Q1 report 2019. Today, I am pleased to present CEO Henrik Hjalmarsson and CFO Peter Welin. For the first part of this call, all participants will be in a listen-only mode. After, there will be a question and answer session. Speaker, please begin.
Good morning, everybody. Welcome to this presentation of Inwido's Q1 results 2019. I am Henrik Hjalmarsson, President and CEO of Inwido, and with me I have Peter Welin, CFO and Deputy CEO. We will spend roughly 30 minutes presenting some of the highlights for the Q1 performance for the Inwido Group, and there will be time for questions after our presentation. Before we start with the actual Q1 presentation, I just thought I'd share a short update on our vision and overall strategy following the new Simplify structure that we went fully live with on January 1, and which we talked about in the recent reports. As you can see from the vision, we've clarified even further that Inwido, we're all about generating increasing shareholder value by leading and developing the strongest companies in comfort, climate, and safety that creates better indoor life.
In our minds, the most critical component of this is making sure we have talented and inspired employees throughout the entire group. We see this as a key element of our proposition. Next page, please, page two. Also, just very shortly before we go into the Q1 performance, as most of you know, we are the leading window manufacturer in Europe and one of the leading door suppliers. We see ourselves as a natural home to the strongest players in our broader industry to allow both further development and profitable growth of those businesses. With Simplify, we've clarified that we work in a decentralized structure that allows entrepreneurial spirit and local decision-making with clear customer focus. We believe that strong local accountability and authority will let us attract the right leaders with the right ownership of the business and the results, therefore achieve better results over time.
With that said, I'm going to walk you through some of the market highlights for our past quarter, our quarterly performance for the business as a whole and for the different business areas, a little bit about the market outlook, and some of the key priorities for the imminent future. After that, Peter will shed some more light on the details of the numbers for the quarter. Next page, please, page three. As most of you are aware, the first quarter is the seasonally smallest quarter for Inwido, with less consumer activity in the winter months. If you look at the overall market development in both Q1, but also I'd say in the recent quarters, the development is quite fragmented across our different geographies and segments.
Looking at the industry market in particularly Sweden and Finland, where we actually have some industry exposure of scale, that development is challenging. New build activity is going down across those geographies. Home building starts are down, and we can also clearly see this in the If we look, for example, at the market data for quarter four in the Swedish market, where total window sales in units was down 8% year-over-year. As the industrial market softens a bit, we also naturally see some tougher competition in the remaining market, which is also impacting, to some extent, the larger units in those geographies. Very positively, the overall consumer demand across basically all our geographies is at healthy levels. We can see that clearly in all the units with stronger and more prominent consumer market exposure.
Which obviously over time with our consumer-focused strategy is positive. From a structural perspective, we've also seen some more tendencies of continued consolidation in the builders merchant markets with a couple of large acquisitions announced so far in the year, and particularly so in the Swedish market. Next page, please, page four. What about the results in the quarter? Well, I'd say all in all, sales in the quarter held up pretty well in line with our expectations, despite a softer order backlog at the start of the year, which was 7% below last year. Sales in the quarter increased by 4%, minus 2% organically. We are obviously particularly happy with the development in e-commerce, which had a very strong quarter with organic growth of 33%. We are also pleased to note that our long-term investment in the e-commerce segment is paying off nicely.
Operating EBITDA at SEK 45 million or SEK 42 million before IFRS 16 impact is also in line with what we expected. The units in the southern business area all performed better than last year. The Danish units as well as e-commerce contributed positively. Particularly a positive profit development in our U.K. business units. It's supporting a nice margin growth in the geographies. Lagging adjustments of our cost base in geographies in the north, where we've lost some sales as well as some IT investments to strengthen our long-term competitiveness, has impacted the profitability negatively, and I'll come back to that when we look at the northern geographies. Order intake was at +8% in the quarter, and we closed the quarter with a backlog order at the same level as last year. We see a better mix in terms of higher order intake from the consumer or higher order backlog from the consumer segment.
Operating cash flow. Our operating cash flow is normally negative in the first quarter, but that amounted to SEK 51 million positive in the quarter. We can also see that we're starting to see some emerging positive signs from our work with strengthening cash flow, and I'll come back to that a bit more later in the presentation. Next page, please. Page five. Looking at Inwido South, overall performance in Inwido South was very satisfactory in the quarter. Actually all business units in the business area improved their result year-over-year.
As I mentioned before, e-commerce had a very positive development with strong organic growth at +33%, and together with a positive performance in the Danish units and an effective profit turnaround in the U.K. units, contributed nicely to a substantial strengthening of the margins in the units. As you can see from the charts on the right-hand side, long-term sales and margin development continues to be positive in South. Sales in the quarter grew 19% year-over-year and amounted to SEK 552 million. The operating EBITDA margin strengthened, as I said, considerably at 10.9% versus 5.8%. If you look at the right-hand side in the chart, you see a dip in the EBITDA margin. That's completely normal in Q1 due to seasonality.
As you can see from the ring chart, we have a very strong consumer share in the southern geographies, which is obviously highly supportive of the margin development, and we have clear strategies to continue to grow and support that. Order backlog at the end of the quarter was 31% up versus last year, partly impacted positively by more beneficial weather in these geographies in particularly March versus what we saw last year. Next page, please. Page six. Looking at the performance in Inwido North, I think we'd have to say all in all, that performance was more challenged in the quarter. We see decreasing volumes in the industry segments, and partly then also increase in the overall competitive pressure, in particular the Swedish and Finnish geographies.
As you can see in the ring graph on the right-hand side, we have a substantially bigger exposure to the industrial markets driven by the Swedish and Finnish geographies, and that's obviously challenging us with the current market development. The increased competition has obviously impacted us as a result of that. Profitability was impacted by the lower volumes in the quarter, where the measures to compensate our total cost base didn't fully cover the volume shortfall in the quarter. Also with some planned IT investments to strengthen our long-term competitiveness in these key geographies. It's really positive to see that the Norwegian business unit continues its good development in terms of positive sales and margin development.
Total sales in the quarter was -4% at SEK 848 million, and the order backlog at the end of the quarter was 13% down year-over-year, but with a better mix in terms of higher exposure to the consumer segment. Next page, please. Page seven. How about the outlook on the market then? Well, overall, we see a continued mixed outlook for the market. Consumer demand remains at a decent level. Consumer confidence is slightly down over the past period, but still at healthy levels. We also note that household economies across all of our key geographies is strong at the moment. At the same time, the industry market outlook continues to be weak, particularly in the Northern business area where we do have some industrial exposure of scale, and that development in Sweden and Finland would obviously continue to impact us.
We see that the underlying e-commerce trend continues to be strong and we predict e-commerce growth across all our key geographies actually. As a result, we obviously intend to continue our investments in the e-commerce segment. Actually, irrespective of all of this, with our new Simplify structure, we feel that we are better equipped to respond to and also adapt activities and plans to a more mixed, or if you will, fragmented market development. That positions us better for meeting the more fragmented market development going forward. Next page, please. Page eight. If you look at the short-term focus, that remains largely the same as when we spoke a quarter ago. We will continue to fully implement the decentralized and more customer-focused Simplify structure across the entire group and to make sure that we reap all the benefits of this new way of working.
Our long-term acquisition strategy still stands, and our work to strengthen the balance sheet to allow for further pursuit of that is ongoing, as I mentioned before. We continue our initiatives to strengthen our consumer proposition and really strengthen our consumer share of sales totally and also strengthen our overall offer to the consumer and renovation market segments through digital channels as well as traditional channels. We will continue to work with cost and efficiency improvements, obviously particularly the units where we have more challenging market developments, but in general, also across the group. We will continue to make investments in both IT and digitalization to strengthen our long-term competitiveness. With that said, I will hand over to Peter, who will shed a bit more light on detailed financial performance for the quarter.
Okay. Thank you so much, Henrik. We turn page, and we go directly to page number 10, please. On this page number 10, you will see the income statement for Q1 in 2019 as well as 2018. You will also see the rolling 12-month now in Q1 2019. For 2019, you can see two columns. One column is excluding IFRS 16. The second column from the left is excluding IFRS 16. I will come back on next page how the impact has been for Inwido when it comes to IFRS 16. The gross margin was just above last year. However, last year we had some restructuring costs in Q1, and that affected the gross margin. Adjusted for restructuring costs last year, the gross margin this year is slightly below last year.
Operating EBITDA, SEK 45 million, and excluding IFRS 16, the operating EBITDA was SEK 42 million compared to SEK 56 million last year. A margin of 3.1% in total compared to 4%. The deviation, as Henrik told you before, is related to North. Lower volume in Sweden and Finland due to lower level of new builds, and we have not been able to fully adjust the costs for the lower volume in Sweden and Finland. We have also in the quarter a negative mix impact in North and increased the strategic IT investment, and we have not been able to fully push forward material prices, price increases on the sales prices. The EBITDA is SEK 42 million excluding IFRS 16 compared to SEK 37 million last year, so some improvement due to restructuring costs last year. Last year, we closed down the factory in Väröbacka, Sweden, and we took that cost in Q1 2018.
Profit after tax is on the same level as last year. Earnings per share is somewhat higher than last year due to minority interest. We have less minority interest this year due to the fact that we acquired remaining shares of Lämpölux in Finland in the beginning of this year. Today, we have only a small minority interest in Poland. We turn page. We go to page 11. This page is showing the IFRS 16 impact for Inwido. IFRS 16 means that all operational lease shall be booked and treated as financial lease, and that mainly impacts net debt and assets and the EBITDA. The net debt has been increased due to IFRS 16 by SEK 383 million, and the EBITDA has been increased by SEK 22 million a quarter, and full year it has been increased by SEK 87 million.
This means that net debt versus EBITDA has been increased from 2.8 excluding IFRS 16 to 2.9 including IFRS 16. We have calculated full year impact of the EBITDA. This is a rather minor impact for Inwido compared to some other companies. The EBITDA has been improved by SEK 3 million due to IFRS 16. The increase of the net debt of SEK 383 million is mainly related to leasing contracts of buildings and offices. We turn page. We go to page 12. This page is showing sales and the order intake for Q1 in 2017, 2018, and 2019. To the left, you can see the sales development. To the right, you can see the order intake development. Sales ended at SEK 1,443 million, +4% compared to last year.
The organic growth, when we adjust for acquisitions as well as the currency, it was -2%. The order intake was +8% in total. Adjusted for acquisitions, the order intake has been +3% compared to last year. The order intake has been positive when it comes to consumer. We have a better mix, whereas the industry sales or industry segment has declined in the quarter due to the market situation in Sweden and Finland with lower new build markets. We turn page. We go to page 13. This page is showing the order backlog for the end of each quarter from 2014 until 2019.
You can see that the order backlog for March this year is on the same level as March last year. This is causing improvement because in December, we reported an order backlog 7% behind last year. The higher order intake in Q1 has improved the order backlog, and the backlog is now ±0% compared to last year. As also Henrik mentioned, the backlog has a better mix with higher degree of consumer sales compared to last year. We turn page. We go to page 14. This page is showing the operating EBITDA and the operating EBITDA margin for Q1 for 2017, 2018, and 2019.
Also, as Henrik said, Inwido has a high degree of seasonality in our business, driven by lower consumer sales in the winter in Q1, thereby the margin is always lower in Q1 compared to rest of the quarters. Industry has a lower degree of seasonality. However, this year the sales within the industry segment has been impacted negatively by the market situation and also by the lower backlog that we had beginning of the quarter. Except for 2017, the margin has been between 0%-4% the latest 5 years. If we go back even further in history, and we go prior the IPO in 2014, we immediately normally made losses in Q1 or a better break even in Q1. The result of 2017 with a margin of 6.1% was a historical high result for Q1.
The result this year was SEK 45 million compared to SEK 56 million last year, whereof SEK 3 million from IFRS 16 impact. A margin of 3.1% compared to 4%. As presented earlier in this presentation, the deviation compared to last year is related to North, whereas South has improved compared to last year. North, as said before, lower volume. We are not enabled to fully adjust the cost level for the lower volume, and we also have a negative mix in North as well as higher degree of IT investments. If we then turn page and we go to page 15. This page is showing net debt and the net debt versus EBITDA from Q4 2016 until Q1 2019. Please notice that this graph is showing the net debt excluding IFRS 16.
If you're going to include IFRS 16 impact, you have to increase the net debt by SEK 383 million, and the EBITDA should be increased by SEK 87 million. The net debt is always higher in Q1 compared to Q4. It's always increased due to our seasonality. However, this year the increase is lower in Q1 2019 compared to Q1 2018 or Q1 2017 due to improved working capital in Q1 2019. The net debt versus EBITDA ended at 2.8, and if you then are going to include IFRS 16, it was 2.9 compared to a target of 2.5. Last year we had 2.5 in Q1 2018, then the net debt versus EBITDA was increased in Q2 and was up to 3.2, driven by the acquisition of Bedst & Billigst and also the dividend payment in May 2018.
We then turn page and we go to page 16. This is the final page before we open up for questions. This page is the same page we presented in the Q4 presentation. This is a reminder. This page is showing that acquisitions that we have made from 2014-2017 have had a positive development for Inwido. In 2017, the margin of this acquisition was 9.4%. The operating EBITDA was improved by 38% in 2018, the acquisition had a margin in 2018 of 11.3%. This once again, same picture as presented in the Q4 presentation. We now open up for questions.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. We have a question from Carl Ragnerstam, Nordea. Your line is now open.
Good morning. It's Carl here from Nordea.
Hi.
Morning. I have a couple of questions. We have earlier discussed the pricing situation in Finland and Sweden. Could you please comment on the current situation and also if you have seen any changes yet?
Sorry, Carl, you said the pricing situation?
Pricing situation, exactly.
Yeah. That remains roughly the same as we've seen over the past couple of quarters. No major change there compared to what we've seen earlier.
Also in Finland, within skyline almost and so on?
Also in that market, yes.
Also, the margin development year-over-year in Inwido South was very strong. Can you comment more specifically about what was the main margin driver behind that between Denmark, U.K., and e-commerce?
In general, a big contribution is actually the proper turnaround in the U.K. geographies with the units in the U.K. That is then helping or substantially contributing to the overall margin development.
We also have obviously healthy development in the e-commerce business, both growth-wise and profit-wise, and the Danish units continue to contribute in a stable way. The biggest single contributor is arguably the profit turnaround in the U.K. units, which is then propping up the overall number.
Okay, perfect. You mentioned that the result was burdened by raw material headwinds and IT investments. What can we expect in terms of raw material impact in 2019 full year? What type of IT investment was it related to?
The raw material situation will probably remain at roughly the same level, unless anything unexpected comes up, but that's our current perspective anyway. If you look at the IT investment, it's mainly investments in, sorry, just 2 categories. It's continuing to develop the overall landscape to increase efficiency and competitiveness, but it's also specific initiatives related to further digitalizing the channel landscape. Effectively, improving the digital tools in the go-to market aspects of the different businesses.
Okay, perfect. The last one for me. You comment on acquisitions and so on. Looking at your balance sheet, it's pretty stretched. As you said, the ratio comes up in Q1, I know that, can we expect acquisitions in 2019, or should we rather expect a deleveraging phase?
Well, we should expect us to continue to strengthen the balance sheet before we do anything more. The exact timing obviously depends on, one, how much progress we make on continuing to strengthen the balance sheet and how quickly that goes. Secondly, obviously, depending on what type of target comes up. We will continue to work with strengthening the balance sheet before we do anything more.
Okay, thanks.
The next question is from Johan Dahl, Danske Bank. Your line is now open.
Yes. Hi, Johan at Danske. Just a couple of questions. Hats off for the developments in Inwido South, but focusing a bit on Inwido North. Could you help us just bridge results Q1 versus last year? I think you referred to an improving mix, i.e. higher share of sales in Inwido North being consumer. There must be fairly substantial headwind from pricing, also cost. Is that correct reading?
In total, you can see that we have higher consumer sales in Inwido North compared to last year, or better mix as I said. However, we have a mix within the consumer as well. The most profitable consumer sales have higher decline this year compared to last year. We also have a mix within the consumer that has been negative impact compared to last year. We have some IT investments, and we also had lower volume compared to last year, affecting then the utilization and the factories and thereby the results. Also we have not been fully been able to increase the prices to compensate the material price increases.
Okay. Got you. Still then it seems It's very interesting to know from my perspective at least, what's your strategy to meet this intensified competition and price pressure? Also what sort of tangible productivity initiatives are you deploying to cope with this?
Henrik here. Overall, the strategy effectively remains the same. The key driver to address this is continuing the work we're doing to strengthen the consumer proposition and hence the consumer share. We've talked historically about, for example, the initiative we've taken in Sweden with Elitfönster Stoppa Blåsten as a new type of consumer-targeted initiative, but there are obviously a number of other initiatives behind that. That will continue to drive that long-term strengthening of that part of the business. Secondly, I think the key short-term issue is, as Peter said, the ability to compensate for our cost structure for volume shortfalls is going to be critical if indeed that were to be the case going forward. That's where we didn't fully compensate in the quarter, and that's obviously of the highest possible attention from our perspective.
Obviously we believe that long term, the investments that we're making in IT will continue to strengthen our competitiveness and hence both increase efficiency, but also increase our ability to strengthen the offering to the particularly consumer market, which is then positive for our margin development going forward.
Okay. In the past you've talked about Inwido as being the responsible market leader. Have we reached a stage where you're no longer willing to compromise volume to defend the profitability? Is that a correct reading?
I wouldn't quite dare to say that as a general, because that might slightly depend on the difference. In the North, we have 15 different business units with some sort of different positionings, and that might be slightly different reading. Overall, the long-term objective is to increase our margins in the North. With the current softening of the industrial markets, exactly the form and shape that will take and exactly when we will see which margin level and the exact action we take depends obviously a little bit on that market development and how the industrial side develops. Overall, the objective is to continue strengthening the margin and using our consumer proposition as a key way to do that.
Okay. Just finally, you mentioned in the report some results from the Simplify project. Could you please just talk about what were the results more in detail? Secondly, I'm also wondering how you're planning your staffing ahead of the high season, if you could provide any details there.
We haven't historically gone into any specific details on the exact contributions from the Simplify strategy and structure. What we see from a qualitative perspective is emerging positive signs in terms of a higher level of accountability, more agile and swifter decision-making, responding to market demands and market changes, and overall a higher customer focus, enabling us to better adapt our proposition to the local market and the customers that we're focusing on. Sorry, your second question?
I'm just wondering how you're planning for the high season.
Okay.
Are you staffing up compared to last year, or are you staffing down? Just some couple comments would be great.
Yeah. Thank you. Sorry for that. Yeah. In general, it's hard to answer. If you say across the geographies in Inwido North, where we have seen a softer industrial market, staffing levels are generally at a slightly lower level than they were last year, and that's mainly to respond to that change effectively reflecting the state of the order backlog and also responding to the changes in the industrial market. In the geographies and across most actually of Inwido South, where the order backlog is stronger and the consumer share is higher with, as I said before, overall healthy consumer demand, staffing is then at slightly higher levels than we saw this time last year.
All right. That's a
Okay. Do we have any further questions? We have received some questions through email. Operator?
The next question is from Marcela Klang from Handelsbanken. Your line is now open. Please go ahead. We can't hear you at the moment. Perhaps you're still on mute?
A couple of follow-up questions on the consumer demand from me. You mentioned better mix in the order backlog. Is it only due to the industry orders falling and consumer demand stable? Or have you actually seen consumer demand growing in March and also now the weeks of April that you have in your books?
The total consumer demand for the group is up year-over-year, the total consumer order backlog is also up year-over-year. That's predominantly driven by South. If you look at the North, consumer demand is relatively stable, consumer order situation is relatively stable year-over-year.
Thank you. When it comes to the second quarter, do you think there is any chance that you will be able to better compensate the falling industry demand by consumer demand compared to the first quarter? Have you seen any signals that this stable consumer demand in the first quarter could improve later on?
I think we have to recognize the fact that for us, quarter one from a consumer activity point of view is a very small quarter. What we're trying not to do is to draw any two big conclusions from the overall consumer demand in the first quarter. What we can focus on at the moment and what we're working with, obviously, largely is the backlog at the start of the quarter, where we see that the consumer demand in the North, as I said, is stable and South, it's up. We will obviously continue with all the activities that we have to continue to drive our overall consumer sales and consumer share. I just say it's a bit too early to say to what extent that can compensate for any volume shortfalls in industrial sales.
Thank you. Then you mentioned the industry sales falling some 8% in the fourth quarter. What was the decrease in the first quarter? Do you expect this to be even more in the second quarter?
What I referred to with the minus 8% was actually the total market volume in units in the Swedish geography.
That's collected by the industry association in Sweden, which collects that data. Minus 8% was total window sales in units. That data is not yet available for quarter one, I really don't want to speculate in what that development will be. I guess we'll see when we have that data where that takes us.
Mm-hmm. This industry figure for the whole market compared to how it affects your sales, is it in a similar range?
I mean, on a total level, we have roughly a market exposure that I think is equal to the total. We are probably relative to the total market, a bit stronger on the consumer side and a bit weaker on the end of sales maybe. Roughly, we have the same proportion in the Swedish market.
Thank you. That's all from me for now. Thank you.
We have a follow-up question of Johan Dahl, Danske Bank. Your line is open.
Yes. Hi. Can you just talk about what opportunities and risks you're seeing with the channel changes in Sweden? Finally, also, any sort of cash flow guidance on CapEx and possibly working capital for the full year would be appreciated.
Henrik, I'll start with the first part, and I'll let Peter respond to the second one. I think it's too early to say any specific details in terms of what the channel landscape development will mean. From our perspective, we have a very conscious strategy in that sense to being the market leader, to be very active in effectively most of these segments and having very clear strategies for those. Particularly pronounced with Simplify and a more decentralized local responsibility for the development in those different segments. We feel that we're well equipped to effectively handle the effects that we'll see from that. Long term, obviously, we do see a strengthening, a macro trend of strengthening and increased e-commerce sales, which we think we're really well equipped to do, both directly and indirectly.
Obviously with a broad assortment, we have to meet any demand that would come up in those different channels. The second part I'll let Peter respond to.
When it comes to CapEx, we say the same as we have said before, talking about 3% of our sales. That is quite a normal and right level for us right now. When it comes to working capital, our working capital has been increased second half of 2017 and also in 2018. We have taken actions, and we foresee that this can be somewhat improved in 2019. We see a rather large improvement now in Q1, but that is due from different reasons, and there will be some coming back now in Q2, believe. However, for the full year, we see an improvement for 2019 compared to 2018.
All right. Thanks.
We have another follow-up question of Kenneth Olvåg, Carnegie. Your line is now open.
Yeah. Thank you. My questions have been answered. Thank you.
We have no further questions, so I hand back to the speakers.
Okay, we have received two questions over the email. The first question is if the leverage target is still 2.5 after the effect of IFRS 16? The answer is that the target of 2.5 is excluding IFRS 16. Once again, the IFRS 16 impact is about 10 to 15 basis points when it comes to net debt versus EBITDA. The second question we have received is also related to our IFRS 16, and that is how is the IFRS 16 effect handled in the covenant terms with the banks? The answer is that there's no immediate impact for us when it comes to IFRS 16 in the bank covenants.
Yeah. Any further questions?
We have no further questions via the telephone lines.
Okay, thank you very much for your time, and we thereby close this presentation and talk to you soon. Bye-bye.
Thank you. Bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.