Earnings Call: Q3 2019

Oct 23, 2019

Ladies and gentlemen, welcome to the Enviro Third Quarter Before 2019. Today, I'm pleased to present CEO, Henrik Hammersen and CFO, Peter Wheeling. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Speaker, please begin. Thank you. Good morning, everyone, and welcome to this presentation of Q3 results 2019. My name is Henrik Hellmason. I am the President and CEO. And with me, I have Peter Whelin, CEO FFO and Deputy CEO. I will begin by walking through some of the highlights in the quarter and also go through business area performance, and Peter will then deep dive into the financials of the quarter. And as the operator mentioned, there will be plenty of time for questions at the end. Next page, please. Page 2. So in terms of overall business performance in the quarter, we saw improved profitability and a very strong cash flow in the quarter. And we're obviously particularly happy with this given the somewhat softer industrial markets in particularly Sweden and Finland in Business Area Nord. As most of you know from before, the industrial market is more cyclical in its nature due to the fluctuating newbuild activity, whereas the consumer market is more stable and resilient through an economic cycle. And we feel we've done a good job in the quarter mitigating the somewhat softening industrial market and capitalizing well on the more stable consumer market. I'm also particularly happy with the strong cash flows, which I see as a testament to the strength of the new operating model, Simplify, that we launched at the back end of last year, where we have full local business unit accountability, not just for the P and L, but also for the balance sheet, which we've seen has given good results on the cash flow side in the quarter. If we look at the numbers, sales was down 1% organically excluding currency effects minus 2%, but operating EBITDA strengthened slightly to SEK203 million, up by SEK1 1,000,000 from last year. The large Danish units continue to perform well with strong organic growth. E commerce continues to grow nicely, the e commerce business unit, and is now at 10% of the group's revenues with above average profitability. The profitability and the development in Norwegian unit continues to progress well, and we're achieving increasingly better results in that market. And we're obviously taking continued efficiency measures to mitigate the somewhat softening top line, particularly in the big units in Sweden and Finland, both in terms of maintaining conversion efficiency, but also managing overheads. Order intake in the quarter was minus 2%. However, if we exclude an acquired order backlog in 2018, the order intake was actually slightly in growth in the quarter. And the order backlog at the end of the quarter was 5% down year over year, which is similar to the situation at the end of quarter 2. As I mentioned, the cash flow was really strong in the quarter at SEK 319,000,000, which is substantially up from the SEK 149,000,000 last year. And this is an improved net debt to EBITDA ratio to 2.5, which is on the group target and substantially better than last year when we landed at 3.0. And we estimate that we've continued to take market share altogether in the Nordic market in the quarter. Next page, please. Page 3. If we look at the overall market development in 2019, in general, we'll say that the market development in our core markets, which is the Nordics and the UK, has been somewhat on the soft side this year. The key drivers of that is, as I mentioned before, the somewhat softening of the industrial markets due to reduced newbuild activity in particularly Sweden and Finland. But also obviously Brexit concerns impacting the consumer sentiment and overall investment level in the UK market. The Danish market is in slight growth, whereas the Norwegian market has been a slight decrease. And if we look in general at the markets in Ireland, Germany and Poland, they are in slight to moderate growth at the moment. Next page, please. Page 4. If we look at some of the important events for the group in the quarter, obviously, making sure that we have capable efficient Managing Directors in all of the use is a really critical point to the Envido operating model. And I'm really happy to see that we've appointed new Managing Directors in both Haiom and Snikapar in Sweden as well as in Port Finn and the Class 1 in Finland. I'm really glad to see the level of the managing directors that we're able to attract with strong industry competence, broad value chain experience and really relevant commercial background. And I think that vouches for strong continued development for these companies. If we look at the lead van stuff, we've commenced installation at the first parts of the preparatory installations of a new planning machine. This is a big investment, but also a really important investment to further improve the competitiveness and the efficiency of Elit Van Stow and actually in our biggest production unit in Veltlanda. In Vosseldur and Vindo, a premium one of our premium manufacturers in Denmark, we've started industrialization of a quite significant and new investment to further increase our premium manufacturing capability and cement versus position as the number one premium window manufacturer in the Danish market. In Pila Group in Finland, which is the biggest business unit in Finland and one of the biggest businesses in the group, We launched a new generation of antenna glass windows, which resolved the issues with mobile signal strength indoors and improves mobile data speeds in new apartment buildings. Next slide, please, Slide 5. I wanted to take the opportunity to remind you of our relatively newly launched operating model, Simplify, that we launched at the back end of last year and just remind you of the 5 strategic pillars of Simplify. Envido is a highly decentralized business with accountable people, and an important aspect of this is full local business unit accountability for the profit and loss as well as for the balance sheet. Envido is the result of 50 acquisitions over the past 20 or so years. And when the balance sheet permits and the targets are ripe, we will continue to grow through acquisitions of strong companies in Europe. We prioritize the residential consumer driven businesses, where we see strong long term potential, but also better resilience over an economic cycle. We run tight, local, cost efficient supply chains with focus on maximum customer value in the most efficient way. And we derive synergies from sourcing, finance, technology, leadership and not the least best practice, which we in group management is a key part in spreading across the group. Next page please, Page 6. If we look at the business unit performance in the quarter business sorry, business area performance in the quarter, business area south continued strong profitable growth in quarter 3. The large Danish units continued to deliver very well in the quarter. E commerce continued its organic growth and grew 8% organically in the quarter. And as I mentioned before, they are now at 10% of group revenue with above average profitability. The majority of the business units in the U. K. Are performing well despite the Brexit uncertainty, so a good testament to a good work in taking market share in the local market there. And we're capitalizing well on a healthy Irish market with good growth in the market there. In terms of the numbers, sales grew by 7% to SEK 724,000,000 and the operating EBITDA improved by 1.2 percentage points to 18.7%. The order backlog at the end of the quarter was 13% up year over year. Next page please, Page 7. In Business Area North, if we start by looking at the right hand side, we see a ring chart where we can see that we actually have some relatively significant industrial market exposure, particularly in Sweden and in Finland. And obviously, the challenging newbuild market in Sweden and Finland is then impacting the top line in a slight negative way in the market. However, as I've mentioned a couple of times already, positively consumer demand is more stable and we saw overall retail sales in the business area in the quarter. We have continued to take efficiency measures to mitigate volume development the negative volume development. We are both in terms of temporary layoffs, adapting work time to adjust direct labor, but also, in some cases, permanent layoffs. And we've done a good job managing the overall cost level in the quarter. The Norwegian business unit continues to improve with further increased profitability in the quarter. In terms of the numbers, sales was down 7% to SEK 902,000,000. The operating EBITDA margin decreased by 1.4 percentage points to 8%, and the order backlog at the end of the quarter was 14% down year over year. Next page, please, Page 8. If we look at the outlook for the markets, we do see a mix development in the different segments and somewhat in the mix in the different geographies. The consumer demand in general is still on a healthy level, albeit softening somewhat and maybe particularly in the U. K. Market due to the more acute Brexit uncertainties at the moment. We expect the e commerce momentum to continue, and we're going to continue to capitalize on the ongoing macro trend of increasing consumer e trade behavior. The Brexit uncertainty will potentially impact the UK and Ireland, obviously, but potentially also Denmark, where we see some quite substantial exports from the Danish geography into the UK. We see an industry market that is on a softer level, particularly in Sweden and in Finland, and we see that as we're going into the winter season in those geographies where consumer demand is normally a little bit softer. And all in all, the organization we strongly feel that the organization is better equipped for development following the simplified implementation with better ability to adapt to local conditions and local opportunities. Next page, please, Page 9. If we then just summarize the short term focus, we will continue a very active margin control in the softer markets, particularly than Sweden and Finland, keeping cost levels overall both on the commercial side and the overhead side under strong control. We will continue to invest in e commerce growth in most of the geographies. We will continue to strengthen the balance sheet to allow for further acquisitions when the timing and the targets are right. And we will obviously continue to secure positive impact from Simplify and the decentralized accountabilities for the both profit and loss and for the balance sheet. Next page, please, Page 10. And with that, I'm going to hand over to Peter Wielink, CFO and Deputy CEO. Thank you so much, Henrik. And then we turn Page and we go to Page number 11, please. On this page, Page number 11, you can see the income statement. You can see to the left the result for Q3. Then to the right, the result for Q1 to Q3, I mean, is year to date. And then further to the right, we can see the result for the latest 12 months. For the quarter as well as year to date, you can also see the impact when it comes to IFRS 16. We start with Q3, and we can see that sales declined by 1%. Organically, it was minus 2%, and we'll come back later to the sales. We can see that the gross margin was a little bit lower compared to last year, mainly due to mix. And we can see that the beta was more or less on par with last year due to the fact that Enviro has reduced overhead costs. And by overhead costs, I mean sales and administration costs. And we have reduced overhead costs by €90,000,000 in Q3. Enviro consists of 28 business units, and some business units have been growing in 2019. And they have then increased their overhead costs, where our business units have lower volume in Q3, and they have reduced overhead costs. And in total and the net impact is under SEK 90,000,000. And this EUR 19,000,000 savings in overhead costs has thereby compensated the lower volume as well as the lower margins. And the result operating beta is on par with last year. And if you include IFRS 16, the EBITDA was somewhat above last year. Financial costs were lower than last year, mainly due to a currency impact, and this has been resulting in an improved profit after tax and also improved earnings per share. Earnings per share has increased by 11% from €2.31 to €2.56 percent. If we look then at year to date, we could see that sales is on same level as last year. Organically, the sales were minus 3%. We were minus 4% up in Q2, and then organic sales was minus 2% in Q3, meaning that year to date, January to September, we have organic sales decline of 3%. Operating EBITA result is somewhat behind last year, mainly due to a slow start of the year. We had a weak winter season in Q1 that impacted the result in Q1. Whereas earnings per share is above last year, it has increased from EUR 5.16 to EUR 5.20. And then to the right, we can see that sales rolling 12 months is SEK 6.682 1,000,000,000,000 and the operating EBITDA margin is now on 9.7 percent and earnings per share is SEK 7.51 1. If we then turn page, we go to Page 12. This page shows the sales and order intake in Q3. To the left, you can see the sales for 2017, 2018 2019. And to the right, we can see the order intake for 'seventeen, 'eighteen and 'nineteen. We start with sales. We can see the sales declined by 1% compared to last year, and organically, it was minus 2%. The order intake was reported minus 2%. However, we made an acquisition in Q3 last year. And if we take away that acquisition because when we acquire companies, we also get an order backlog in that acquisition, and that order backlog is then reported order intake for us. If we then take away that order backlog that we acquired, the order intake for Q3 this year was on par with last year, small growth. If we then turn Page and we go to Page 13. This page is showing the order backlog from Q3 2014 until Q3 this year, end of each quarter. We can see at the end of the quarter this year, it's 5% lower than end of the quarter last year. We don't have any acquisitions, and we had the same structure this year as Q3 last year. We can also see that the backlog was lower in Q3 when we started quarter, it was minus 4%, but the sales ended minus 1 percent because Envida succeeded to gain order intake in consumer orders in Q3, which were delivered in Q3. And now we start with order backlog for beginning of Q4 with minus 5%. If we then turn Page, we go to Page 14. This page is showing operating EBITA as well as operating EBITA margin. To the left, you can see the quarter, the Q3. And to the right, we can see the year to date figures, January to September. We can see that Enviro has succeeded to improve the margins in Q3 this year from 12% in 2018 to 12.2% in Q3 for 2019. And it's also above the level of 2017. So we have a positive development when it comes to the margin. So indeed, we have succeeded to improve margin despite lower volume in the quarter. If we look year to date, the end of September, we can see that we're still behind last year, 9% compared to 9.2%. And this is due to the fact of the slow start we had in Q1 in the winter season. Indeed, we have succeeded to improve the margin in Q2 and also then in Q3. But year to date, we are still behind last year. And we're also behind the level of 2017. If we then go to next page, Page 16, and this page is then showing the development of operating cash flow. As we said in late this Q quarter presentations, we have been focused on our cash flows, and we have been focused on our balance sheet with a target to reduce the net debt and thereby also reduce the net debt plus EBITDA. And as you can see, the operating cash flow has been improved. Year to date, end of September, operating cash flow has been improved by SEK 330 2,000,000, mainly due to lower working capital and also due to lower tax payments. In 2018, Enviro paid too high taxes in some countries, especially Finland and Sweden because these tax payments were based on previous year's results. The result declined in 2018 in these countries, and thus, the tax payments were too high in 2018. In 2019, the tax payment has been more on the right level compared to in relation to the profits. And thereby, we have a lower tax payment this year compared to last year. Working capital has been improved due to the working capital program we have launched within the group and with several activities and those are result of the simplified model we have within the group. Working capital has not only been reduced due to lower volume, but has also been reduced in relation to sales, which we can be seeing on the next page. And this page, Page number 15, is all excluding IFRS 16 impact. If we then turn to Page 16, and this is the final page before we open up for questions. This page is showing net debt versus EBITDA to the left and then the working capital development to the right. And as you can see on to the right, you can see that working capital has been reduced in value, but also in relation to sales. You can see the line, the yellow line, you can see a decline where working capital and related sales, later 12 months has been reduced. Working capital on this page is inventory plus trade receivables minus trade payables. And to the left, you can then see the development of the net debt and the net debt versus EBITDA. Due to the stronger cash flows in this year but also the strong cash flow we had end of Q4 last year, the net debt has been reduced by SEK 367,000,000 compared to September last year, and the net debt versus EBITDA has been reduced from SEK 3.0 1 year ago to 2.5 now, a reduction by 50 basis points. And once again, these figures are excluding IFRS 16. That was the presentation. And operator, we open up for questions. Thank First question is from Kar Rynostan at Nordea. Please go ahead. Hi. It's Karl Rynasdan here from Nordea. So I have a few questions. First of all, we can see that you managed to take out SG and A quite nicely during the quarter. Is it much more to do in terms of taking out overhead costs for Q4 and going into 2020? Karl, Henrik here. It's let's say, we have continuous activities on particularly the biggest bigger units in Sweden and Finland, where we see the softer industrial markets to adjust overheads reflecting the development of the market. The and that goes both on the conversion cost side, I'd say, but also on the overhead side. And there is activities still to be delivered there. The exact magnitude of that, I don't want to I mean, this is driven very much on a business unit. I don't want to speculate in that, but there is some work ongoing that we yield some further results. Okay, perfect. You also mentioned that you are gaining market shares in the Nordics. Could you specify on what geographies and market segments as well? I would say, overall, if we look at, let's say, the past quarter and the past quarters, the key areas where we've taken share has been in the Norwegian geography. We've taken some quite nice steps forward. We've also taken some share in Denmark. In Sweden and Finland, we've maintained or slightly dropped share, I would say. That's the so on an overall level in the Nordics, we're growing, but the geographies are we've made better progress in Denmark and Norway and been more stable or in slight decline in Sweden and Finland. Okay. And speaking of Norway and Finland, they are seemingly weakening. Have you seen any changes to the overall pricing softer industrial markets. And overall, the price highlighted as the more softer industrial markets. And overall, the price levels are, from our perspective, relatively stable. But so no major movements, I would say. The next question is from Marcella Klam at Handelsbanken. Please go ahead. Hi, Marcela. It's Handelsbanken here. Congratulations on the low working capital. I wonder how comfortable are you with your inventory level now? Obviously, we are entering a lower season. But are you comfortable with your inventory level? Or could there be a risk of any bottleneck? Hi, Marcela. What I would say in general is our business model is such that 90 9% of all the volumes we sell are actually made to order. So in that sense, we and we work with very lean and efficient value chains, I would say, going backwards to our suppliers as well. So overall, to optimize the business, we normally don't need a lot of inventory except on some key components. And in those areas where which we see as the key components, we I personally feel quite comfortable with the levels we're at now in terms of meeting demand going forward. Sounds good. Another question related to e commerce. It is 10% of the group right now. And you mentioned previously, Denmark is the most mature market in for e commerce. But how big part that is booked under e commerce under Envido South actually relates to Sweden and Finland? I mean, there is a majority of sales in the e commerce business unit is in the South Geography, so to speak. So the I mean, order of magnitude is something like between 50% twothree that are in the South geography. The rest is actually around twothree. The rest is in the north geography, roughly. Maybe onethree in the north. Yes. Could you also speak a little bit about your latest initiative towards the retail segment, Elizantherpaplatz, how that has developed? And do you have more initiatives coming to target consumer in the North? Yes. I think overall, our perspective is that consumer behavior is changing, and I think our success in e commerce is part I mean, 1, we're doing a good job, but secondly, we're also capitalizing on a macro trend. So that's part of that. And we see that change of behavior not just in terms of transferring straight off to an e trade solution, but also in terms of seeking convenient solutions, etcetera. And we will continue to develop our overall proposition to meet that changed behavior. Elite Sunstopper Plus is one of those initiatives that is and if you look at the specific performance of that, that's continuing to grow, in honesty, from a relatively modest base, but it's growing nicely. And we see that more potential for similar types I wouldn't even call it similar, but for initiatives that meet the same overall macro trend changing consumer behavior in other geographies going forward. And a final question from me. You mentioned some parts of Danish production going to the UK and being threatened by Brexit. How big part of Denmark actually goes to the UK approximately? So from our perspective, exports to U. K. Is very small. We have some exports from our factories to Ireland, to the to our own Irish entity, but that's relatively small in relation to the total volume. And for the markets, it's somewhere it's 5% to 10% of the total volumes. And this is just a guesstimate at the moment without having the excess data. But in that range, 5% to 10% that goes into the UK market of Danish production volume. So it's not a considerable number. So I guess there are no further questions. I just want to take the opportunity to remind you that Envido holds a Capital Markets Day on the 7th November this year in Stockholm, and you find further details on our website, envido.com. With that, thank you for listening in on behalf of us, and have a good rest of the day. Thank you very much. Bye bye.