Earnings Call: Q3 2021

Oct 26, 2021

Good morning, everybody, and welcome to this presentation of Envato's 3rd Quarter 2021 Results. My name is Henrik Janneron. I am the President and CEO. And with me, I have Peter Whelan, CFO and Deputy CEO. Next page, please, Page 2. We will spend the coming 25 minutes or so going through a brief introduction to invito for those of you who are new to us, giving an update on the Q3 highlights as well as the performance and the 1st 9 months performance. A short update on M and A status, looking to the market outlook as well as our short term priorities. Peter will go through the detailed financials, and I will then close with a summary, after which There will be plenty of time for questions. Next page, please, Page 3. So very briefly, for those of you who might be new to us, Envigo is a leading window group in Europe with a clear market leader position in the Nordic region as well as strong presence in the UK and Ireland. We have net sales rolling 12 months of SEK 7,300,000,000 with an operating EBITA margin of 12.2%. And we have roughly 4,600 employees in the 12 countries you see marked in dark blue on the right hand side of the slide. The white box that you see on the right hand side picture are where we have production locations across Northern Europe and we market and sell all the spectacular brands that you can see on the bottom part of this slide. Next page please, Page 4. We have a clear and proven value creation model to drive sustainable shareholder value over time. It's based on 5 elements that ensure that we deliver long term, cost efficient, both customer as well as employee value in a sustainable way and hence, drive shareholder value over time. It's based on our proven ability to improve businesses based on the 50 plus acquisitions that we made over the 2025 and some changed years. And we effectively plug in acquired businesses here, but obviously being sensitive to the to the starting point of the businesses we acquire to protect the base and maximize an incremental value. The 5 Five elements is, if we start from the top right hand side, that we believe in a decentralized accountability model with a strong customer and business focus as well as local leadership and drive, effectively owning the agenda, the customer relationship and the performance of the business locally. We drive efficiency synergies from sourcing as well as technology, improving the profitability of the businesses within the group with efficiency and better prices. We drive a very clear and strong performance management structure with a balanced scorecard KPI sheet that drives the right behaviors across the business, delivering business improvements over time. We believe strongly in capital efficiency as well as smart capital allocation. And lastly, the 5th one, use this cash generated through the improved business performance through the synergies that we derive to do value creating M and A as well as to invest for growth. And all in all, making sure that we do this in a sustainable way to be a sustainable business for a sustainable future. Next page, please, Page 5. Looking then at the Q3 highlights, which was again a strong quarter for Envido. We We posted the 10th consecutive quarter of strength in margins as well as the 6th quarter in a row of organic growth. We saw favorable markets in general, both on the consumer and the industry side with a continued strong order intake for the group. We continue to see high price pressure on input materials as well as transportation, which we mitigated both with improvements in efficiency an improvement in the central cost level as well as a strong proactive work with price increases to the market. Next page please, Page 6. Looking then at the numbers. We grew in the quarter with 11% to SEK 1,897,000,000,000 organically up 10% year over year. We posted the highest operating EBITA ever in Single quarter SEK 275,000,000, up from SEK 247,000,000 last year, which means that the operating EBITA margin We came in 0.1 percentage points up versus last year at 14.5%. We had a continued strong ordering pick, up 22% year over year or 20 percent adjusted for acquisitions, which means that we closed the quarter with the highest order backlog and we're up 75% year over year to SEK 2,283,000,000 or up 68% adjusted for acquisitions. We continued with strong cash generation, closing the quarter with a net debt versus operating EBITDA, excluding IFRS 16, of 0.7, which is down from 1.2 at the same time last year. Next page please, Page 7. Looking briefly at the development, the 1st 9 months. Sales has grown by 14% to SEK 5,550,000,000. Organically, that's plus 15%. Our operating EBITA is growing considerably to SEK663,000,000, up from SEK 4.98 million last year, which means that the operating EBITDA margin has improved by 1.7 percentage points to 11.9%. Earnings per share has grown nicely, up almost SEK 3 per share to SEK 8.57 per share. Next page please, Page 8. Looking at the business area south, As you can see in the green chart on the right hand side, we have the vast majority of the sales exposure here to the consumer market, which has allowed us to driving continued profitable growth in the business area in the quarter. The larger Danish units continue to grow sales as well as margins in an overall positive consumer market in Denmark. We've seen a good rebound in the Irish market after the COVID shutdowns with a fairly strong market both for renovation as well as for new construction. E commerce grew organically 7%, but against very high Comparables. In Q3 2020, we grew organically by 42% in the e commerce business, but still with a strong order backlog, up 30 Jan, 35% year over year. Reported sales for the business area, up 11% organically, that's plus 12% to SEK 873,000,000 with an operating EBITA margin of 23.6%, slightly down versus last year, mainly driven from strategic investments in marketing and partially IT for future growth. And we closed the quarter with an order backlog up 53% versus last year. Next page, please, Page 9. Looking at Business Area North, if you look in the green chart here on the right hand side, you can see that we have a bigger industry market exposure in North. And in the quarter, we continued our growth and also grew the order backlog to very strong levels. Sales grew fueled by strength and positions in general in all geographies in North with a both positive and a consumer and industry market. We saw a good development for 1 of our biggest businesses, Lindqvans Dock, and particularly its consumer facing installation brand, Lindqvans Jan, of Platts. The industry markets have recovered better than expected by against the expectations both by industry assessors as well as by ourselves. Reported sales grew 10%, organically plus 8% to SEK 983,000,000. Our operating EBITA margin came in at 7.9%, slightly down from last year, mainly driven from strategic marketing investments for future growth. And the order backlog at the end of the quarter was up 92% versus last year. Next Page 6, Page 10. Briefly then an update in terms of M and A. We do see an overall higher activity level in this area and also increased opportunities. As the markets open up and travel restrictions are lifted, there is an increasing ability to meet their interactions with potential targets. With our very strong balance sheet, our acquisition dialogue has been accelerated considerably during 2021, which means that we are presently in multiple talks with potential targets, which is well in line with our ambition to increase our total growth rates with value creating acquisitions. Next page please, Page 11. Looking then at the market outlook, We obviously entered Q4 with a very strong order backlog, which will help us deliver sales in short term and overall strength in positions in all our core markets. We see in the near term health activity levels on both the consumer and the industry side. However, it's hard to predict if and or when input material inflation, transportation costs as well as continually lifted COVID restrictions will impact market demand in 2022. Long term, our optimistic continues to be sorry, our outlook continues to be optimistic with regards to an increasing demand for energy efficient and energy saving windows and doors, driven by an increasing desire to invest in a sustainable and good life at home. Next page please, Page 12. If we look then briefly at the short term priorities, they remain, to a large extent, the same. We will continue to keep a close eye on input material inflation to make sure that we take swift and resolute action with regards to market pricing to compensate. We will maintain a strong customer focused execution in a very dynamic environment that's out there at the moment. We will continue to increase our M and A efforts. We will continue with our value generating investments in both initiatives, both on the market development side as well as on the supply chain side to drive further increases in capacity. And we will continue to increase our efforts to drive our sustainability agenda, both increasing the positive impact we can have with energy saving windows and also continuously decreasing the impact that we have on the environment and the society around us. Next page, please, Page 13. And with that, I'm going to hand over to Peter, who's going to take you through the financials. Peter, please. Thank you so much, Henrik. Please turn to Page 14. Page 14. On this We can see the income statement for Q3 year to date, late 12 months as well as last year. If we start with the quarter, Q3, Sales were up 11% compared to last year. If we then adjust the sales with acquisitions or acquisition as well as the currency impact, Organic sales growth was 10% compared to last year. Gross margin was slightly improved from 27 point 6% to 27.8%, and we have a negative impact from higher material costs. This has been mitigated by higher sales prices and also we have a higher volume, thereby higher capacity utilization and somewhat improved efficiency in the quarter. We also have a positive mix impact in the quarter, which has a positive contribution to the gross margin. Our overhead costs have increased in the quarter, mainly sales expenses. We have higher sales expenses compared to last year driven by higher volumes but also driven by investments in marketing. We also have slightly higher administration costs compared to last year, driven by investments in IT. So looking at our profit level of operating EBITA, It has been improved by 12% from SEK 247,000,000 last year to SEK 275,000,000 this year. And this is the highest result ever for a quarter. The margin has also improved from 14.4% to 14.5%. EBITA is the same as operating EBITA in the quarter because we don't have any restructuring costs in this quarter. Last year, we had a restructuring cost of SEK 7,000,000 in Q3. Further down the income statement, we can see that profit after tax And Sweda earn per share has been improved by 17% compared to last year. EPS was 3.57% this year compared to 3.5% last year. Year to date, we have a sales growth of 14%. Organically, it's plus 15%. The margin has been improved by 50 basis points from 25.7% to 26.3%, mainly thanks to the improvement in the beginning of the year before material prices started to increase. Operating EBITA has been improved by 33%. EBITA has been improved by 37% and profit after tax as well as earnings per share have been improved by 63% compared to last year. Earnings per share is today on €8.27 compared to €5.68 last year. For the period latest 12 months, meaning from October 2020 to end of 10, 2021, sales has increased and has reached SEK 7,000,000,000,349,000,000. And the operating EBITA A margin has been improved and is today 12.2% and earnings per share based on 11.59. Envida has in October received information from Stuhua in Sweden that Envida will receive repayment of group health insurance for workers in Sweden. The total amount is NOK 90,000,000. This repayment has not It's been booked in Q3 results. It will be booked in Q4 and will have a positive impact Of the results in Q4 of NOK 90,000,000 before taxes. If you look at the page, we go to Page On this page, we can see the sales development as well as the order intake development for Q3 For 2019, 2020 as well as 2021. To the left, you can see the development of sales and to the right, you can see the development of the order intake. Sales have increased and was plus 11% compared to last year, organically plus Top 10% and we reached the sales of EUR 1,897,000,000 and also above the level of 2019. The order intake was plus 22% compared to last year. If I take away the acquisition we made in April, Order intake is plus 20% compared to last year. This is actually the highest Best order intake ever in a quarter, the first time ever in Veeder, was above SEK 2,000,000,000 in the quarter. Jan. South had an order intake improvement of 9% and North had an order intake improvement of 34% in total. And the takeaway, the position in Finland was plus 31% in the quarter compared to last year. The left hand page, we go to Page 16. This page It's showing the order backlog end of each quarter from Q3 2017 up until Q3 2021. As you can see on this page, order backlog has increased and has reached the highest level ever. Taxi improved order intake in Q3 with order intake of plus 22% and sales was only plus 11%. The order backlog was improved also in Q3 this year. And we have a total order backlog of EUR 2,283,000,000, an increase of 75% compared to last year. If we take away the acquisition, the order backlog is plus 68% compared to last year. The higher backlog has delivered times, and most business units have today longer delivered times and we normally have this period of the year. South had the order backlog increase of 57 53%, and North had the order backlog increase of 92% compared to Logic. And a higher backlog end of September will have a positive impact on sales in Q4. If we turn to Page, we go to Page number 17. This page is showing The operating EBITA and operating EBITA margin for Q3 as well as year to date. To the left, you can see the Q3 for Janssen. 2019, 2020 as well as 2021. And to the right, you can see year to date in the table. This year, the market has improved from 14.4% to 14.5%. Jan. And operating EBITA in SEK was improved from NOK 247,000,000 to NOK 275,000,000. Both North as well as South had lower margin compared to last year. However, we have somewhat positive mix. South has been growing more than north. That has a positive contribution to the group margin. We also have improved results Within Other, Other is internal companies supplying North as well as South with treated aluminum. There are growing internal sales as well as positive results in the quarter compared to last year. And we also have lower central Project costs in the quarter compared to last year. So in total, a positive margin improvement of 0.1% units compared to last year. And ENVIA has improved the margin 10th quarters in a row now. In 2019, the margin was 12.2%. January to September, the margin has improved From 10.2% last year to 11.9% this year, and in 2019, the margin was 9% in the same period. If we then turn page, we go to Page 18. This page is showing net debt as well as net debt compared to operating EBITDA. The net debt has been slightly reduced in the quarter, reduction of about euros 200,000,000 compared to end of June. Excluding IFRS 16, the reduction is €198,000,000 and including IFRS 16, the reduction is € 209,000,000 The net debt normally decreases in the second half of the year due to seasonality within the business. This year, CapEx has been a little bit lower compared to last year. It is due to the fact that we have a longer delivery time on machineries that we have ordered, and the CapEx will come later Jan during this year and also come from in the beginning of next year. Net debt plus EBITDA excluding IFRS 16 has been reduced from EUR 1,200,000 last year to EUR 0.7 end of September this year. And the IFRS 16 debt amounts to SEK 343,000,000 And net debt compared to EBITDA, including IFRS 16, has been reduced from 1.5 to 1.0. If you look at the page, we go to Page 19. This page is showing the performance of Enviro from the IPO in 2014 until later 12 months September 2021. Sales have been improved from EUR 4,916,000,000 to EUR 7,349,000,000,000,000,000,349, An increase of 49% since IPO equals to a CAGR of 6%. At the same time, operating EBITDA has been improved by 78%, and the margin has been improved from 10.2% units to 12.2% units. We had a good development in 2015 and 2016 in on the margins. The margin was improved, mainly driven by higher consumer sales. Jan. Then in 2017, beginning 2017, we had some problems with sourcing and we had quite large extra costs from our sourcing problems in 2017. And then end of 2017 2018, We had higher increase of industry sales. And since we have a lower margin on industry sales compared to consumer sales, The margin was negatively impacted during this period. Then from 2019 and up until today, The consumer share has been improving. The margin has been improving. InVideo has improved the margin 10 quarters in a row. And we also now see the latest quarters and higher organic sales growth and thereby higher capacity utilization to improve efficiency. And the market today is rolling on 12.2% end of September 2021. I now hand over back to Henrik, and he will make a short summary, and then we will open up for questions. Next page please, Page 20. So summarizing the Q3 and the 1st 9 months, We've seen strong sales and order intake growth, continually improved margins, strengthened market positions in all our Core Markets with market share gains. An increasing M and A activity levels also now facilitated by travel restrictions wearing off following the elimination of pandemic restrictions and continues ongoing investments for future profitable growth, both on the supply chain side as well as on the marketing market development side. Next page please, Page 21. So with that, we open up for questions. I'll hand back to the operator, please. Thank you. Jan. We have a first question from Adela Dachen from Handelsbanken. Jan. Madam, please go ahead. Hi, good morning, everyone. And this is Ella Daseke from Handelsbanken. First of all, I would just like to congratulate you on a strong quarter and obviously improved margins Despite inflationary pressures, and my first question relates to that. And if you feel that your position in the market allows you to better control The cost increases and if you expect the price adjustments that you've already initiated to be maintained in the long run. Hi, Adela. Thanks very much. I guess on that question, I think Jan. The relative size that we have in our in the core markets, but actually even more so the leverage that we have on the Simcyte, given our scale and how we drive synergies from sourcing as a group, allows us to stay a bit more in control of timings as well as the overall development with regards to prices. I think it also that level of control and how should I say, information advantage also allows us to drive the narrative around price increases into the market a bit better than the parts of our competition. In terms of the outlook going forward, we expect to see some continued, particularly in some areas, inflationary pressures going forward. We will hold on to the price increases that we have made and potentially then take even further price increases to compensate for that. But obviously, at some point, we'll see input material prices starting to come down again. And then we will likely have pass some of that on back to the markets. But for the moment, we see continued inflationary pressures and we will hold on to the price increases and potentially take more. Got it. All right. And then secondly, on the order backlog, obviously, it's very high. And I'm wondering if you could shed some more light on that, So what this is driven by? And then also if you see any capacity constraints that may limit you on delivering on that in the Q4. I know it's your Largest quarter, but I don't think it's a question worth asking. Yes. So I think it's to answer First part of the question, overall, we've seen a little bit of a shift in the back end of the Q3 where the order intake growth has really accelerated also in business area north, which is pleasing, obviously, fueling the continued growth there. But across the board, the orders back The situation is strong in general. And obviously, the main driver has been strengthened positions. We've taken share in almost basically all of our geographies, but also fundamentally favorable market developments that are supported that. Looking at the capacity, Janssi. I mean, obviously, the ability for strong relative growth in the short term is more limited in the high seasons of Q3 and Q4. We still we do think that there is some opportunity to grow versus last year. As you might remember, we had some operational Disturbances last year, for example, we had a mid COVID related shutdown in parts of Denmark. We also had some COVID disturbances. So we think there is some opportunity to grow a bit further. And then I'll also highlight the fact that we are making continued supply chain investments to expand capacity to deliver on these expectations. All right. And then my last question is on M and A. And I believe you've previously stated that you aim to close On at least 1 or 2 or maybe 2 more deals by the end of this year, do you believe that that comment is still viable? Jan. Let's say that we are How should I say? M and A processes, as you know, are always somehow unpredictable, but the ambition to close One more deal this year, SteelStats. And we have sufficient activity in the pipeline to support that. So that ambition is still there. But obviously, at the moment, we're also very focused on building a strong pipeline for in terms of M and A for 2022 and beyond. So that work is also very much ongoing at the moment. Got it. All right. Great. Thank you very much. Thank you. Thank you. Next question from Kenneth Jan. So from Carnegie. Sir, please go ahead. Yes. So two questions, please. 1st, on capacity utilization and how smooth your production have been During Q3, I'm thinking about shortage of materials, if you needed to take stop days and and so on or if you feel that you have had a good capacity utilization and good flow in production, so to speak. Jan. Yes, thanks, Kennen. Very relevant question actually. And we have seen operational disturbances in the quarter, I would say. All in all, probably as a whole for the group, a bit less than the COVID disturbances that we saw last year, but stiff disturbances, and we've seen it particularly in Finland and in Sweden. And it's been around both logistics inbound logistics, but also actual to some key raw materials, which has forced us to make some not material shutdowns, but some minor shutdowns here and there, a few days of parts of production. So it has impacted efficiency negatively in the quarter. Okay. And then the next question is that you had a very, very Jan. Order book now in the end of Q3. That bodes very well for Q4. But when the market is very, very strong, you could also have Some sales volumes that spilled over into Q1. So I'm curious how you're planning to Plan your manning during Q1, which is usually the low season for you. I mean, last year, you had A bit higher sales volumes in Q1, do you see that also this year? I think in I mean, if you look at the structure of the order backlog, it's fair to say that the order backlog is big, but it also means that it's long. And in that sense, we do expect to be a need to man our factories on a slightly higher level Then what will be normal in a low season in January February. And then the perspective at this point, given the length of the order backlog is Jan. That January looks okay from that perspective in terms of having to with Mann. However, if you look at this back end of the quarter, quarter 1, the visibility there is still a bit less. But at least to start, for the quarter, we will have to man our factories at a slightly higher level than we would typically do in the low season. Okay. Sounds great. That's all for me. Thank you. Thank you. Thank you. No more questions for the moment. Jan. And while we wait for any further questions, I'll just take the opportunity to remind Jan, that you're cordially invited to Enviro's Capital Markets Day, which will be the 9th December in Stockholm. All the details as well as virtually, by the way. All the details is on our website, www.indido.com. Thank you, gentlemen. We have no more questions by phone. Okay. So if there are no further questions, I thank you all very much for your attention and we