Earnings Call: Q2 2021

Jul 16, 2021

Ladies and gentlemen, welcome to the Envigo's Audiocaster Teleconference Q2 2021. Today, I am pleased to present CEO, Henrik Jarmensen and CFO, Peter Lowen. For the first part of this call, all participants will be in a listen only mode. And afterwards, there will be a question and answer session. Viegas. Please begin. Thank you very much. Good morning, everybody, and welcome to this presentation of Envido's Second Quarter and First Half Year Results twenty twenty one. My name is Henrik Jallmaffen. I am the President and CEO. And with With me, I have Peter Whelim, CFO and Deputy CEO. Next page please, Page 2. So we will spend the coming 25 minutes or so going through a brief introduction to Invedo for those of you who are new to us. A few words on the Q2 performance, the highlights as well as the first half year numbers. I will go through a brief update on M and A and some words on the market outlook as well as our short term priorities. Peter will then take over and go through the financials in a bit more detail, after which I will summarize Henrik. Next page, please, Page 3. So for those who are new to us, we are a leading window group in Europe, a clear market leader in the Nordic region with a strong presence in the UK and Ireland. Over the past 12 months ending in the quarter 2, 21, we've achieved sales of SEK 7,200,000,000 and an operating EBITA margin of 12.1%. We've got roughly 4,600 employees in the locations that you see marked with white dots on the map on the right hand side. And we market and sell all the fantastic brands that you can see on the bottom part of this slide. Next page, please. Page 4. Our value creation is based on a clear and proven model, which we refer to as our virtuous cycle to drive shareholder value. These are 5 elements that are the basis for our value creation, and they ensure that we deliver long term cost efficient Customer value as well as employee value and hence drives shareholder value over time. Based on our proven ability to improve businesses to drive profits after more than 50 acquisitions over the past 25 years. And it's built to plug in acquired businesses, obviously being sensitive to their start point to make sure that we protect the base, but also maximize the incremental value that we can drive from new acquisitions. These five elements then, starting from the top right hand side, is that we drive efficiency synergies from areas such as sourcing and technology. We can achieve better pricing and innovation by buying together as a group, but also sharing product and production technology to improve the businesses Rui, under the Enviro umbrella. Secondly, we run a decentralized model with strong local accountability with focus on business and focus on customers with strong leadership and drive because we believe that this drives better decision making closer to the customer and also drives performance and results focus. Thirdly, we believe that what you measure is what you get. So a clear and strong performance management structure and KPI structure with a strong focus on the results that you achieved, drives the right behaviors and drives results over time. Number 4 is a strong focus on capital efficiency and allocation, which leads then into the 5th one, which is an integral part for the long term value creation, which is good value accretive M and A as well as investments for growth in the different business units. Next page please, Page 5. So in terms of Q2 then, Well, overall, it was a strong quarter for Envito. We achieved sales above SEK 2,000,000,000 for the first time in a single quarter, which means an organic sales growth of 19%. We had an all time high operating EBITDA in the quarter as well as a strong order intake and close to quarter with highest ever order backlog. We saw 15% organic growth in e commerce despite with some considerably tougher comparables from last year. And all of this means that we posted the 9th consecutive quarter with strength in margins as well as the 5th quarter in a row with organic growth. Next page, please, Page 6. Looking then at the numbers. Sales grew to SEK 2.009 billion, up from SEK 1.719 billion last year. The operating EBITA grew by SEK 65,000,000 to SEK 267,000,000,000. The operating EBITA margin strengthened by 1.5 percentage points to 13.3%. Order intake, up 32% or up 27% adjusted for acquisition, which means that the order backlog at the end of the quarter increased by 61% for 55% adjusted for acquisition to just north of SEK 2,000,000,000. And the net debt versus operating EBITDA, excluding IFRS 16 closed at NOK 0.9, which is considerably down from the NOK 1.7 at the same time last year. Next page, please. Page 7. Looking at the development, the 1st 6 months of the year, sales has grown nicely organically at 18% up to SEK 3,000,000,000 with SEK 3,000,000. The operating EBITDA margin sorry, the operating EBITDA strengthened considerably to SEK 388,000,000 with an operating EBITA margin then strengthening 2.7 percentage points to 10.6%. We've closed the acquisition of Metalliti of Allymaki in Finland being an important part of creating and the conditions for long term profitable growth in Finland, not the least in metal windows and doors as well as facade systems. And we have achieved almost a doubling of our EPS to SEK 5 sharp per share. Next page, please, Page 8. Looking then at the Business Area performances, starting with Business Area South. We saw high growth rate and further strengthened margins in the quarter. As you can see in the ring chart on the right hand side of this chart and as Many of you will remember from before, we have a considerable exposure to the consumer market in Business Area South. E commerce grew nicely in the quarter, 15% organically. And again, despite some tougher comparables from last year, Order intake grew 7%, and the quarter closed with an order backlog up 43% versus same time last year. The larger Danish units continue to grow sales and margins in what's been a favorable consumer market. And we've seen some Quite considerable recovery in demand in the UK and Ireland post some quite severe COVID-nineteen related shutdowns and restrictions in the past year. As you can see in the charts on the top right hand side, sales grew nicely organically, plus 26 percent or reported plus 20 percent to SEK 855,000,000. And as you can see in the chart on the bottom right hand side, The operating EBITA increased and the operating EBITA margin increased from 19.3% last year to 20.8% this year. And the order backlog at the end of the quarter was up 58% year over year. Next page please, Page 9. Looking then at Business Area North, very pleasingly, we've seen continued margin improvement and a good sales growth in the quarter. As you can see here in the ring chart on the right hand side, we have some more exposure to the industry market in North. But in the quarter, sales growth was largely fueled by strength and positions on a positive consumer market. We saw a good profit development, particularly in Swedish Business Units, but also have to acknowledge that the industry markets in both Sweden and Finland has been recovering better than expected both by ourselves but also by industry analysts. As you can see in the chart on the top right hand side, net sales Ritchie. Reported sales grew 14% or organically 30% to SEK 1,102,000,000. And as you can see in the chart on the bottom right hand side, operating EBITA improved and the operating EBITA margin strengthened by 1.2 percentage points to 8.8% in the quarter. And the order backlog at the end of the quarter, up 62% versus same time last year. Next page please, Page 10. Looking then briefly at M and A, which is obviously a very important value driver for the group. We have seen some overall increased activity level in this area. In the COVID pandemic, it's been relatively easier to make progress in smaller Transactions in existing geographies and a bit more challenging to go after larger transactions, particularly in new geographies. However, as the markets open up, travel restrictions are slowly lifted as well as meeting restrictions. We do see some increased opportunities in this area. And obviously, we are in the process of integrating Vitality of Allymaki, which, as I mentioned before, we closed in April. Looking then at our 8 criteria on the right hand side, starting from the top. We focus with the details on businesses within windows and doors because this is our expertise and our focus. We go primarily for profitable businesses. With We prefer to take businesses from good to great rather than going after turnaround cases. We look at businesses with a strong position either in their market and or in their segment. We look primarily at the renovation segment because we run consumer focused businesses, which we know delivers with better and stronger margins over time. We look at management opportunities because we know in our industry, good leadership drives value over time. As mentioned previously, we look at synergy opportunities. Sharing is caring, and we know that synergies in areas such as procurements with better prices, but also product and production technology drives value from the group over time. We have a clear geographical focus on the Nordics, the DACH region, the UK and Poland. And we also look for incremental capabilities, be it in products or in technology, for example. Next page, please, Page 11. Looking briefly at the market outlook. We obviously entered the Q3 with a strong order backlog, which will support sales in the near term. We see for the near term continued healthy activity levels in the consumer and in the industrial markets. However, we also see continued inflationary pressure on with Materials continuing through quarter 2 and into quarter 3, and we are continuously taking price increases to offset this. We see some midterm uncertainty in the markets as society returns to what we refer to as the new normal, But we continue to be optimistic about the long term outlook as the demand for energy efficient windows and doors increases when investments into homes and buildings across Europe increases to decrease their energy intensity. Next page, please, Page 12. Looking then at our short term priorities, which remain largely the same from before, We keep a close eye on input material inflation to make sure that we take swift and resolute price adjustments where needed. We maintain a customer focused and strong execution in what continues to be a quite dynamic environment. We continue our value generating investments in growth initiatives, for example, in e commerce. We obviously continue to increase our M and A efforts as that's an important value driver for the group. And we run The next question comes from the line of Peter. Please go ahead. Thank you. Next page, please, Page 13. And with that, I hand over to Peter, who will take you through some of the numbers. Peter, please. Thank you, Henrik. And then I ask you to go to the next page, Page number 14, please. On this page, we can see the income statement. To the left, we can see the income statement for Q2 in the middle, January to June further right, the latest 12 months and then and to the right 2020. If we start with a rolling 12 months or the latest 12 months, the operating EBITA margin has been improved now 9 quarters in a row. And operating EBITA margin, latest 12 months, is now on 12.1%. For the quarter, sales was plus 17%. And we were, for the first time ever, above the SEK 2,000,000,000 mark with a sales of SEK 2,900,000,000, a growth of 17%. If we adjusted for a currency as well as the latest acquisition, sales is plus 19%. We have a negative impact In sales for the currency when translating external currency to SEK due to stronger SEK in the quarter. Looking at the margin, the margin was improved in the quarter from 26.9% to 27.1%. Even though we have sales even though we have inflation in material prices, especially later in the quarter, We have reduced that or compensated that with higher sales prices, but also with higher volume. The higher volume, especially in April, May, has improved the margin. We have better efficiency and better capacity utilization. Operating in beta, plus 32% compared to last year, from NOK 202,000,000 to NOK 267,000,000. The beta margin, 11.8% to 13.3%. EBITA was improved by 37%. The difference between operating EBITA and EBITA The quarter is related to the acquisitions cost of Metallica Belemaki. Further down in the income statements, we can see that profit after tax as well as the earnings per share was increased by 34% compared to last year. For the period, year end to June, sales is plus 15%. Adjusted for currency as well as acquisition, it is plus 18% compared to last year. Margin, Close to 1% improvement from 24.6% to 25.5%. We had a good margin development in Q1. We had strong sales in Q1 due to the high backlog end of last year. So we opened up the year with a better sales with a higher capacity utilization and improved efficiency, which has also continued in Q2. Operating EBITA, plus 55 percent compared to last year from SEK 251,000,000 to SEK 388,000,000. And further on the Eco statement, we can see that profit after tax is plus 96% and our earnings per share is plus 95%. We have today an earnings per share of even of NOK 5 compared to NOK 2.56 last year. Rolling 12 months or later 12 months, Sales of SEK 7,167,000,000, operating and beta margin of 12.1 percent and an earnings per share of SEK 11.08 compared to. Next page, Page number 15, please. On this page, we can see the development in sales as well as in order intake for 2019, 2020, 21 for the quarter, the Q2. To left, you can see the development in sales and to the right, you can see the development in the order intake. Sales, as I said before, for the first time ever, we are above the SEK 2,000,000,000 mark, sales of SEK 2,900,000,000, Growth of 17% compared to last year, organically plus 19%, high organically due to the currency impact. We have a currency impact negative currency impact of about 3% in the quarter. North was plus 14%. Organically, it's plus 13% in sales in the quarter, and South has sales growth of 20%, organically plus 26% compared to last year. And then in 2019, we had a sales of SEK 1,710,000,000. Looking at the order intake, the order intake has improved even more than the sales in the quarter. The order intake is plus 32% in total, which we call reported order intake. However, when we make acquisitions Henrik. And the order backlog of the acquisition is booked at order intake in our reporting. So taking away the acquisition of Metallica A, Welomaki, The backlog the order intake is plus 27% compared to last year. North has an order intake growth of 39%. Adjusted for acquisition, it's plus 30% Henrik. And SAU had an order intake growth of 22% in the quarter compared to last year. If you then turn the page, we go to Page 16. This page is showing the order backlog End of each quarter from Q2 2017 to Q2 2021. We have The seasonality in our order backlog, normally the order backlog is the highest levels in Q2 or in Q3 and lowest levels in Q4. And as you can see on this graph, we have a quite large improvement in order backlog end of this quarter compared to Q2 last year. And also here, we have this SEK 2,000,000,000 mark. For the first time ever, we have an order backlog above SEK 2,000,000,000. We have an increase of 61% compared to Q2 last year. If we then adjust it for the acquisitions, we Take away the backlog from the latest acquisition, it is plus 55% compared to last year. So a higher order backlog will support sales in the second half of this year. North has a Total backlog increase of 62% and South has a backlog increase of 58% compared to last year. If we turn page, we go to Page number 17, please. This page is showing Operating EBITA and operating EBITA margin. To the left, you can see the development for 2019, 2020, 2021 in the quarter. At the right, we can see the development for the same year, January to June. As said before, the margin has been improved Now 9 quarters in a row, and the margins for latest quarters, Q2 was 13.3% compared to 11.8% last year and 10.9% in 2019. Even though we have a key inflations, It has been mitigated by higher sales prices and we had also improved efficiency and the capacity utilization. We started the quarter with a high backlog. And with a high backlog, we could run the productions in a high speed or high capacitization in April, May, higher than normally during this month. And thereby, the margin has been improved in the quarter. Looking at the end of June, we have a margin improvement of 2.7% units from 7.9% to 10.6 and the CEO of the company. It was 7.3% in 2019. We also had a good margin improvement in Q1. Both in Q1, we had high capacity utilization and improved efficiency, which then continued in Q2, and the margin has improved even further. If we then take the next page, please, Page 18. This page is showing the net debt and the net debt versus EBITDA, including as well as excluding IFRS 16. The net debt has increased in the quarter compared to quarter 1, quite normal due to the dividend payment and also due to seasonality. We paid out dividend this year of SEK 261,000,000 in May. Last year, we didn't pay any dividends, and we also had a quite Good cash flow improvement last year due to working capital. We have improved working capital also this year in Q2, but not as strong as Q2 last year. However, even though net debt has increased, the net debt to EBITDA is still on the same level of 0.9 because we have improved EBITDA and compensated a higher net debt. So net debt to EBITDA, excluding IFRS 16, is NOK 0.9 compared to NOK 1.7 1 year ago. If we include IFRS 16, we add on net debt of SEK 354,000,000 And the net debt to EBITDA is SEK 1,200,000 compared to SEK 1,900,000,000 1 year ago. Next page, please. We go to Page 19. This page is showing our development since 2014 until today, well in 12 months. We made an IPO in September 2014. In 2014, we had a sales of SEK 4,916,000,000 and operating EBITA margin of 10.2%. Sales have been improved by 46% since 2014, equal to CAGR of 6%, and we are now on SEK 7,167,000,000. Operating in beta has, during the same time, improved by 73%, equal to 9% in CAGR, and we are today on a margin level of 12.1%. We had a good mine development in 'fourteen, 'fifteen and 'sixteen as well. We were close to 12% end of 2016. Then in 2017, the beginning of the year, we had sourcing challenges, which cost us and cost us our margin. End of 2017, 2018 and 2019, we had also a higher degree of industry sales or lower degree of consumer sales. Those of you who know about us, we know that we divide our sales between consumer and industry, and we have Higher margin in consumer sales compared to industry sales. So in 20 eighteennineteen, when the consumer sales Rui. The share was reduced. The margin was also then reduced. Now we have improved the margin 9 quarters in a row. We have improved consumer share. We are today closer to 75%. It has been improved to 2020 as well as beginning of this year. We have higher volume in our factories. We have improved efficiency and we have better capacitization. And thereby, the margin has been improved, and we are today on 12.1% rolling 12 months. I'll now hand over back to Henrik. Henrik will make a short And then we will open up for questions. Next page please, Page 20. So to summarize the Q2 and the 1st 6 months, obviously, we've seen a strong start to the year in what's been an overall good Consumer Market. We've seen healthy sales and order intake growth as well as strength in margins in both our business areas. Made some progress, although potentially modest so far, but in terms of the acquisition of Vitality Value, Mackie. But we are also increasing the M and A activities going forward. And we entered the Q3 with a strong order backlog as well as a short term favorable outlook for both the Consumer segment and the Industrial segment. Next page, please, Page 21. So with that, thank you very much, and we open up for questions. Operator, please. Henry. Our first question comes from Adela Dushyin from Handelsbanken. Please go ahead. Your line is now open. Yes. Good morning, everyone. This is Oz Galadash here on the line with Bank Young. I have Two questions actually. The first one is related to the inflationary pressures. It seems like you've been able to pass those Haas over to the end customer already. Is that correct? Or should we expect some additional margin pressure in the quarters to come? Hi, Adela. I think what we've seen is we've seen more inflation coming through in the back end of the quarter than early on. We have Wirth. We've taken both swift and, I would say, quite considerable price increases, but we will see more inflation coming through in quarter 3, Ritchie, which will might put some pressure on the gross margin. On the other hand, we have an opportunity to with better production utilization and efficiencies to compensate some of that as well. But Henrik. To compensate some of that as well. But as I said, we have also taken And when we're talking about those price increases, could you just give us some context about what exactly you mean by that? Are we looking at 3%, 5%, 10%? What exactly does the price increases mean? Yes, that's a very good question. And in reality, as you're familiar with, we have 29 business units. And the answer to that question are probably 29 different answers. But broadly speaking, it's in the Spectrum price increases are probably in the spectrum of 3% to north of 10%, a bit depending on The material mix that the business in question is selling and also the customer mix. So it varies a bit, but it's in that range. Henrik. And are you seeing that your competitors are doing similar things? And do you expect as a result of your price increases that you might lose some market Ritter, if your competitors are not increasing prices as well. We've seen with There's moving on price as well, perhaps a little bit. We were a bit closer to the development, I would think, and we were a bit earlier, but we've since seen the with the investors moving as well. We're not expecting any to lose any sales at this point on market share because of the price increases. I mean, we should also remember that we're going into the second half of the year with a strong order backlog, Which will obviously support development as well. But we've seen a move in the total market on price. All right. And then my second question relates to your M and A efforts. If you could first just remind us of what The M and A process looks like for you, like how exactly do you go to market when you look at potential targets? And then what characteristics are at the top of mind for you at the moment? Yes. So there are 2 typical ways that we carry out The first one, which is the most common one, is actually that we get in contact with proactively with the current owners of businesses that we find interesting. Mainly these are private and or family owners and many of the businesses are also family led. Those Processes tend to take a bit of time and they are a bit unpredictable in terms of how long time they come. So there is a bit of a there is a risk of a catch up effect in terms of that type of process. The second type is then a bit more uncommon, but also happens where we are actually contacted by potential sellers or sometimes advisors. And at the moment, we are actually pursuing targets in both of those categories. The situation is still a little bit dynamic. So in terms of predicting the time line for this, it is a little bit difficult. We have the ambition to close or to get to, I would say, and sign 1 or 2 more targets this year. That is our ambition. But obviously, that depends on the exact response from potential sellers as well as how Travel and meeting restrictions developed following the summer now. Did you say that You worked on closing 2 targets this year or? We have the ambition to sign 1 to 2 more targets Ritchie, this year. Got it. Okay. And then lastly, given your market position here in the Nordics, especially in Sweden and Finland, Do you believe that your capacity or consolidation efforts are limited here? There are some limitations in the Nordics, yes, due to competition restrictions as we have some quite considerable market share, particularly in Sweden, Finland and Denmark. Ritchie. There are obviously you can obviously make niche acquisitions and acquisitions in what I would call neighboring categories, But it would have to be mainly smaller units. All right. That's actually all I had for now. Thank you very much. Thank you. Thank you. The next question comes from Kenneth Hall from Carnegie. Please go ahead. Your line is open. Yes. Thank you. I I have some questions around the very strong demand situation you have. Firstly, what are you doing To increase capacity so that you can deliver on the strong orders. And do you feel that longer Well, first, what are the delivery times if I were to buy some windows from my house right now? Henrik. And do you see that you start losing orders because delivery times are longer than normal? Okay. Hi, Kennen. So the lead times are a bit longer than normal. Yes, they are probably in the range of, on average, maybe with 3 to 4 weeks longer than normal, something like that, depending a bit on the category and where you are. We haven't seen that we're starting to lose orders because of that yet. One of the parameters to take into consideration is actually the material scarcity in the market. So Thanks to our well developed sourcing work and also the fact that we are the leading player in Europe. I think we've been better at securing raw materials in a scarce situation than potentially some of competition, which has actually allowed us to keep factories running potentially a bit more than some competitors have. So the lead times are a little bit longer than normal. And sorry, I lost the second you had a second part to that question, which I lost. Yes. So a little bit, what are you doing in order to increase capacity? It's forcing the main obstacles? Or can you do More in your plant in order to increase capacity. Yeah. I think the answer to that it's a very relevant question. And the answer to that question varies a little bit. It is actually plant capacity is a constraint for us at the moment. As we've said before, one area where we have Reis. Our investment work is actually in our e commerce business. But at the moment, we are somewhat constrained by Production capacity actually in our growth in e commerce. We had a very as many will remember, we had a very strong growth last year. So And those investments will kick in at the beginning of next year, which will then relieve that situation somehow. But in other areas, we do have some more capacity to spare. So they are actually sourcing is the main bottleneck. So it's a little bit of a mix. We're doing we're obviously taking action basically everywhere to maximize capacity, and we think we have Yes. We do have room to further improve a little bit the production utilization. Are you adding more shifts as well or working a lot of overtime that is costly? We're mainly adding more shifts and also actually, in some cases, shifting around production of Products to maximize capacity utilization, but mainly we're adding shifts where we can. Normally Our normal way of operating is normally not to plan for over time. Then obviously, sometimes you run over time because things don't always go as you plan, but we normally don't plan, But rather, Admiral Sheer. And then one thing that I'm thinking about is that if we could get a sense of roughly how much your price increases are. So what I'm after a little bit that you both you have strong order Sorry, strong organic sales growth, both in sort of sales but also in orders. And of that growth, How could that be split into sort of price effect and more volume effect? Oh, that's yes, that's a very, very difficult with question to answer actually, because as I mentioned previously, the price effect, the increase effect It's quite diverse across the units. As I said, there is a spread between probably on the lowest than 3% up to definitely north 10% in some areas. And we also have a quite considerable mix effect, as you know, depending on how big of the order Consumer facing versus industry facing. So I couldn't actually give you a off the bat, a reliable answer with that question. But there is obviously some price impact as well in the order backlog. And there is definitely some mix impact in the order backlog with consumer sales. But to quantify that, off the top of my head, I wouldn't dare to do that. Yes. But it seems then if I look at the reported numbers, it Seems like the majority of the effect is probably volume driven, so to say. Absolutely. That's correct. Yes. Yes. Great. Okay. That's all for me. Thank you. Thank you. Thank you. There appear to be no further questions. I'll return the conference back to you, speakers. Okay. Then thank you very much for your attention. We will close the call there, and we wish you all a pleasant summer. Thank you very much. Thank you. This does conclude today's call. Thank you very much for attending. You may now disconnect your lines.