Welcome to ITAB Shop Concept quarter three presentation 2022. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. If you wish to ask a question, please press zero one on your telephone keypad. Today I'm pleased to present CEO Andréas Elgaard and CFO Ulrika Bergmo Sköld. Please begin when ready.
Yes, hello. A very warm welcome to this presentation of ITAB's Q3 report 2022. My name is Mats Karlqvist, and I'm the Head of Investor Relations at ITAB. We will end the presentation with a Q&A session, where you can ask your questions in the conference call, or if you want to submit them via email to ir@ITAB.com, and I will read them out in the call. The presentation, including the Q&A session, is recorded and will be available at our website afterwards. With that, we could please turn to Slide 2, and I am delighted to hand over to today's speakers, Andréas Elgaard and Ulrika Bergmo Sköld. Go ahead, Andréas.
Thank you, everybody. This is Andréas Elgaard. We can go to the next slide. That is just a headline for a short introduction to ITAB. We like to take the opportunity each time that we do these presentations to give you a very, very quick snapshot of who we are. Of course, it doesn't do us justice, but it hopefully intrigues you a little bit to know more, and then we're always eager to have more deep downs and do presentations that go more in-depth. Next slide, please. We usually use this phrase that we are what we create together with our customers. On this slide, you can see a little bit the width and also the depth of what we are doing.
Of course, there are pictures from grocery stores where that is our main segment. You can also see car showrooms from electric car showrooms, pharmacies that are very important to us, do-it-yourself, fashion, cafe, restaurants. You would say we are in all types of retail. Depending on the relationship we have with the customer, depending on their dilemma, depending on their level of engagement, the outcome of what we do looks very different, and it's really very much up to what we create together with our customers. If we go to the next slide. It has a headline here that we are the leader in Europe with a global reach. To put that into context, we are in an industry that is very fragmented.
We are one of the three largest companies, but none of the largest companies have a market share that is above 10%. It is a very fragmented market that is, I would say, ripe for maturing and for consolidation. Here we have done some rounding up of our sales figures. These are full year 2021 figures that you see here, where you can see that our biggest customer segment, grocery, is almost 60% of our activity and our sales. The second largest of our segments is home improvement, do it yourself, that is, around SEK 900 million in 2021, followed by fashion and then, all our other customers and all our other segments.
It's quite a big chunk there, but to call out a few of the areas where we are quite big, I would mention pharmacy, consumer electronics, just to mention some. We can take the next slide, please. ITAB of today is a strategic partner to retailers. We are at our best when we work on a strategic level where we try to solve the dilemmas that retailers have, and we co-create experiences and solutions that help them to improve either their sales or their internal efficiency and profitability. We offer everything from.
We offer. I would say that we offer not just products, we offer a lot of services, everything from installation and aftercare services, of course, that are given, but also designing shopping experiences, designing shop concepts, designing solutions that help to drive operational efficiency across the retail estate. I've already mentioned that we support multiple retailing sectors. Today, our activities span 15 production facilities with around 2,900 employees and in 24 countries. We have a global reach, and we, for instance, are helping some of our customers to install our checkout and loss prevention solutions in U.S., in Australia, Middle East, and so on.
I just want to highlight this because we sometimes get questions on it, and it's also something that should be looked into in our reports because we took a decision very early on this year in March that we are discontinuing all our activity in Russia, and we are doing that in a controlled fashion. We respect the U.K., U.S., and E.U. sanctions and also respecting Russian law. As you're all aware, these things change on a weekly basis, but we're very busy working on this to discontinue all our activity. Next slide, please. This is just more of a, I would say, to remind those of you that kind of maybe either are new into ITAB or those that have been following us.
I want to remind everybody that we came, not just we, but our whole industry came from a situation where margins were more and more challenged, where there was an underlying change in the business, and that came from the ongoing change that consumers have that is challenging retail in new ways. Big expansion programs you don't see anymore. Instead, it's lots of projects and lots of repurposing, retrofitting going on in retail. More work than ever, but different in nature. For ITAB it meant that we had been challenged in our profitability for several years. Our KPIs were not pointing in the right direction, and there was a quite strong need to change. Next slide, please. This is just a headline slide.
We set out to work out a strategy. We did this during the autumn and early days of 2020. We call our strategy One ITAB, and that we are better together. It's addressing both, I would say, the outside-in view and the internal need for change that we had as a group. If you go to the next slide. Our strategy is built on consumer and retail insights. We truly took an outside-in view trying to understand the dynamics in the consumer expectations, the consumer demand, the consumer sentiment, and this is changing rapidly. It's not that it has changed, and now we all need to adapt. It's a continuous ongoing change where expectations the consumer has is not set by the traditional players in retail. It is set by social media. It is set by online platforms.
People expect more guidance, more personalization, instant gratification to a much higher extent. For retailers, this means that their value chain, their operations are geared up to serve in a certain way, and they need to invest. They need to invest online. They need to invest in their stores. They need to adjust their formats. They need to basically become relevant and increasingly stay relevant, which triggers more rapid change, more constant change. This is of course good for us because we help to satisfy the need for change. Also it challenges us because we have been geared up our whole industry to serve large projects, large expansions, to do much of the same.
For a number of years, there's been a gradual switch away from these bigger programs into projects where it's important to truly understand the underlying consumer change that causes the retailer to struggle and to have problems. They both need to invest in stores and online. They still sit with the same cost, that challenges them. We are trying to help them to by being more agile, more flexible, being more focused on driving value outcome for our retailers and in that way stay relevant and stay even more relevant than before. Next slide, please. Our strategy, it consists of seven strategic priorities. We have divided these priorities also into, it's a bit maybe, double signals here, but three phases. We call the first phase stabilize. That is the phase where we're focusing on re-engineering our cost structure.
That comes from the need of change where our margins were challenged. We have worked on our capacity. We have worked on driving synergies internally. We have worked on driving synergies together with our suppliers and with our customers. I'm happy to conclude that the stabilize phase of our strategy execution have come to an end where the big kind of heavy lifting is done, the factory moves and so on have happened, and they have been executed. The second phase, it's about building, investing in new capabilities. This we have been busy doing already during the stabilize phase, but that is ramping up now into more and more of execution. The first things we changed was our go-to-market model with our value proposition. We have trained and educated coworkers.
We have implemented tools and methods that are helping them to stay relevant and to be ahead of the game. We are more and more now investing in our internal capabilities to drive efficiency out of the company and to share best practice across the company in a much faster and better way so we continuously can improve. All of this kind of work is geared up against simplifying One ITAB, making us more capable, making us able to act as one in order to be able to expand, not as historically, where when we expanded our cost base grew as much as our sales. Now we are building up a base that is more scalable, so when we expand on that, our cost is not growing at the same speed as our sales.
Those are the three phases you can see on this slide and a bit how they're distributed over time. Next slide, please. I took this picture in because this is basically what's the change that we are doing, and it is about becoming the leading solution provider in our industry. What that means is that it's not about the product range or the solutions that we have from the past that is always relevant when it comes to solving the consumer dilemmas that retailers have. It is a methodology, and it's a mindset change, and it's also a change for many of our customers because some of them have been used to trying to solve the problems on their own.
We all know that many large retail brands are struggling because they think they can fix this by using their old tools, and we are helping them to focus on how do you achieve your desired consumer brand experience. How can we help you to translate the ambitions that you have in creating the experience that you want? We're helping them with that. At the same time, it's not just about creating an experience that the consumers like. You also need to drive an increased conversion, increase your share of basket value, and increase your sales. That means we are helping them to do that so you get a better flow, a better convenience, a better experience that is inspiring, but also drive sales. Unfortunately, that is also not enough. You also need to improve the efficiency.
The internal efficiency within the retailer, so the same people can do more or you can do less with the same, with them. You can have less people to do the same amount of work, and improve your service level. These are the things that we are driving. Of course, a lot of this is about reducing the operational costs that the retailer has and drive efficient consumer journeys that is also efficient for the retailer. This is a dilemma. You know from the grocery sector, just to take an example, like many retailers, they invest in e-commerce and online shopping, but they still sit with all their stores and they have all the cost and where they have the profitability is still in their stores.
They need to invest in new capabilities online, and they still need to invest in their stores. This is a dilemma that their cost structure goes up, and that's where we can help them to find return on investment so they drive their costs down. If we take the next slide, please. This is just maybe a bit fluffy or high level illustration of what we are doing. On the left side of the slide you have what we're doing today, and on the right side is what we intend to do more of in the future. This is ITAB's influence today on the consumer journey and the retail operations. It's basically those two things that we influence with our customers.
It is how the brand experience and the consumer journey looks like, and it is how they can operate their stores in an efficient way. That we do already today, and we do it with our lighting solutions, our interior solutions, our retail tech, our know-how, being consultative and so on. We are on a journey there, going from being more of a product-focused partner to being more of a solution-focused partner. In the future, we believe that these things will be very important. We'll continue to influence the consumer journey. We'll continue to influence the retail operations. We believe that in the future, ITAB has quite a big role to play when it comes to helping also the retailers to drive efficiency, not just in their retail operations, but in their supply chain, in their value chain.
It's not just the retailer's value chain, it's also their supplier's value chain. This is where we need to leverage all the data that we sit on in the point of sales or in the entry to the store or in how we guide the customers and to consolidate this data, make it part of the total amount of data that the retailer have from multiple channels, be able to leverage that, but also be able to contribute so the physical store truly becomes part of the omni-channel or multi-channel experience that consumers have with brands. We are already doing parts of these things, and we'll be happy to start to share that more in the near future on what we have been doing with a couple of different retailers across Europe. Let's go to the next slide.
Just to sum up, basically you could say that this is the wrap up of our strategy. That what we are doing is it's all about rethinking retail. Retail is going through more change than ever, and we do it together with our customers, together across ITAB and together with our suppliers, so we quickly can bring innovation to our customers. If we go to the next slide, please. This is a slide that just kind of summarizes the three phases, the stabilize phase, the build and invest phase, the expand phase, where it's about simplifying in order to be able to amplify and then drive growth. I want to just kind of highlight two things here. On the left-hand side, we're done with the restructuring costs.
There will always be new things that happen if the world keeps on changing in this dramatic way as it's doing right now. The things that we talked about in summer 2020 we have done when it comes to the restructuring, and we have gotten the effect that we expected and communicated as well. On the right side of this slide is where we need to have our focus, and that is the threat. It's the. We believe in the long-term viability of our strategy, but all the achievements that we have made, they are we need to make sure that we protect them and that we're being very proactive in managing the current inflation, the energy crisis, and that the cost of capital is going up. We need to be very diligent in managing our capital.
We need to make sure that we constantly transfer cost increases to our customers, and we do that in a competitive and market friendly way, where we manage our relationships. We can take the next slide. This slide is just to remind everybody about the financial targets that we set in the beginning of this year. It's all about the purpose of driving sustainable, profitable growth and increased capital efficiency. We have a growth target to be on EBIT between 4%-8% over a business cycle. Our earnings on EBIT should be between 7%-9% Sorry, the first one was the growth. The second one is the EBIT between 7%-9%.
This, if we can stick to this over a business cycle, it will be all-time high for EBIT, and we are on good path towards this. When it comes to our capital efficiency, we want our cash conversion target to be of at least 80% over a business cycle. Our dividend policy remains as before that, when possible, we would like to give out 30% or more in dividends. Okay. By that, I wrap up the first part. I will come back in the end before we go to the Q&A session. I hand over to Ulrika to take the next slide.
Yes. Good day, everybody. You can move on to the next slide. Before presenting our financials, I want to mention that we as of the interim report for the third quarter, we have recognized ITAB's Russian operations as discontinued operations in accordance with IFRS 5. The process is ongoing, and all figures presented now shows continued operations unless otherwise stated. Looking at the yearly overview and the rolling twelve months development in our business, our net sales grew with 13%, and we have an adjusted EBIT of 6.8%. We had a negative trending cash flow during the first six months and the end of last year, but we have now recovered a bit in the third quarter.
For rolling twelve months, we are now close to zero, and we have a positive cash flow year-to-date 2022. Next slide, please. We have a growth across all geographies and customer sectors, and in the third quarter, we have a currency adjusted growth of 17%, where the acquisition of Checkmark contributed with 2%. Growth driver is mainly the price increases, but we also have a volume growth in retail lighting and retail tech loss prevention solutions. Looking at our customer sectors down to the right, we have a significant growth during the third quarter in fashion, recovering from really low levels, coming out of the pandemic. We also see strong growth in other sectors outside the grocery area.
In our growth, grocery sector, we continue to grow, and over the latest years, it's our main growth area. Next slide, please. We have a historically strong quarter in the third quarter for 2022, and we increased profitability with an adjusted EBIT margin in the quarter of 9.4%. Implemented price increases is reflected in the results, and we are now more in balance with the significant cost increase we're seeing in the market. However, inflation and energy situation is still challenging. Profit is also driven by strong sales and a positive volume impact, where we have seen strong demand in areas we are especially strong in, such as energy efficiency in retail lighting and also loss prevention in retail technology. We have also in the third quarter more favorable customer and product mix.
We have a positive margin effect from that. Still we have uncertainties and challenges in the world, and they continue to affect our operating environment, and we follow the situation closely to be able to implement mitigating actions going forward if needed. Next slide, please. We have strengthened our cash flow in the third quarter, driven by strong results and a more balanced effect in our operating capital, where we can see that our initiatives and actions to reduce inventory levels have started to materialize. Cash flow for year-to-date 2022 is now positive with SEK 73 million, despite the challenges driving a significant operating capital increase during the year due to the rise in commodity prices and higher levels of inventory to be able to handle the significant supply chain disturbances we have been meeting.
By that, I go to the next slide and hand over to you, Andréas, to wrap up the quarter three. Thank you.
Thank you very much, Ulrika. Just to kind of sum up the main takeaways. Those of you that have followed us, you know that during 2021 we saw that plastics, steel products, they started to become scarce and the prices very rapidly increased. Since we're dependent on these things, it kind of hurt us very quickly because we didn't manage to push the cost increases to our customers at the same pace as they were hitting us in our cost side. It took some time before we were in balance, and by the end of 2021 we were in balance.
You can see the same then when inflation really kicked off in the beginning of this year, we were back in the same situation where it's impossible for us to price increase proactively, you can say, because we need proof. We have some very large customers. We are always a bit hurt when there are some rapid changes. Right now, to conclude this, that we are in better balance. We are catching up, and you can see that also in our results. It's not just that we are in balance with managing inflation, it is mainly that we have the effect of the cost savings that we have been busy executing on.
A big thank you to all of the teams across ITAB because they've done a tremendous job here. We can see that we have positive. It is a bit double. We see that sales is growing, profitability is growing, but at the same time we know that we're in front of a recession and then how much it will hit us is still in what we are trying to understand, and we are planning to be able to take actions across the group depending on the effects that we will see. At the same time, I want to highlight that we are mainly in sectors that are more stable. Sectors like pharmacy and the grocery sector are very, very stable.
Of course, everybody's keeping their cash close but so far we have a positive outlook also in the future. We believe that the market is still up for consolidation and that there will be opportunities. I want to highlight again that we acquired Checkmark in the beginning of the year. That has strengthened not only our profit and loss but also I would say our position as a market leader in the Nordic region when it comes to retail technology to create efficient solutions for our customers. We have talked about Russia a couple of times. It is not easy.
I think those of you that have some insight, you understand how difficult it is to do that in a controlled way, and we are busy doing that and in a very professional way, I would say. I want to be just to everybody, we know how uncertain the world around us is. We hope that the things will turn out for the better. We are looking very optimistically on the future, but at the same time we need to be aware that there are changes happening in a pace that we have not seen before, and there are some dynamics that we have not seen before for a very, very long time in Europe. We need to stay active and agile and take the corrective measures when they come.
By that, I would like to say thank you and hand over to the Q&A session. I give the word to you, Mats.
Yes. Thank you very much, Andréas. I don't know if we have received any questions or from the participant in conference call. We start with that.
Thank you. If you wish to ask a question, please press zero-one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero-two to cancel. There will now be a brief pause while questions are being registered. The first question comes from Örjan Rödén from Erik Penser Bank. Please go ahead, your line is now open.
Hi, everybody, congratulations to a very impressive performance. It's well deserved, I think, to see the results of all your work. I'm thinking about the pricing you have managed to push through. We know that some raw materials actually started to decline in prices. Was this quarter exceptional good? So you had a positive effect of higher raw material prices back earlier in the year and from last year and at the same time your costs were actually going down? Or do you feel more that this is a relevant level for your price increases? The second question is more related to the top-line growth. Do you...
How are your customers thinking now going into the next phase of the kind of the retail business after we know that you had a lot of changes going on in the pandemic with different products coming along that didn't existed before, like exit gates and so on and so forth. What trends do you see in particular in food retail when it comes to expansion plans or investment plans into 2023 and 2024? Thank you.
Thank you for the questions. If we can begin with the first one about raw material, it is true that some raw materials have started to go down. At the same time, I would say that it doesn't affect us when the indexes start to point down. It doesn't affect us immediately because we are, of course, securing steel and, if we take that as an example, ahead of the curve. We cannot buy just on the spot market. We don't have large effects. We have kind of a surplus situation because the inflation is today hitting all areas of our activity.
We have maybe in the, in 2021 and the beginning of 2022, the price increases was about material cost increases. Now it's about energy, it's about salary, it's about. I would say everything is going in one direction. It I wouldn't say that we had a positive effect of the changing raw material market, so. Then you also had a follow-up on that, if we're, if this is what we should expect to see. I would say that, if things, if everything was super stable and we could continue in a stable environment, then I think we have seen, then this is representative. But I don't think that things are as stable. Inflation is going to continue. Things are going to continue to, you know, move from different areas.
I think we need to stay vigilant here, and I could foresee that we will see effects hitting quarters going a little bit in different ways, also affected by product mix and by customer mix. That was the first part. The second part top line and what our customers think. I mean, we have many customers in across mainly Europe. And they think very many different things. Some are continuing like there was no tomorrow, especially the discounters are really strong and focused and continuing like before. The grocery sector is maybe a little bit more stable, but we can also see that there is some hesitation because inflation has hit also these organizations in ways that they are not used to.
They're used to countering the cost of their goods to the consumers, but now they see that the cost of their operations is going high, their salaries are moving. The need for efficiency, if there was a need for efficient solutions before this situation, it's even bigger now. Many of the business cases we have in our solutions that are geared up in driving efficiency in the checkout arena or in to prevent shrinkage, I mean, the loss due to theft in stores, those solutions are very, very attractive right now. It's also good for us because it's favorable for our product mix. We can see that we sent out a press release during the quarter that was about the energy savings that our customers are doing when they're switching.
We made examples that was to go from LED lighting to the latest technology of LED lighting where we are leading. We have industry-leading solutions with super efficient LED lighting. Even if you go from, you think that you have done an effort for the environment and switched to LED, still, there is huge amounts of savings that you can do by going into retrofitting and changing your lighting once again. These business cases have a very quick payback. Usually, we do these things overnight. The consumers don't know it, the staff in the store don't even know it because it happens during the night when the stores are closed, so everything is switched. Then you have immediate kind of payback on that.
We can see that all solutions that drive efficiency in operations are very attractive, but at the same time, customers are a bit cash wary. They don't know what is going to happen. Will the situation in Ukraine escalate? I think everybody is trying to prepare for the unknown, and that is to keep control over their spend and make sure that they're more diligent. We can see that change in the market as well.
Okay.
I hope that answers the questions.
Yes. Thank you. Yes, absolutely. Great.
Thank you. No further questions at this time. I hand over back to the speakers for any closing remarks.
Yeah. Thank you very much. We have received a couple of questions from Gustav Olsson at Swedbank Robur Fonder . The first, I think, concerns the strong margin, and if we could say anything about the effect on the margin due to the product and customer mix that we've seen over the last quarter compared to the price increases. How much? Could we say anything about how the mix has affected the margin?
Yeah. I mean, Ulrika, you can also maybe add on after I say the first thing.
Mm-hmm.
We have some very large customers where the dynamic when we change prices goes a little bit slower because I mean, they have more purchasers than we have employees, so they're quite strong. It takes time before we can transfer our cost increases to them. Depending on the timing of those activities, when we say a favorable customer mix, that doesn't mean that it's the customers that we favor. It means that these are maybe the customers where we have had the effect. Right now, I think we have a positive situation on most of our customers. By that, I mean that we're back in a more balanced situation. That's one part of that answer.
When we talk about product mix, it's more when we do more service, more retail tech, and at the moment, more lighting, that's also positive. When we do concepts that we have been involved in designing and creating together with our customers on the interior side, then it's also favorable. I don't know if you want to add on some more details on that, Ulrika.
No, I agree. It's a bit difficult to isolate the factors, but it's true, like you say, Andréas. And if we have normalized EBIT around 7%-8% of the price increases, I would say that the top up here is more volume and product mix in the quarter. I think, yeah, that is.
Yeah.
the conclusion.
Okay. Thank you very much. The second question from Gustav concerns when we say that the price levels and cost levels are more in balance, if we could say anything about how this will go going forward, how the operating margin will develop going forward, based on this is, yeah, second question.
I mean, we don't provide the market with a forecast on how our result will develop. We did a guidance in 2020 when the market situation was extreme, and we asked for, I would say, the trust from our shareholders to do our transformation program. At that time, we gave a guidance. We usually don't do that. At the same time, even if we did do that, I think that all forecasting at this moment is very sensitive to the external factors in our world, and it is very uncertain. I also want to say that we have taken quite significant chunks of cost out, and we can see that effect.
We need to be careful in not giving those effects away. We refer back to our financial targets, I would say. That is what you should be. That's what you have the right to expect of us, and over a business cycle. I think that is super important. Of course, these targets were set for us to start to work towards after the cost restructuring activity that we now have concluded. This is where we are kind of super focused on delivering towards.
Okay. Thank you very much. I have no further questions through the email. By that, I just want to say thank you very much for participating in this presentation. Please do not hesitate to reach out to us if you have any further questions or comments going forward. Okay. Thank you very much.
Thank you.
Thank you. Bye-bye.
Bye-bye.