Earnings Call: Q2 2018

Jul 16, 2018

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's Invedo Q2 Report. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Monday, 15th July, 2018. And now I'd like to hand the conference over to your first speaker today, Hakan Jeppesen. Please go ahead, sir. Thank you very much, and welcome to the presentation of Invedo's Q2 2018, and we go directly to Slide 2, talking about the highlights for the 2nd quarter. Winter effects were impacting Q2 negatively, as you all understood. The late winter across Northern Europe delayed the season start. And with 4 to 6 weeks lead time from order to delivery, we had no chance to fully recover within the quarter. Still with that in mind, it's okay results for Enviro in Q2 according to the expectations after the winter there in March. Competition is sharpening everywhere, I must say, to a great extent because of the late winter. All companies in the sector trying to fill production and created some price pressure. We still think that the price pressure has now eased off with the starting season. Denmark continues to deliver extraordinary results. EBE, the European business, is also on track and improving. Enviro Finland is gearing up and improving performance. Still, we have not at all yet reached our potential in the Finnish market as I see it. Swedish market is the biggest challenge for us currently. Big changes in the market and still hesitant consumers. However, within the business area, Sweden, Norway, Norway is now back in black in the Q2, and that is, of course, very positive for us. The business unit e commerce is delivering according to plan and growing continuously. Now we also, in the second quarter, add BEST and BILIXT to the e commerce with another around SEK 130,000,000 of sales in yearly turnover. Today, e commerce is around 8% of total sales in the group, and that is, of course, a very positive development for us. 1st July, we closed the acquisition of Profin in Finland, the leading supplier of panorama sliding doors and windows. And they have, in 2017, a yearly turnover of around €12,000,000 Turning to Slide 3, talking about the 2nd quarter Envito performance. Sales overall holding up well at SEK 1,700,000,000 reported plus 3% and adjusted for currency and acquisitions, minus 2%, but still an okay figure under the circumstances. Finland and e commerce growing in the quarter, and that was impacted by the late season start, of course. The operating EBITDA at SEK 184,000,000 was 4% lower than last year. Again, orders came late because of the weather, and that impacted quite a lot. Sweden hurt most by hesitating situation. We have in Sweden with all the discussions around the dwelling sector and real estate prices. Still, profit improvements in all business areas and units but Sweden, Denmark and e commerce performing really well, division Norway is back in black in the second quarter. The reported order intake was 5% plus in Q2, organic slightly above 0, around plus 1%. Towards the end of the quarter, the segment mix turned for the better, and overall consumer share was almost 75% in Q2 all in all, and that was also a positive sign for the future. Turning to Slide 4. Looking at the 1st 6 months, again, has very much been impacted by the late winter, of course. Therefore, sales and profits were on a lower level than we originally planned for. Reported sales first half year were plus 3% compared to last year at SEK 3,100,000,000. Operating EBITDA dropped to SEK 240,000,000 from SEK 274,000,000 of last year, especially impacted by tough comparison figures in the Q1. As stated, we have concluded 2 acquisitions, Best and Billix E Commerce based in Denmark from April 1 and ProFin in Finland was signed in June and will be in our books from quarter 3 2018. On top of that, we also finalized the acquisition of Ootrupp in Denmark by taking over 100% of the shares in February this year. So far this year, we have launched many new promising products and concepts for better energy utilization, security and comfort. And so far, they those launches look very promising in most of the markets where we operate. Turning to Slide 5, starting to go through the various business areas, starting with Sweden Norway, where we really have a conversion in progress. The conditions in the Swedish market are certainly the most challenging issue for Enviro currently, and we are taking several initiatives to improve results going forward. We have launched new products for energy, light, comfort, security. We are strengthening the organization with increased customer focus. We are doing cost savings across the board to improve efficiency and to keep our competitiveness. And new concepts have also been launched for most important customers like retail, house manufacturers and construction companies. So a heavy program rolling in Sweden to secure our leading position there. Towards end of the quarter, we could see some effects in terms of better segment mix and strengthening margins, especially in Sweden, but also Norway. However, a weaker demand with lower volumes offset some of the improvements. Consumers are still hesitant, and activity in newbuilds started to ease off after strong growth latest years. Sales were 7% down and the order backlog minus 11% compared to 1 year ago. Turning to Slide 6, and talking about Finland. The market demand in Finland seems to be rather stable, even though also here the harsh winter impacted with several days during the first half year where we couldn't operate because of the cold weather. Consumer confidence is on a historical high level and rather stable, even though it has leveled out a little bit towards the end of the quarter. Several competitors in the Finnish market are struggling with volumes and results and trying to fill production with low prices. We have handled it and continue to grow, but with slightly lower margins than expected. Sales were plus 9% in Q2 and plus 2% organic. Envido continues to invest in the sales organization in Finland to be able to capture the right share of the market. This can be noticed in higher costs. We have now sorry, we are now working to stabilize this while capturing sales, and we see some promising signs in the Q2. Order backlog by June 30 was minus 2% compared to last year. Slide 7, Denmark. Envido Denmark continues to deliver strong results in a rather healthy market. In Q2, profitability was even better than last year despite very tough comparison figures. Several new products and concepts have been launched that helped to increase orders by 4% in the quarter. The order backlog has therefore approached the level of last year after the drop in Q1 2018. Denmark is really performing and seems to be in a stable mode towards a strong and good year again. Turning to Slide 8, Europe Emerging Business Europe initiatives taken within BA EBE are leading to a healthy development in all units. Also U. K. Has turned into profit in the 2nd quarter despite the uncertainties in the UK market caused by all the Brexit discussions. Business unit e commerce with Internet trade directly to consumers is growing fine both in sales and profits. Order intake was plus 20% in the 2nd quarter, and the newly acquired Best and Billix will add further going forward. E commerce is now more than 8% of total group sales as of the Q2 2018. All in all, reported sales in Europe were plus 16% higher with a healthy order intake of plus 7% organically in Q2. The order backlog was 16% higher at quarterend. Turning to Slide 9, describing the market outlook. As always, it varies quite a lot between the individual markets, of course, especially in such fragmented markets as those where Envido operates. The consumer confidence is average still on rather high levels, with highest insecurity in the UK and the Swedish housing markets. New built markets are leveling out from very high levels, and this affects Imido in Sweden and Finland, where we have the new built sector. In the other business areas and business units, we have very low level of newbuild and industrial business. The underlying demand and need is high in general. Still, the consumers in Sweden are continuing to hesitate and the renovation market there is not really growing at this stage. After the late and hard winter and somewhat lower market growth than earlier, competition has sharpened with increased price pressure in most markets. However, we expect and have, in general, seen prices stabilizing with a stronger season and since compensation is needed for higher raw material prices in basically all markets. Slide 10, where to focus near term. Enviro's financial management ambition is to increase operating EBITDA on average by 10% yearly. In order to achieve that in the next 6 to 18 months, we need to, 1st of all, stabilize and improve the performance in Sweden with the measures earlier described Secondly, profitability before volume and compensating for slightly higher raw material costs are crucial as well as continuing to strive for the right segment mix. Thirdly, we try to focus on our profitable business as well as acquiring companies with the right prerequisites to build for future profitable growth. Fourthly, further cost and efficiency improvements are needed to secure performance and competitiveness. And last but not least, in vitro companies must always strive to have leading edge products and concepts, especially within Internet of Things that we really think is a vital part of the future assortment for our group. And we invest quite heavily in those areas to have a vital assortment and the right concept. So that concludes my overall presentation of the situation. And I hand over to our CFO, Peter Verlee, who will now go through a little bit more in detail the figures for the 1st 6 months and the Q2. Thank you so much, Hakan. And then we turn page to Page number 12. And this picture shows the results for Q2 as well as the results for year to date Q1 and Q2. As Hakan mentioned, the season started late and that affected sales beginning of the quarter. And total sales, including acquisitions, grew by 3% in the quarter compared to last year. And adjusted for acquisitions as well as currency, sales declined by 2%. Gross margin was improved in the quarter compared to last year, whereas operating in beta as well as EBITDA ended some 1,000,000 behind last year, SEK 184,000,000 compared to SEK 193,000,000 last year. Due to investments in IT and the digitization as well as new product launches. The operating EBITDA and EBITDA margin was 10.6% compared to 11.5% last year. Profit after tax was on the other side improved compared to last year due to lower net financial items and less tax costs. The lower financial items were a consequence of positive translations differences in the quarter. Year to date sales grew by 3% with organic growth was minus 2% and operating EBITDA declined by 13% from SEK 276,000,000 to SEK240,000,000 2018. Late start of the season with lower consumer sales as a consequence has together with the lower volume reduced operating EBITDA margins in 2018 from 9.1% to 7.1%. However, as Harel can also mention, the share of consumer sales was improved end of the second quarter. EBITA was SEK 220,000,000 compared to SEK 274,000,000 for 2018. Envira has in 2018 had restructuring costs of SEK 20,000,000 in Q1 as previously communicated in the Q1 report as well as the Q4 report last year. And profit after tax was year to date 4% behind last year due to lower financial net and somewhat lower tax. And once again the lower financial items year to date is a consequence of positive translation differences. If we then turn to Page 13, with this picture we would like to show that the negative deviation in operating in beta compared to last year for our Q2 is due to the performance of Envito Sweden and Norway. Or to be more precise, it is due to Sweden. The result of Norway has been improved and Norway made a positive result now in the second quarter, meaning the negative deviations when comparing to last year is related to Sweden. The other business areas are performing better than last year when translating their results to Swedish kronor. And the main reason behind the recent development in Sweden is the lower volume as Hakan mentioned before. If we then turn to Page 14, on this page you can see sales to the left for 20 16, 2017 2018 for the Q2. And then to the right, you can see the order intake for the same years. Sales was, as previously mentioned, plus 3% in total sales for 2018 compared to 2017. And organic growth, meaning we take away the acquisitions or adjusted acquisitions and we adjusted currency, organic growth was minus 2%. The total order intake was +8 percent for the quarter. After adjusting the order intake for the acquisitions, the order intake was plus 5% compared to last year. And also adjusting for the currency, the order intake was slightly higher than last year. If we then turn to Page number 15, and this Page number 15 shows the order backlog from Q2, 2013 until Q2, 2018. The order backlog in Swedish millions. The order backlog per end of June 2018 is an all time high level for Q2, plus 1% when comparing to last year. However, the backlog of 2018 includes the acquisition of BEST and Billiards. When adjusting for the acquisition, the backlog is 1% compared to last year. And when also adjusting for currencies, the backlog is some further percentage lower compared to last year. If we then turn to Page 16, this page shows operating beta and the beta margin. To the left you find the quarter April to June and to the right you find operating beta and operating beta margin year to date for 2016, 2017 and 2018. The operating EBITA margin for Q2 was behind last year due to the performance in Sweden as previously mentioned and also due to investments in IT and digitalization as well as new product launches. From 11.5% last year to 10.6% this year. When comparing to 2016 to a margin of 14.2%, the main reason behind a lower margin this year is lower degree of consumer sales in this quarter compared to Q2 2016. And this is both for the margins development when compared to 2016 is both related to the quarter as well as to year to date. Year to date, the margin was 9.7% in 2016, 9.1% last year and now 7.7% this year. Looking at operating in beta in 1,000,000, it was SEK 250,000,000 this year compared to SEK 276,000,000 last year and SEK 245,000,000 in 2016. If we then turn to Page 17, and this is the final page before we open up for questions. This page shows net debt in Swedish millions, the stables, and net debt versus operating EBITDA, the line. The net debt has increased in Q2 due to acquisitions, dividend and normal seasonal working capital increase. And the acquisition of BESTOBILIERS was closed in the beginning of the quarter and the payment of the share was made at that time. The total net debt versus EBITDA was 3.2% per sorry, 3.2% per end of June. And the red line to the right and the stable to the right shows the net debt and net debt versus EBITDA excluding the acquisition of BEST and BIllios. And net debt versus EBITDA has increased during 2018, especially now in Q2 due to the acquisition. Although our assessment is that our strong cash flows in the second half of the year will reduce the net debt versus EBITDA. This was the presentation. And we'll now open up for questions. Thank you, ladies and gentlemen. We'll now begin the question and answer session. Your first question comes from the line of Johan Dahl from SEB. Please ask your question. Yes, hi there. A couple of questions from me. Could you just elaborate a bit on the order book, the way it looks now, especially with regards to customer mix? You talked about 75% residential in Q2. If you compare sort of what the order book looks like today, does that improve further in terms of consumer sale or does it deteriorate? When comparing the order book end of June compared to last year, we have somewhat higher degree of consumer sales in the order book this year compared to last year. Okay, very clear. Thanks so much. Secondly, can you elaborate also a bit the cost you're taking below gross profit. You talked about IT, digitalization investment, product development. Could you explain a little bit what the framework looks like for this investment? How much will it impact you in the current year, next year? And what do you expect to benefit from those investments? If you take the IT costs, we're looking about benefits going for the future and not so much for 2018. When it comes to product launches, we can see some effects now in 2018, but metal effect beginning then of next year. And when it comes to the organizations, we are working with this. We are launching new products. However, we should not calculate with too much impact in 2018. It's more connected for the future. And how much are these investments? I mean, you made a very interesting comparison looking at Q2 earnings this year compared to 2 years ago. And it seems to be that only half of that delta is due to gross margin and the remainder seem to be investments like the ones you're taking currently. Is are these sort of a 3 digit numbers? Or how much is it? The investments in values is not so high when you're comparing to in relation to sales. However, when you compare to 2016, we also then make adjustments for acquisitions we have made since beginning since Q2 2016. So it's not so hard just to make an easy impairment compared to 2016 in that level. When it comes to investments, they are increasing, especially when it comes to developments and IT costs. But in percentage of sales, it's not so materialized. All right. So just before getting back in line, can you just talk slowly or a little bit why growth isn't better in Finland? Or can you say you weren't entirely happy with the performance in Finland? What's going on? I think the Finnish market is there is some unrest absolutely, and it was quite clear that Finland for the first time, I think during my time in the company, has also been impacted by the winter actually. I mean, you normally expect winter in Finland, but it was harder this time, and that created harder competition. We also have at least one major company, the number 2 in Finland, has also been restructured with 92% getting rid of 92% of the debt in the company, and they are pretty aggressive in the Finnish market. The Finnish market has been extremely volatile this year. All the signs are positive, I would say. Consumer confidence is high. Maybe newbuild is a little bit leveling out. But all in all, it looks good, but it seems to be rather volatile. And it was absolutely impacted by the late winter also getting even further into the Q2 than what we expected. So it's hard to say where it's going. I think we saw that the produced volume in Finland in the Q1 was actually as much as 18% down compared to 1 year ago. And that was very much driven by the harsh winter, of course. And we gained market share in the Q1. So with the organization and with the setup we have now and with the normalizing market, we really see that we would capture more sales and the right market share also for the rest of this year. But it remains to be seen, of course. Thank you. Thank you. Your next question comes from the line of Preg Radczanovic from Nordea. Please ask your question. Thank you very much. The situation in Sweden and Norway, you have talked about this for a couple of quarters, but has it improved or worsened compared to Q1? What is the delta from here? No, I think the I mean, the demand has been, I would say, and I think we have talked about this all the way back to 2016 that the route market, the renovation market has really started to ease off actually late 2015 or early 2016 and then it was it got even more stable or stabilized by all the new demands on house owners, so to speak. And then that was, to some extent, of course, compensated by the really, really strong newbuild market. Now we can clearly see that the newbuild market is, to some extent, leveling off and consumers the consumer market is stable or rather slightly decreasing. It's not no drama at all, but it's not a fast growing market, of course, with all the debate we have in the market with real estate prices, lending bubbles, etcetera. So that is what we see. So we see a rather stable market with a slightly slower growth in the newbuild right now, and that causes demand to weaken a bit compared to what we have seen in the last quarters. And I see no reason to believe that the Swedish market suddenly would change. I think there is an election. There is a lot of insecurity in the market when it comes to house prices, and there are debates and articles almost every day in the papers impacting how people think about their investments in their homes. So I think this market will continue the way it is. The renovation market will be rather stable and a major part of the market, and we will grab some shares in the renovation market going forward and with all the measures we are taking. So that is what you can expect going forward. Thank you. And the level of fixed cost in Sweden or annually, could you remind us what that is approximately? The level yes, we don't talk about fixed costs. But I mean Sweden Norway is really an efficient business for us, where we are around, let's say, 11%, twelve percent of sales is what we call sales, marketing, administration and development. And that is really, really efficient business. And but still, we think there are more things to do to organize it in a smarter way, and that is also what we're working on, and we have all these programs running right now. Okay. And on the investments in the sales force in Finland, how much of that is affecting EBITA for Q2? And is that recruitment of new sales personnel? And could you tell us what that could bring us for? Yes. Finland is, to some extent, different than the other markets since such a big share of the Finnish business is direct sales. So that means that you really have to have a good organization up and running with a lot of field sales and back office sales or indoor sales. And if you lose capacity or competence in that area, you also lose orders because you don't get orders if you don't knock the door, so to speak. And sometimes, when we report our quarters, there will be some it can be a little bit unbalanced between when we recruit people and when we take orders. And right now, we have been building organization to come back to the level where we would like to be to make sure that we really keep our leading position in Finland. Still, we have managed in the Q2 to improve results in Finland, and we are now building for the future and hope for even better quarters going forward. And could you tell us a little bit about the order intake so far in Q3, how this has progressed? A little bit of a hint. In Finland or? Overall for the group. Overall, there is a slight growth. I mean organic order intake growth is 1%. I mean, we report 8%, but it's in reality, it's organically 1%. It's because of the acquisitions, of course, but also because of the vast currency effects we're seeing right now. You can say that Denmark all the markets in Europe are growing fine, especially e commerce is really, really growing in a nice and neat way. And we increased orders in our e commerce directly to consumers by almost 20% in the Q2. If you talk about Finland and Sweden, Norway, they are around 0 in order intake for the Q2. So they are more or less on the same level as last year. And with the effects we saw and with the delay we had from March to April, I think that is rather okay at this stage. Thank you. Next question comes from the line of Rasmus Engeberg from SHB. Please ask your question. Yes. Hi. I wanted to start with Sweden and Norway. I mean, considering the negative mix you have and the negative organic growth, it seems to me that you're doing really well. Were you surprised with either is it the mix or the synergies that does this? And did this come as a bit of a surprise to you? We are never surprised by our own success. Just kidding. No, but I think we are doing a pretty good job. It is Sweden is absolutely one of the more difficult markets because there are so many components, new competitors, weaker demand and also I think also digitalization, meaning that new ways of marketing, new ways of sales, changing also a lot of the channels in the market. So there are many things to handle. And I think so far, our organization in Sweden and Sweden Norway is doing really well, and we have seen some progress when it comes to the mix going forward with our new organization. And we're also compensating, I would say, really well for raw material price increases, etcetera. So I think we are not pleased with the development overall. We want to do more, but we shouldn't be too depressed either. We are coping and we are keeping up so far in Sweden, Norway. Norway. And these synergies, is that something that would sort of help you offset negative sales growth also in the 3rd or maybe the 4th quarter even? I think so far, the synergies that we're talking about and referring to are more for the Norwegian business, where we are now back in black. And I see no reason that shouldn't continue in the 3rd Q4. And we have also a much better, I would say, much better mix in the Norwegian business this year compared to last. So it's a combination of lower cost for lower fixed cost and better mix in the business with better prices. So but yes, it looks promising. And Sweden is a bit of a different story, And it takes a bit of a longer time to adjust. But hopefully, we will see better performance going forward also in Sweden. And then just a final question for Peter. The payments for acquisitions in this quarter, what does that include? It seems like a fairly large figure. Is it both what is included in that figure? We paid for acquisitions on Fest and BilliGas in the beginning of April. That's included total because we paid in it was a net cash payment. So that is it's only that in that figure? For Q2, yes. Is that right that you paid then about 3 times sales for that company? Roughly, yes. Yes. Okay, good. And so the payment for Profin will be in the Q3. And that, I guess, it's a different kind of multiple, I suppose. Yes. Yes. Good. Just wanted to get that sorted out. Thank you. Your next question comes from the line of Kenneth Towle from Carnegie. Please ask your question. Yes. Thank you. So I was a little bit curious about this restructuring program that you launched last year. Mainly done? And also where we are in terms of savings of the SEK 100,000,000? What's the phase of those savings, please? I will not comment on a specific figure, but we have the earliest and the fastest effects we got in EBE in Europe because of some major restructuring. And that has really paid off. And we can now clearly see that EBE is approaching the profitability levels that we are expecting. When it comes to Sweden, Norway, especially and also in Finland, it takes a bit of a longer time. It's a big organization. It's more complicated initiatives, and they are still rolling. And we hope to see more effects during the second half of the year than in the first half of the year. And it should be fully integrated in 2019, as we stated also when we launched the program. Okay. Then also for the Swedish operations, if we look into next year, you're saying now that the new build activities are leveling off, renovation are slightly negative maybe. But when we go into next year, the newbuild activities should drop quite significantly since housing starts dropped quite a lot in the end of last year. So how would you how are you planning to meet that drop? I mean, with all these things that we do already, with the cost saving initiative, with a slightly changed organization from that respect to be more even more customer focused in various ways with all the new concepts that we have launched that we also keep and maybe even further strengthen our position in the Swedish market. I think those are the things we can do and of course, adjusting capacity in the factories. As a matter of fact, we also already this year have closed one factory in Sweden and integrated it with the other factories. So we have continuously ongoing initiatives, and I think we have shown historically that we are rather good at keeping profit margins on the right level even if the general market demand should slightly lower. So many things ongoing, and I'm not actually so really worried about that. And that the consumer share of the total market also is increasing is also helping us a little bit because some of our core customers also in that because of that also have to focus a little bit more on the segments where we think it's important to be, and that would also help us going forward. So no guarantees, but I think we are on our way towards a better balance and a more efficient organization coming into 2019. Okay, very good. Thank you. Thank you. Next question comes from the line of Emmanuel Defiglia from DIO. Please ask your question. Yes, good morning. This is Emmanuel from MelbV Asset Management. I have two questions. The first is, you mentioned in your report new competitors. And I was just wondering if you can give us some color if about the profile of these new competitors, namely, are they doing something different to you from the selling, maybe using more the Internet? Do they have a different cost structure? That would be the first question. I'll take the second afterwards, please. Yes. You can say that I mean, first of all, in the last couple of years, if we talk about especially the Swedish market, it's quite clear that we have also some of the market leaders are stronger than historically, but they are more traditional companies like ourselves. But we also see some new entrants to some extent with production in low cost countries like in the Baltic States or in Eastern Europe. And they are not I wouldn't say that they are grabbing a huge market share, but they are, to some extent, annoying the market and trying to offer very, very low prices in some cases. And some of it is also new, I mean, Internet concepts. But we are also investing ourselves in the e commerce, and it's growing fine. So we meet that challenge in a good way, I would say. And I think that some of the new players coming in, they also try to utilize the winter season by offering lower prices and trying to win some advantages because of that. And I think this will also ease off going forward because of you have to compensate the profitability levels that some of the players are working on is not sustainable. So but clearly, we have seen more competition the last couple of years and also this winter. Okay. And my second and last question is on the second half of this year. I know you don't like to give specific guidance, but I was just wondering whether what I'm going to say to you sounds reasonable, which is given that you're guiding for a stable market with newbuild maybe slightly weaker and given that you had all the production problems in the second half of last year. So when I compare second half to second half, would it be reasonable to assume that you should be able to do a small improvement or an improvement, let's say, in profit, in EBITDA for the second half? Would that be reasonable or you rather not comment? No, I cannot because if I start guiding on how we will perform, then I have to do it for the rest of my life. So I can't comment on that. I think you will have to calculate yourself on what you believe. Okay. Thank you. Thank you. There are no further questions at present. Okay. Thank you for listening. Take care. Bye bye. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.