from all Michael's numbers in Q2, it was a very good quarter for us. And after the 1st month, 6 months of 2021, we have seen good recoveries, especially in EBIT and order intake, and we entered Q3 with a very healthy backlog. We have dealt with, as we said, very well with the supply chain challenges. We foresee them to continue For the foreseeable future, with some risk of delays, we do from our side everything we can to mitigate those, And we will continue the hard work to do that. Our core values project that I mentioned is Of course, the collaboration project with achieving focusing and achieving more together. Michael gave Some examples, I think we have many examples of increased collaboration around the group that we can come back to And so the reportings in the future. But all in all, positive. So with that, I will end The presentation part and open up for questions. So I will hand back to the other Michael for taking care of that. Thank you, Bodil. And with that, we ask Lydia to open up for questions from the conference Paul, please go ahead. Thank you, Michael. Our first question today comes from Matt Liss of Kepler. Hi, Matt. Your line is open. That was Nooty there. Sorry, and I repeat myself. Congrats on the good set of numbers. And I have a couple of questions there. First, looking at the orders there, pretty strong numbers. And I just wondered If you could say something about the mix there, are you able to pass on I mean, we are seeing quite substantial increases in raw material prices and so on. Are you able to Pass those cost increases on to the customers. Okay. Thank you, Matt, and good afternoon, and thank you for the comment regarding the good reports and good numbers. It's something that we certainly feel That's for about than the last couple of iterations. So thank you for that. When it comes to the order intake, it's a real strong number for the Q2. But you're right that the global supply chain challenges for logistics and materials is around us. And all of our operating companies have now passed on the impact the cost impact of those increases Through to our luminaire prices to the market, there will, of course, be a little bit of a timing delay before some of those From quotations and signed way through to orders and invoicing, of course, that's only natural. But also on the supply chain side, that Timing is also represented through the inventories that we hold that were obviously purchased at the lower price level. So in answer to the question, yes, We can pass them on to the market. And yes, we have now adjusted our prices accordingly to deal with that. Okay. Thank you. And then I have a question regarding the I mean looking at the seasonal trend, previously, if you look at previous years, I mean maybe the order Eagle Senior acquisition, You have this, well, the Q3 was normally somewhat stronger, the strongest of the year. Should we expect to see the same Seasonality this year or is there any sort of if you could give some comments about that. Okay. Certainly, you're right with your observation. And I think that observation carries on even post the Gazzini acquisition. What we do know, Matt, is that we are sat on an order backlog position that circa SEK400 1,000,000 Higher than it was at the start of the year and over $500,000,000 that's higher than it was a year ago today. So we move forward into the Q3. On the downside to that, we do have the supply chain challenges. As we put in the report and as Frode has commented, there was no significant disruption caused by that in Q2. So we suppose we don't expect any significant confidences of that as we move into the Q3. So the seasonality, I think, remains intact across the Faygold Group. We are sat on probably a record We've not checked, but probably a record for the backlog position. And then the only cloud on the horizon now, I suppose, is the supply chain. But As Bodo says, we have dealt with it very well so far, and we continue to deal with it well around us today. So I think the seasonality comment remains intact, and we look forward to the 3rd Q4. There's no reason why we shouldn't be. We've got good momentum, good activity levels in most of our main markets and a very, very strong order backlog position. I think what you also need to remember from our part, which is very important, is that we are a certification business. So when you look into it, it takes 12 to 18 months to really make a difference. And I think that's also what you started. It was difficult in Q2 last year because it was difficult to meet people And the industry wasn't used to deal with it digitally. So that has also been taking step by step in terms of getting more digital mature We're dealing with it, but we also have had the possibilities of having much more face to face meetings Compared to what we did a year ago. I think there are also other factors that play in, in addition to the seasonality. Then again, in the outlook, you mentioned that it might be I mean, you are back to pre COVID levels in the second quarter, But you also indicated for the full year, it may be too early to see such performance, I mean, pre COVID. When do you expect to see that well reaching the pre COVID levels on a yearly basis? Well, you're right. To pick that up from the outlook, we did mention that it may take a little longer to get So pre COVID levels on a full annual basis. As Bodo mentioned and I mentioned in the financial side, we are now tracking At the EBIT operating level operating margin level, we are now tracking the rate of profitability that we saw pre COVID, And that's good now for the 1st 6 months of the year. And from a growth perspective, If we do carry on like we performed in the Q2, then it can't be very many quarters away. You know We don't give ourselves a forward looking target objective, Matt. But if we carry on at the same sort of trajectory, It can't be very far away before the annualized numbers are matching what we saw in 2019. We are quite conservative people. Yes. It's good to know. I remember We did say in the Q4 webcast or the Q1 that We do see the recovery taking a while, 2 to 3 years. Again, on both of conservative comment, The fact that we're sat here today in August of 2021 and the recovery is coming ahead of that plan, That only serves to do as well for the future. And as I say, stacked here with a tremendous order backlog, We are pleased that the market is recovering faster than our conservatism that we exhibited 90 and 180 days ago. Great. And then a small one here. About the CapEx for the full year, could you give some guidance there? About the CapEx, yes, certainly. Well, we know that the focus during 2020 was on cash and cash management. So we did temporarily suspend capital investment projects. When we realized that we've got a good grip on liquidity and cash at bank And additional reserves should we need it. Then towards the middle of the Q4 last year, we started To release a little bit on the capital investment side, and then that carried on through the Q1 and carried on quite strongly during the Q2 of this year. So we expect the capital investment to be approaching 1.5 percentage points for the full year, 1.5 percentage points of the net sales number. That's still on the low side for the Fagerholt Group. It's still less than the long term level of depreciation, But it's because this gap of temporary suspension that was built in last year, it's now starting to come through. And we do expect to see an increase in that in Q3 going into Q4. Great. And a final one, I mean, you mentioned that the gearing is back on pre EcoCindy level and what is the sort of Interpretation of that, do you see similar kind of acquisitions out there, Not this launch as you could see it maybe, but is there more to do in the acquisitions side? Or should we expect dividends to pick up or something else Maybe. I mean, if you look into our strategy, we have a where we're saying we have a high focus and collaboration on organic growth. But of course, M and A is still part of our strategy as well, more coming out of the business areas Then it's coming from a group level. And I mean, you've seen us doing some of the smaller technology acquisitions. Then it needs to fit into the strategies. I think we still have an appetite. I think the number that we are down to pre Evusini means that If something comes up and we think that this is good, we are ready for it again. So I think that's the first step of it. But from the strategy, we see both organic and mergers and acquisitions. And we never say we've got more or less money available for dividend distribution. That's not something that we talk about. Yes. Okay. Great. Thanks a lot. Okay. Thank you, Matt. Thank you. Alternatively, please click the questions tab above the slides if you've joined on the webcast. We have no further questions on the phone line. So I'll hand over to Michael to take questions from the webcast. Thank you, Lydia. We have received questions from the webcast. We have one here on Our product development and if you can elaborate a bit on the share of sales for newly developed products compared to historical products. I can't give you a number, but if you look from a product The policy, I think, here it's important. It will vary between the different brands. But I think for us, it's one of our it's part of our goals How we work as well, innovation is key for us. To keep a high rate of New products is something we work very strongly on. Then it will vary, as I said, between the different brands. But we In general, some of the product utilities, particularly we look quite good at a high rate of new products. We actually had in the April, May time of year, we had 3 specific Product presentation, new product presentations from 3 of our brands, from the Fagerholt brand, the Gazzini brand and the White Croft brand, And all three presentations about what are they doing and what's in the pipeline, both just recent, so within the last 6 months And then in the next 6 to 12 months, each one of those is buoyant activity with Fabulous new products in. So I think during COVID, I don't think we've seen a slowing down. I think what it's done is I think it's given people the opportunity To be even more creative and more design aesthetic led during that period. So watch out for some Nice looking luminaires with a high sustainability impact coming through. I've sort of pointed out the Fagerholt multi lume rethink It's a concept that's fairly leading in its class. And I think it's also when you see our business model with the 13 brand, It's very good from a sustainability perspective and product development because we see different types of out of the box thinking coming out The different brands and when they then speak and talk together, they exchange ideas with great to higher innovation level as such. And Hi, Oswald. I spent a fair bit of time in Italy in July. I haven't been there for a long time for obvious reasons. And I think when you look into product development, I never got out of Because there are so many new things that they want us to present. So I think what Michael said, it hasn't slowed down during COVID. We've continued the high innovation level. We have another question here regarding financial targets and if we plan to communicate any long term financial targets in the coming year. The answer is simply no. We've had 75 years A history where we don't do such things. So sorry to be so short, but that's not what we do. Our ambition, short term ambition To return to pre COVID levels as soon as we possibly can. We stated that in the Q4 reporting webinar. We stated that again in the Q1 and today in the Q2. So first of all, let's get back to pre COVID, Which is a big tick in the box. We're well on the way there. We're excited about the short term future. And then with all the Strategic alignment and strategy plans that are taking shape. They're not just plans now. We talked before about the collaboration areas. So beyond that immediate short term of getting back to pre COVID, again, it's a healthy situation that we see. Yes. And we prefer to have a stable, healthy long term growth as it goes, but we won't put any numbers periodic firmly. Good. And with that, we are done with the questions here. So Just before we end, Odile, any last reflections from your side on the quarter and the presentation here? I think from a summary, very short summary was that it was a very good quarter for us With maybe stronger signs of recovery than we thought. So we're very happy about that. And I also think that It was positive indicators on all normally when you do something, you have something that feels a little bit less good, but here it was only positive from the numbers. And also that we continue step by step to work on all our strategic topics, which for us is Equally important that we see things going in the right direction. I think that was a very short summary, a lot of positive. Great. And with that, I think we end today's call. And thank you, everyone, for joining the conference call. We hope to see you again at our Q3 presentation, which will be on October 29. So again, thank you for today. Thank you for joining us. This concludes today's call. You may now disconnect your line.