Earnings Call: Q1 2020

Apr 23, 2020

Ladies and gentlemen, welcome to the Enviro Q1 Telephone Conference for Year 2020. Today, I'm pleased to present CEO, Henrik Halmenson and CFO, Peter Wieland. For the first part of this call, all participants are in a listen only mode and afterwards there will be a question around the session. Speakers, please begin. Thank you very much. Good morning, everybody, and welcome to this presentation of Envito's Q1 2020 results. My name is Henrik Jarmathan. I am the President and CEO. And with me, I have Pietro Weline, CFO and Deputy CEO. I'm going to take you through some highlights in the quarter, a short update on the COVID-nineteen status, an update by business area and then a short summary of the business outlook. Peter will then go through the detailed financials, and I will wrap up with a summary. And there will, as usually, be plenty of time at the end for questions. Next page, please, Page 2. Just starting off with a brief summary of Envido for those of you who are new to us. Invito is the largest window group in Europe and one of the leading door manufacturers. We are a clear market leader in the Nordic region with a strong position in the UK and Ireland, as well as a niche position in Poland and an emerging e commerce position in Germany. We have about 4,400 employees in 11 countries, and we sell market and sell all the spectacular brands you'll see at the bottom part of this slide. Next page, please, Page 3. So starting off with some of the highlights of the quarter. Given the turbulent situation with regards to COVID-nineteen, we are relatively happy to report a quarter with modest sales growth, and particularly that it's the 4th consecutive quarter of strength in margins for Envido. We saw increased order intake, 9% up and strength in order backlog at the end of the quarter, 12%, and particularly pleasingly, we saw an order intake turnaround in Business Area North. E commerce continued to grow nicely at 19% in the quarter and with a strong order backlog at the end of the quarter, I'll come back to that. We saw continued strong performance in the larger Danish units with nice growth as well as profit development, a positive development in the largest unit in Finland with good efficiency and good cost control. And as I'll come back to later, U. K. Was the key geography where we saw COVID-nineteen impact, particularly at the back end of quarter. Next page, please, Page 4. If we look at the quarter in numbers, we saw modest sales growth of SEK 5,000,000 to SEK 1,448,000,000. Organically, that was 1% down. Our operating EBITDA strengthened with SEK 3,000,000 to SEK 48,000,000, which means that the operating EBITDA margin strengthened by 20 basis points to 3.3%. Order intake was 9% up, and pleasingly, as I said before, not only South continued nice growth, but also North Business Area North continued or started growing their order intake. The order backlog at the end of the quarter then was 12% up. We had a nice operating cash flow of SEK33 1,000,000, which is slightly below the SEK50 1,000,000 of last year, but we also had a more challenging working capital position to start with. So I'm overall pleased with that performance. All in all, that means that the net debt versus operating EBITDA came in at 2.3x versus 2.8 times a year ago. That means that we continue to work with strengthening our balance sheet. That's a slight increase versus the end of the year. And that's, as Peter will come back to, mainly driven by currency effects on our lending. Next page, please, Page 5. If we then look at COVID-nineteen and the impact on the group, first of all, very pleasingly, we have very few cases where employees have been sick enough to be forced to seek care and thereby be confirmed COVID-nineteen positive. Our priorities have been to protect the health and well-being of our employees, to limit the spread of the virus, but also importantly, to keep the businesses running. I think it's testaments to the fact that we've done that pretty well. We've seen some mixed customer activity in the quarter, but nothing that we would consider to be material yet. The consumer direct installation business model in Finland has been impacted by the measures taken by the Finnish government. And basically, at the back end of the quarter, the UK market activity came to a halt following the government directives with regards to the battle of the virus. All factories are running, except for 3 in the U. K. That we were forced to close following government decision, and those 3 represent roughly 5% of the group's production capacity. Next page, please. Page 6. We have seen some disturbances in material supply so far, but nothing that I would consider to be material. It's been linked to Northern Italy and China, but as I said, nothing material yet. We monitor the situation daily on a business unit level, and we have detailed plans for rapid cost out if and when the demand development requires that on a business area and a business unit level. And the fact that we have a good track record of adapting our cost levels to fluctuations in demand, which is then further supported by our decentralized operations model, gives us a good possibility to manage the situation. Next page, please, Page 7. If you look at the development in Business Area South, we saw good growth and a strong order backlog. The larger Danish units, as I said, continue to deliver well with nice growth and good profit development. E commerce grew by 19% in the quarter, which means that they were 10% of group sales, and order intake grew by 38%, so very nice to see. As I said, the U. K. Business units were forced to a shutdown at the back end of the quarter, thanks to government directives. And we saw continued good development in Ireland, albeit held back slightly at the back end of the quarter by COVID-nineteen development. As you can see in the chart on the top right hand side, sales grew by 9% to SEK603 1,000,000. And as you can see in the chart on the bottom right hand side, the EBITDA margin grew by 10 basis points to 11.0 percent. And the order backlog at the end of the quarter was 17% up versus the same time last year. Next, page 8. If we look at Business Area North, it was really pleasing to see the order intake turnaround in the quarter. We saw a good profit recovery, as I said, in the largest Finnish unit with good work in terms of efficiency and cost control. The largest Swedish units were held back by a weak order backlog at the start of the quarter, but we had a strong order intake and hence, at the end of the quarter, a strong order backlog in both Sweden and Finland, partly fueled by a slight continued recovery in the industrial markets. The consumer direct installation businesses in Finland were impacted by COVID-nineteen negatively as were at the back end of the quarter, the Norwegian business unit. As you can see in the chart on the top right hand side, sales were 5% down to SEK801 1,000,000. And as you can see on the bottom right hand side, the reported EBITDA margin operating EBITDA margin shrunk slightly by 0.5 percentage points to minus 0.2 percent. And the order backlog at the end of the quarter was plus 9% versus the same time last year. Next page please, Page 9. If you look at the business outlook, we obviously entered quarter 2 with a good order backlog, but I would say that the outlook is more uncertain than I think it's ever been, thanks to the COVID-nineteen situation. Consumer demand will be impacted by rising unemployment, but a lot of other factors such as government stimuli, house prices, potential changes in behavior. We already see this breadth, I would say, development of the consumer intake and the way the exact way this is going to impact us going forward is going to be is too early to say. The we've seen some continued signs of industry market recovery in Sweden and Finland, but the continued outlook is very dependent on the outcome of the COVID-nineteen spread, which will impact likely the financial situation, but also logistics and access to labor. We see that an extended shutdown in the UK will impact the time of recovery there. We see an underlying demand in Ireland, which does create market potential, but obviously will be impacted by COVID-nineteen. And we do, however, see an e commerce segment where we expect to continue growth after the nice development we had in the Q1. Next page, please, Page 10. If we look at the short term focus, it will for us be about managing our way through the COVID-nineteen impact. We will continue with proactive and aggressive cost management in the face of potential change in demand. We will continue to strengthen the balance sheet as we've done successfully in 2019 to create resilience if the turbulence and the market impact increases. We will continue our investments in e commerce growth to capture an increased potential in this situation and also build on the nice momentum we have coming out of the Q1. And we will also work to take the opportunity to strengthen our positions in our key geographies and key segments through this dynamic market. And in essence, I would say that we are preparing for the worst, but we're obviously hoping for the best. Next page, please, Page 11. And with that, I'm going to hand over to Peter, who's going to go through the financials. Take it away, Peter. Okay. Thank you, Henrik. Then we go to Page number 12, please. On this page, we can see the income statement for Q1 this year and also Q1 last year. And to the right, we can see the income statement for the latest 12 months. Sales was plus SEK 5,000,000 compared to last year, organically, minus 1%, and organic means that we have an adjusted currency impact. We have a slightly decrease in gross margin from 22.3% down to 21.9%. However, we have been able to compensate this lower gross margin by lower overhead costs, and thereby, operating in beta has been improved from EUR 45,000,000 to EUR 48,000,000, an improvement by 6%. Margins from 3.1% to 3.3%, 20 basis point improvement. EBITDA was plus 7%, whereas operating EBITDA is plus 6%, And the reason for that is that we have in Q1 this year a minor positive restructuring cost from adjustments from last year. If we then look further down in the income statement, we can see that profit after tax and earnings per share, the EPS, is down by 83%, and the reason behind it is the currency impact. Envidea has several loans in other currencies than SEK. And with a weaker Swedish krona at the end of the quarter, we had an income adjustment from a currency impact, and the impact in Q1 this year was NOK 0.59 per share. And thereby, we have a lower earnings per share this year compared to last year. If we then look to the right, we can see the rolling 12 months or the latest 12 months. Net sales was SEK 6,600,000,000 operating EBITDA SEK 648,000,000 and the margin is 9.8% now. Small improvement compared to end of last year, then we had 9.7%. And then earnings per share has then been reduced to NOK 0.7 2 per share and the decrease comes down from the currency impact. If we then turn Page, we go to Page 13. On this page, we can see the sales development in Q1 2018, 2019, 2020 to the left, and we can see the order intake in Q1 'eighteen, 'nineteen and 2020. Sales was then plus $5,000,000 compared to last year, as I said before, slightly above last year, and organically meaning adjustments for the currency impact, sales is down by 1%. North has a negative sales growth of 5%. And if adjusted with currency, North had a negative sales growth of 6%, whereas South has an improved growth by had a sales growth of 9% in the quarter. And if I adjust that with a currency impact, it was plus 7%. If we then look at the order intake, to the right, we can see that order intake has been improved in this year compared to last year, plus 9%. And here, we are very glad to see that both North and South has positive order intake compared to last year. North has shown negative growth last quarter, but now in Q1 2020, we have a a positive growth in North by 7% compared to last year, mainly driven by the industry markets, although the consumer market also showed some growth this year compared to last year. And then South, plus 12% order intake this year compared to last year. And here, the e commerce was the main driver behind the improved order intake compared to last year. If we then turn the page, we go to Page 14. This page shows the order backlog from Q1 2015 until Q1 2020. And we can see that order backlog has been improved this year compared to last year. Due to the higher order intake in Q1, we can see the order backlog is now plus 12% compared to last year. If we then adjust for the current impact, order backlog is still positive. It's positive by 8% compared to last year. And as Henrik said, we have positive order backlog compared to last year, both in North as well as in South. North has a positive order backlog of 9% compared to last year, and South has a positive order backlog of 17% compared to last year. The backlog of North is driven by the industry market, but we also have a higher backlog on consumer sales in North, whereas the backlog of South is mainly driven by the consumer markets. So Enviro has now higher backlog compared to last year, which then, of course, is positive. Because the latest 6 quarters, we have shown lower backlog compared to last year, and this means that we have a little bit better start in Q2 this year compared to last year. EBITDA turn to Page. We go to Page number 15. On this page, we can see the margin, operating beta margin and operating beta for Q1 for 2018, 2019 2020. We can see the margin improvement this year compared to last year, 3.3% compared to 3.1%, although we are below the level of 2018 of 4%. This year, we have a negative growth in Q1, organic growth of 1%. Despite the negative growth, lower volume, we have been able to improve the margins. We have lower gross margin, but we also have lower overhead costs, and that has compensated a lower gross margin and also compensated a lower volume. And thereby, we have a result improvement of SEK 3,000,000 compared to last year, SEK 48,000,000 compared to SEK 45,000,000 an improvement by 20 basis points looking at the margins. So Envira has now been able to improve the margins 4 quarters in a row, even though volume has been lower during these quarters. If we then turn to Page 16. This page shows to the left net debt and net debt versus EBITDA. And to the right, you can see the cash flows from the operating activities in Q1. Net debt has increased now in Q1 compared to Q4. This is normal. Our net debt is always at lowest level in Q4 due to the seasonality. Working capital is always at the lowest level. But now in Q1, net debt has increased by SEK 100 and So net debt has increased from SEK 1,700,000,000 So net debt has increased from SEK 1,700,000,000 end of Q4 to SEK 1,800,000,000 end of March this year. So however, comparing to last year, we see an improvement. We can also see that net debt plus EBITDA is now 2.3 compared to 2.8 last year. So an improvement by 50 basis points compared to end of March last year. To the right, we can see the cash flows from operating activities in Q1. We have slightly lower cash flows this quarter compared to 2019. However, if we compare our cash flows from operating activities to previous years, we can see that we are above the level of 2017 and also above the level of 2018. And the main reason for that is our improvements when it comes to working capital. Cash flows and working capital has been a focus area of Navido last year, and we have improved our cash flows and we have improved our working capital. And as you can see, we are on positive cash flows in Q1. If you compare that to 2017 2018, we had negative operating cash flows in Q1. So I'm very glad to see that we are gaining from our activities when it comes to our cash flows improvement. If we then compare the cash flow this year compared to last year, we must say that the working capital was too high in end of 2018, and thereby, the improvement was larger in the beginning of 2019 compared to the beginning of 2020. But still, we are above the level of 2017 2018, which is very positive. If we then turn to Page, we go to Page 17. This is the same page we showed on the Capital Market Day in November last year. This page shows the main bank loans we have within Enviro. Our main banks are Nordea, Handelsbanken and Svyanket Spokteris. We also had some minor loans, local loans within the group, but the main loans are these 3. And as you can see, Nordea will expire as 2024, whereas Handelsbank and Exensys Forte Kleid will expire in 2022, both of them. So it means that Envigo doesn't have to go out to the financial market and make a refinance until year 2022. So no refinance this year or next year. And if we look at the liquidity, we can say that we have a very strong liquidity. Available funds, including the unutilized credit facilities, is just above SEK 1,600,000,000 end of March this year. So we have a strong financial situation when it comes to our liquidity. And if I go over to Page 18, and Henrik will make a summary, and thereafter, we will open up for questions. Thank you. So if we look at Page 18, a short summary of the quarter. I think it's fair to say that COVID-nineteen will have long lasting consequences for all industries, also for the window and door industry, but exactly how that will impact us is too early to say. We continue to monitor and follow the recommendations from local authorities, and we continue to prioritize the health and well-being of our employees, contributing to limiting the spread of the virus, but also importantly, keeping our businesses running. Quarter 1 has given us a good start with improved margins for the 4th consecutive quarter as well as good order intake and improved order backlog and now both in Business Area South and Business Area North. We have developed detailed plans by business unit and by business area, by site for rapid cost out if and when demand development so requires. And importantly, we have a good track record as a group of adopting our cost levels to fluctuations in demand, and that's even further supported by the decentralized business model. With that, we thank you very much, and we open up for questions. Operator, please. Thank The first question we have is from the line of Adela Dacian from Handelsbanken. Please go ahead. Hi, good morning everyone. A couple of questions from me. First of all, you highlighted in the outlook section of the earnings release that you're prepared to initiate cost reduction measures if demand falls as a result of the virus. Could you give us some more information on what we can expect those actions potentially look like for your set point? Well, it's Henrik here. I'll start and Peter can fill in. I think it's important to note that already at the back end of the quarter, we initiated considerable cost activities. And actually, a rough calculation that says that at the back end of the quarter, given the situation in the direct sales to consumer businesses in Finland and the development of the UK. We've taken out something in an annualized pace something like 9% of our overhead cost and about 5% of our production cost. And we do that by and that's all in all, it's probably in the order of magnitude of SEK 200,000,000 of cost that started to come out. Obviously, we do this by business unit and by business area, so it's very difficult to go into specifics. But we've developed plans whereby we can adopt the production capacity and all the direct labor and production costs associated with that, but also the overhead costs by business unit. And we have to say that the decisions and the possibilities given by local governments obviously to with the temporary layoffs, etcetera, is something that we then use to adopt our cost base to weather through any areas where we have impact. Okay. But did you start to see the benefits of that already in Q1 or do you expect the majority of it to come in the Q2 of 2020? The majority of that will come in the Q2 of 2020, but also it's these measures have been primarily taken in the areas where we have the most considerable impact of the COVID-nineteen spread. So in the U. K, we've taken out the vast majority of our costs, but also we've taken out basically all deliveries at the moment. So it's really to compensate for the state of the deliveries where we're working to take out the corresponding amount of costs. But once again here, very small amount in Q1, so it will come from Q2 and further. Okay, good. And then on the consumer renovation market, especially in the Nordics, I mean, it's tough to ignore the coronavirus here, especially if the majority of your sales come from this specific segment. What are you doing to mitigate the risk for further declines in the consumer sales? I mean, overall, the if you look, I was talking specifically, I didn't catch you. Are you talking specifically about Business Area North or was that in general? Generally for the consumer sales specifically. Yes. So I think in terms of the consumer sales, the number one key activity is actually to continue to bolster the e commerce activity. So we saw really good development in the e commerce segment with 19% growth in the Q1 and a strong order intake of +38%. That's actually probably driven by a consumer renovations strength in consumer renovation sentiment. The development is different by geography. We have to admit that. And what we're continuing to do is actually leveraging the activities we've done before, not only in e commerce, but also in, for example, the installation proposition that we've developed with Elites van Stoppel Plus in Sweden and the consumer direct sales activities in Finland. In some areas, those activities are held back because of COVID-nineteen restrictions. And to face that, we focus on taking out and mitigating with cost until we can come back and work under normal circumstances, yes. Okay. And then finally, if I may just ask about your outlook on acquisitions. I mean, I assume that's not number 1 in your priority list at the moment. But is it fair to assume that the current situation will result in further opportunities to buy companies that have taken a harder hit than you have due to the virus outbreak? Yes. I think fundamentally, M and A, given the situation is off the table at the moment, and we're focusing on creating resilience in our balance sheet. But I think it's fair to say that the overall industry across Europe will be impacted by this. I would be surprised if we don't see some bankruptcies even in some of our key geographies. And we will also likely see more targets come available at the back end of this. But as I said, at the moment, that's not a priority for us. Thank you. The next question we have is from Kyle Radnathan from Nordea. Please go ahead. Hi, it's Carl here from Nordea. Thank you for taking my questions. First of all, I mean, looking at your order intake, on the order intake in April? No. It's too early to say anything about April at the moment. So we were happy about the states where we closed the quarter and order intake weathered well all the way through on a total level, all the way through the back end of March as we close the quarter. And we're obviously working to continue to leverage that, but the situation going forward is, as I think everybody will testament to at the moment, is very uncertain. Okay, perfect. But I guess April is significantly weaker than the numbers we have seen in Q1, right? As I said, we'll on the comment we'll focus on the Q1, and it's actually too early also to say anything conclusive about April. But the closure the momentum coming out of March was still strong. What we have in April is we have an Easter impact, which came earlier than last year, and hence, we're actually not going to see the overall situation for April until we close the month. So it's a bit too early to say. Okay. And regarding Denmark, the order seems also very quite nice. I mean, did you see any lockdown effect in Q1 in Denmark? And what have you seen in that market? I mean, when exiting the quarter? I mean, overall from an overall perspective, not really, no. Demand has held up well. Consumer demand has held up maybe in Denmark better than almost any other geography actually. So the market has been stable for us through this, both on the e commerce sales side, but also on the traditional business side. We obviously did see some impact from the lockdown with higher sick leaves impacting operations, but nothing from a material or from a market perspective. Okay, perfect. Thank you. Thank you. The next question we have is from Kenneth Ho from Carnegie. Please go ahead. Yes, thanks. So the order book was pretty strong, I think, in the end of the quarter. How has the order intake developed compared to the traditional seasonality? Did you so I'm particularly interested in the second 2 weeks, call it, in March. Did you have a much slower order intake then? Or was it still strong in the end of the quarter? At the order intake versus sort of a traditional profile held up pretty well through all the way through to the end of March. So also March was positive in terms of the order development. What we have seen is we have seen a slight continued recovery of the industry market, which is also, as Peter said, bolstered particularly Business Area North. But versus a normal profile, the order intake situation held well all the way through to the last couple of weeks of March. And you're not getting any signal from the industrial markets that constructions are being delayed or that they have problem on their side, so to say? The one area where we have been impacted is the U. K. And also Ireland. We have particularly in Ireland, we have some industry market exposure, and there construction activity has been halted. In the other geographies, none so far. I think it's also too early to say. I mean, operation has been kept going and the sites have worked. What is going to happen in the long run is more difficult to say. Where we have seen positive impact actually and almost considerable positive impact is on the apartments or really the condo side. So condo renovations and sales to condo associations has been strong in the quarter, whether that's due to available capacity to actually do these renovations now that the industry market in Sweden and Finland has been a bit softer, I don't know. But there, we've had a positive impact in the quarter. Okay. In Do you believe the market has been as strong? Or do you have a feeling that you take market shares? Yes. Our feeling is that particularly most particularly on the order intake side, we've been taking shares. And we think also as we actually don't have the numbers reported from the different associations yet for the quarter, but we our feeling is that we've taken some share in the quarter. We have experienced from before that in a dynamic situation like this, we as the leading player in Europe and a strong market leader in the Nordics is a stable place to go to for your deliveries in turbulence. So we think that we have an opportunity to take some share. Also in Finland, you said that the sales and marketing model where you basically knock doors to sell and install windows are have come to a halt. And I would guess that the sort of industrial side is still running in Finland. But could is there another way to get to the consumers in Finland at the moment? Could you try to push e commerce or change the business model? Or is it just a stop? I think there are we're working across all the geographies to leverage the fact that we have in all our strong markets, we have positions in all the channels and routes to market. If we take the example of Finland, we have seen a challenge in terms of the home installation and direct to home sales model. On the other hand, we've seen improvements in the retail business there because we've done more of that business to retailers instead. And we've also seen some other activity compensate for that. So also the channel to the market, the middlemen of the installers, so then actually going to other types of activities and that's generating that could be part of the explanation for the strong development on the condo association sales, for example. Okay. And then finally, one issue you usually have now in this to plan your manning in your plants maybe in January, February or so. And then sort of hope that the orders come in, in the right levels, so you have a manning in the plant to cater for the volumes. Do you feel that your planned manning for next 2 months or so are is appropriate? Or do you have too many or too few? Well, I think in general, I'm going to take the opportunity to complement the senior leaders and the managing directors. The business units have done a really good job in staying incredibly close to the situation and even more so than normally. And if we normally plan on a monthly and weekly basis, almost daily taking activity. So I think at the moment, we have probably at the moment some pockets of too low capacity. And in particular, we've done you've seen that the e commerce order intake and e commerce business develop nicely. We're straining those production sites at the moment. The industry development, for example, the project business in Sweden has been doing nicely. We're straining those capacities. But overall, I'd say that we are in line with where we wanted to be to meet the current demand. Okay, great. That's all for me. Thank you. We have a question from Roland Kuehning from Value Holdings. 2 of them. First question is with regard to your Industry segment. If you look at your order intake, do you see any kind of stocking of your customers, so securing doors and windows? And the second question would be on your dividend. Do you see what I have you discussed, the possibility to pay later this year a dividend if everything hopefully calm down? Or do you think for this year, there will be no dividend? Thanks a lot. So please just repeat. Which segment were you referring to in your first I didn't quite catch that. To the industry segment. So I think the customer of the industry may be doing a stocking of their inventory to be secure that they have the windows and doors on board? So to answer those questions, so to question number 1, no. We haven't seen that. In general, all the products that we sell basically 99% are made to order. So it's designated for the individual project that's where it's supposed to be installed. And in basically all cases, our customers on the project sites have no ability to store the products really. So we haven't really seen any effect like that. Whether there's been an impact in terms of how they plan their project, so they've done window installations earlier or later and that might have impacted, we don't really know. So that's hard to say. If you look at the dividend question, I mean, the Board made the call in relation to the AGM to change the recommendation the suggestion for a dividend. Whether there will be a discussion later in the year in the board depending on the development for an extraordinary dividend, I don't know at the moment. And actually, I would say it's too early to even have that discussion because now we're focusing on creating resilience in our balance sheet and weathering through the situation the best way we can. And we'll get to the best way to create that shareholder value with the Board when that's appropriate. Okay. Many thanks for the answers. All the best. Stay healthy and congrats for the results in Q1. Thank you very much, Paul. Thank you. Thank you. At this time, we have no further questions in queue. I'd like to hand back to the speakers. Okay. With that then, thank you very much for listening in, and we thereby close this call. Thank you. Bye bye. Thank you. Ladies and gentlemen, this concludes your call for today. We thank you very much for joining and ask that you disconnect your lines. Have a great day ahead.