Earnings Call: Q3 2017

Oct 23, 2017

Morning, ladies and gentlemen. Thank you for standing by and welcome to Enviro Q3 Report Conference Call. 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, 23rd June. Paul will give you the figures later on and we will take as stated questions after the presentation. So let's go to Slide 2. And I start with the summary of the development during summer and Q3, where I think we can say that we follow our strategic plan. We continue to grow by 8% in the Q3, 4% organic. So the top line is there. We have made 2 acquisitions during spring and summer, and Best and Bilix, the e commerce company based in Denmark. So we have added another around SEK 200,000,000 of total supply chain disturbances especially in the Swedish supply chain from our component factories all the way through to the window factories and they are much less now, but they have still impacted the quarter roughly by SEK 25,000,000 in the quarter. Had the usual uncertainties, political and financial risks of course, but that is something that we see in basically all industries. So we think it's jumping a little bit up and down. We get various signals, but at least the inflation is not falling anymore. So we are also seeing and expecting some raw material prices going forward for aluminum, for glass, for wood and for transportation and that will also lead in a good manner. Consumers seems to be in a positive mood trend. As a matter of fact, the Finnish consumers there are on an all time high level when it comes to consumer confidence. I think the only question mark we have right now is the UK market where there is a slight trend downwards for consumers and that's of course connected to the Brexit discussions. And markets in general as before the summer are driven generally by new built. There are lack of dwellings and so the new build has continued to be to invest, but still in a good mood. We also continue to see a shortage of competence. It's difficult to recruit on all levels in the Nordic markets And especially I would say in the countryside, it's also hard to find all the resources we need in our factories with the urbanization going on. The good demand creates longer lead times and this goes for I would say all producers in our industry, but also outside our industry and also for the raw material because the markets are still I would say very volume and production driven and go for some kind of cost plus price. About the Envido performance, again good growth, profitability hit by short term operational disturbances. But in general, you can say that nothing has changed in our business model. We still see it as the right model and a successful one, but the operational disturbance. Organic growth 4% and you can say that all segments are growing even Sweden, Norway with a slight growth. Organic plus 1% in the quarter and it's positive more or less everywhere except Sweden and that is very much connected on the sales engine and also the capacity there. The order stock towards the end of the quarter is plus 7%, that's the EBITDA margin after good growth and good control of the business. So very, very good performance in Denmark. Commerce is now 6% of total group sales and e commerce is developing according to plan, even though that we can see some sharper competition and the development jumping a little bit up and down from week to week and month to month. But overall good development for e commerce further for us BNB adds some SEK 125,000,000 of turnover with a Nordic platform for that business. And we will add another major production unit in a low cost country as well. So again, the short term disturbances in the Swedish supply chain continue and will be back in Q4 as I see it. Turning to Slide 5 to go through a little bit why is this happening. First of all, I would like to say that we all have to remember that we are made to order. We don't have any article number production. We don't have any windows and doors on the shelves that we can deliver. So we have to it's been of course from the start of the year with no winter and a very high volume growth both at our suppliers and in our own factories made us for many of our suppliers in the beginning of the year. And then trying to ramp up, we got some shortage of people and competence and it was very difficult and it is still difficult to recruit the right level of resources in some of the areas. And we added to that some new product launches and some changes in our product platform that created some technical challenges during spring summer on top of all the challenges that we had. And then of course, as you always have, but with all the other problems or challenges that we've had some machinery breakdown and some new investments not running exactly according to expected from the beginning, our reduction, very costly of course. And I have to thank all our good people out there in the factories for working so hard to make our processes. I would say all processes have been revised and especially the material planning and the coordination with our main suppliers. We have taken down deliberately capacity in some of the Swedish units to not overbook and to get some headroom going in several plants. In some factories, we have also added new leadership and exchange the leadership to get a better short term and stronger completely coming back on track with our supply chain. Turning to Slide 6, if we take a look at the 1st 9 months, again good sales growth and profit obviously below our expectations, but in line with 2,006 can grow and we are taking strengthening our market position. As I said before, more backlog of orders plus 7% is high and the highest ever. And the operating EBITDA in line with last year 1st 9 months. But obviously the operating companies this year and the last latest one was Best and Bilix, the Danish, but with a Nordic platform in e commerce. That's our latest Envido member and we will continue this path of course going forward. Going to Slide 7 and then going through all the business slightly with 1% in the quarter despite the challenges we've had in the production. This is a new segment as of July 1. Henrik Jallmason is the new Head of the business area starting August. And we see in the Swedish market that the consumer confidence is on a healthy level, but we also see slight signals that consumers continue to be slightly more hesitant summertime in 20 when there was a lot of debate also about amortizations and lending in the Swedish market. So there is not a big change, but in comparison to the industrial markets, the new bit markets consumers are more hesitant I would say. Further disturbances in the supply chain, I'm not going to say so much more about that, but substantial extra cost in the quarter is basically the reason for dragging the operating EBITDA. There has dropped a bit in Sweden from around 60% down to around 55% because of the strong growth in the new build sector. Total sales still in Sweden, Norway plus 1% and total order backlog brand on quarter plus 15%. Part of that order backlog is of course also a deal more negative than they might be if we cannot deliver according to expectations. Turning to Slide 8, just a reminder of the reasons why we created Sweden Norway as a new business area. There are several reasons, but of course we want to get a bigger business area where we can utilize the resources better because of they are utilizing the same factories, it's more or less the same products. And with the consolidation of 2 areas, it's very much in line with how Enviro normally operates, where we produce and such lower profitability and consolidation is needed and synergies are needed to get Norway completely back on track. And this Glan, very strong order book and segment mix still slightly unfavorable. We see that Finland is really coming back now as a market with good GDP development and a very high consumer confidence, actually higher than before the financial crisis. And we so far also see continued very good growth within the newbuild sector. Both construction companies and house factories are very active and showing good demand there. We had problems operationally also in Finland of a completely different kind. It was more esteemed in the beginning of 2017. I would say that we are now back on track within the consumer business and we will be fully recovered in Q4. And the organic order intake already in Q3 was actually more than 40% in Finland during the quarter. So the activation with lack of sales people in some of the consumer driven segments and that created indirectly a negative mix. I think we will recover that in the coming about the finished development in the coming quarters. Denmark Q3, I already stated that it's a very strong development in both sales and for confidence and still in a positive trend. We have good growth in all our channels and especially the sales to the carpenters and installers, human driven. So here we don't engage very much in the new built market at all. Total sales plus 18%, total order backlog minus 3% and that is nothing to be worried about. We have shorter lead times. We have improved capacity and we are dealing with the orders very, very fast in the Danish business. So it's nothing to be especially concerned about for Denmark as I see it right now. Turning to Slide 11, emerging business Europe where we have as always a mixed development. However, the overall business area is developing more or less according to plan with growth and with improved profitability where Ireland, Poland and the latest acquisition within new PVC windows in UK developed well. The e commerce is still growing and according to plan even though the growth in the quarter was slightly lower than earlier. But growth pace will vary going forward. Growth pace to be more up and down going forward also. The acquisition as I said before, West Ambilex strained crowns of sales in the next coming period. So it's really taking up a big share of the restructuring and then we are improving our competitiveness especially in the direct sales model that we have around the London area and up 22%. Total order backlog lower minus 13% that is very much related to direct sales in U. K. And to some extent in Austria for the business units. Turning to Slide 12, the outlook and it continues to be good as we see it. The markets are in general positive and the Enviro long term performance should be promising where the underlying profit is still good. To repeat the challenges of course, we have to come back on track with the supply chain disturbances and the right and enough competence to also ramp up production when needed. And of course the political and financial uncertainties as for all could be worthwhile mentioning, even though we have not seen a big change in the sentiment over the last couple of years, despite all the things happening around us. Operations will be in better shape in Q4, but as I said, we still expect some extra cost around €10,000,000 I would say if everything goes according to the plan we have now. And then of course coming back into 2018, we should be fully recovered. Strategic pillar in our plan that we should always try to make efficiency improvements and structural changes to improve to take out at least €100,000,000 of cost and thereby also improving the competitiveness with full effect in 20 19, but already into some details later on in this presentation. Our management ambition is still there and we tend to think that we are with most of them on track. We are acquiring companies. We are launching now connected products in most markets. We are taking efficiency and cost efficiency measures to be as flexible as a short term challenge we have is to capitalize on the strong Nordic position by now getting the value chain back on track to come back to normal production as soon as possible, But also to continue to ramp up sales in Finland in a as we see favorable market where we have a couple of competitors with some challenges. The number 2 in Finland is now in some kind of administration phase and not really operating as the company should. We will continue to evaluate further acquisitions. That's a continuous process and acquisition based growth in Europe will still be a focused area for us. Obviously with the SEK 100,000,000 program running, the efficiency and cost improvement program must be in focus that we secure that we also create and get these $100,000,000 out of the system. And we will continue to launch connected and other new products to improve life at home for our consumers. That is of course the foundation for the whole company. That was the general question. Thank you very much, Hakan. Then we turn page to Page 16. On this page, you can see the income statement for the Q3 as well as year to date to write. EBITDA decreased in the quarter and reached $172,000,000 compared to $202,000,000 last year. And I will later in the presentation come back with some reasons behind the lower results. Last year, the Q3 had a positive one time effect of €10,000,000 from resolution of an earn out. And thereby, as you can see, the EBITDA is €40,000,000 less this year compared to last year due to the fact that this $10,000,000 resolution of the earn outs. Profit after tax reached $160,000,000 compared to $152,000,000 last year. And on year to date, sales has been improved by 16%, were up 5% inorganic growth, Page 17. In the Q2 report in July, we stated extra costs and loss of income of about SEK 45,000,000 is going to be sold in the beginning of Q3. However, as Hakan previously stated, the production disturbances continued after summer vacation and has affected a re effective summer vacation. The units have been forced to run on extra shifts and on overtime to handle the delivery time to our customers. This has been costly and at the same time new people have been recruited to handle situations with lower efficiency as a consequence. We are in a high season right now and the production units estimated today that the situation will be sold during the Q4 when we are entering the low season and the extra cost in Q4 of interest sales compared to last year and at the same time lower sales efficiency in Finland and U. K. The negative sales mix, the sales department in Finland, as we described in the Q2 report, is today up on speed and the order intake is ahead of last year in the Q3. Page number 18, this page is showing to the left sales in the Q3 for 'sixteen, 2017 and 2015. And to the right, you can see the order intake for 2015, 2016 and 2017. And as I stated before, the sales increased by 8% in total, whereas organic growth was 4%. So, Envide is not facing a top line issue. It's more a short term cost issue with too low efficiency in this coming quarter. However, the negative sales mix is more driven by the market. The order intake was in par with last year and adjusted for acquisitions, the order intake was plus 1% compared to last year. The order intake has been impacted by the production disturbances since in Sweden, every time and thereby short term reduction in capacity for new orders with short delivery times. If we then turn page to Page 19. On this page, you can see the order backlog in Swedish krona from Q1 2012 until Q3 2017. As you can see, the order backlog is plus 7% compared to Q3 last year, and this is the highest order backlog we ever had. The order backlog is always at peak in Q3 and it will be reduced in the Q4 when we are entering the low season. But we are plus 7% compared to last year, which is positive. If we then turn to Page number 20, on this page, you can see operating EBITDA in Swedish krona for the Q3 as well as year to date. And you can also see the margin, operating EBITDA margin for the Q3 as well as year to date for the year 2015 until 2017. The margin was reduced in the quarter as a consequence of the lower efficiency and a negative sales mix effect, and the margin reached 11% compared to 14% last year and 14.7% the year before. Operating EBITDA on year to date is on par with last year, but the margin has decreased from 11.3% to 9.7%. If we then turn to Page 21, and this is the cost efficiency and cost improvement program, as Holger mentioned, in VIDA during the first half of twenty eighteen and will reach full effect from 1st January 2019. The savings are within all business areas and will demand a one time restructuring cost of about CHF 80,000,000 to be taken in Q4 and Q1. Most of the restructuring costs are write down of assets and will not generate any cash payment. We will come back with more detailed information about this program in the Q4 report. And this program is, of course, one of the actions for Envido to reach our targets. If we turn on page to Page number 22, the last slide before we open up the question. On this page, you can see the net debt in EBITDA has been somewhat improved despite the lower result in the quarter. The net debt versus EBITDA was end of September 2.2% compared to 2.6% last year. Envita has, as most of you know, a very high seasonality and this seasonality will be in previous years. We open up now for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. A couple of questions. Firstly, if you look on the Sweden Norway operations, I think, Kocken, you sounded fairly confident on orders. Clearly, the production disturbances, it sounded that the sources of these problems come from a very wide variety of areas. And I just wanted to hear from you, I mean, obviously, prices are pressured in that channel and isn't really were you too optimistic in trying to achieve those orders, something here to strengthen the confidence in you actually achieving those savings? Okay. I think when it comes to the a lot of questions there. If you take the Sweden Norway case, I think the situation is more or less unchanged from before and actually what is very positive for us in the Swedish market is that we in Q2 also gained market share again in Sweden despite all the challenges. But we have had a lower if we cannot deliver. I think the situation is very much unchanged. We hear a lot about the Norwegian market and the challenges in the real estate market there. We cannot really see it. We come from a small position in Norway and we are still growing substantially in Norway actually. We have 27 soon with the Danish acquisition we will have 29 factories. Of course, they are not running smoothly 100% all of them all the time. So this happens. The problem for us now is that a couple of our bigger factories came behind because it started with the material short efficiency further by launching some new technical platforms and we did some mistakes there and ran into some problems with those projects. And in comp where you lag too much behind, it takes normally a longer time to come back on track because you try to pressure the system slumps or and that is basically what happened to some extent after the summer where we pressured the system very hard. So I would say these are problems or challenges or things that happen from time to time in a system that to make our production process even more detailed and efficient. And but also when you get some disturbances, the risks that these are larger than before when you had a lot of I mean, extra resources, extra material stock, etcetera. The risks now are, of course, with 10%, 11% working capital to sales, the risks are higher and that is what we see right now. And then the final one, could you give us something to strengthen the confidence in you being able to achieve the CHF 100,000,000 in savings? Well, I think the confidence I think the only confidence I can give you is that you look back at history, you take a look at the Envita when you compare to all other window door makers that you can find how they perform. You can see all the 20 factories we closed down. You can see the margin improvements that we have done back to 2010, 2011 and all the other KPIs that we have improved over the years. I think that is the only the confidence I can give you. Obviously, as I normally say, to drive business is not science, so there can always you can always end up with new problems and challenges that you haven't foreseen. But I'm pretty secure that we have defined they are strong and good. Okay. Thanks. Thank you. And your next question comes from the line of Kenneth Stoll of Carnegie. Thank you. Please ask your question. Yes. First, I'd like to hear some comments about pricing in Findlay sales force around London there. What is happening there? As I remember, you should start to introduce your own supply your own windows to that sales force around now. So an update there also. Thank you. Phil, I think there are several reasons for price increases to some extent. That will generate price increases to our customers, but also of course that we are one of them to some extent utilize that. I think as the last time when another big competitor ran into problems some 3, 4 years ago, I think you should also be careful that next coming quarters. When it comes to UK, I think it's more of the challenge we have there is that we have had because of the capacity of all the supply into our own factories and that has also created some downturn in sales. And therefore, we have to now to look into this business model and also restructure what we can and what we have to do to come back on track with full competitiveness. So and the plan I see now for UK, it looks very promising and I hope for good development in 2018 with the U. K. Sales. Okay. So, is it still a capacity problem in factories supplying the U. K. Or? Yes, you can say that. And not only because of the supply chain issues we're talking about in Sweden, it's also about the huge growth of the e commerce business unit and e commerce to a great extent and our U. K. Part of our U. K. Business is utilizing the same factory, a big factory we have in Poland. And we are investing, but with the growth we have seen in both actually in U. K, but especially in e commerce, we haven't had the right capacity to take on more production in our own regime. So that is part of the problem for U. K. Aggressive, we are investing heavily in our Polish factory to ramp up sales sorry, ramp up production and to be able to ramp up sales in U. K. And we expect that to happen in the first half of twenty eighteen. Okay. Thank you. Thank you. And your next question comes from the line of Pritchard Savinovich of Nordea Tanki. Please ask your question. Thank you very much. Could you tell us about the organic growth in Sweden and Norway, respectively, for Q3? The free was I think around €478,000,000 for the respective Yes. I mean, obviously the Sweden Norway margin is dragged down a bit because of that Norway is not the most profitable as I said by almost 18% in the quarter. So but the Swedish growth is I mean maybe it's not the best quarter to calculate growth rates because we have consciously limited some of the sales to be able to deliver as much as we can to the most important customers in Sweden. So we will have to come back I think in Q4 and Q1 and Q2 next year to really see the potential of the Swedish market. That's how we see it right now. All right. And do you see any changes in the consumer behavior in Sweden since the housing market has been a bit uneasy and unstable? Not really. I mean the changes we have seen and are seeing in Sweden, they occurred, as I've said from around 15, 16 months ago and the market tends to be stable in that direction and it continues the same way. So whether that will be you can read, I mean, I don't know how many articles about all the risks and problems. And of course that might impact consumers going forward. But we currently see it being worse right now. I think we have a nice and decent development even though new build is growing much faster still. All right. And non resend Aristide, you might lose any clients now because of Easter weather? Yes. As I said, I mean, I'm quite sure that we have made a couple of customers very disappointed during this time, but we try to stay very close to them and communicate as much as we can about the challenges. And basically, we have taken all the costs to make sure that they are not hurt too much. And there might be some damages in some relationships as always when you are delayed with your on the other hand, I think it's also very known in the market that we are not the only one with substantial. We will have some tough discussions with a couple of customers also going forward. All right. And given your leverage level along with these disturbances again, how confident are you on carrying out new M and A at this point? I must say, I don't see any big problems there. I think we will continue to take down net debt during Q4. And I think there is plenty of headroom to make further acquisitions in 2018. So I'm really looking forward to come back with positive news on that side later on. Okay. And one final one for me, somewhat of a slower development. And also the Q3 figure of minus 3%, does that include the latest acquisition of Best and Be Leased? No. Okay. We're going back to the 2 questions. Normally, it depends on quarter to quarter. But you can take in roughly, you can calculate that sales in 1 quarter, 50% of the sales in the quarter is in the backlog when a quarter starts and 50% of the sales is generated by new orders in the quarter to be delivered in the quarter. And when it comes to Best and Billegate, that is not that deal is signed, but we have not closed the deal and they are not within our books as of today. However, we have base in our books, but that order back. All right. Thank you very much. That's all for me. Thank you. And we don't have any further questions at this time. Please continue. Okay. Thank you all for listening in and that ends the presentation of EMEA to Q3. Have a nice working week. Thank you very much. Thank you. And that does conclude our conference for today. Thank you for participating. You may all disconnect.