Electrolux Professional publ AB

F:4KK1

Earnings Call Transcript 2024-Q1

[Jacob Broberg, executive]

Good morning, and welcome to Electrolux Professional Group and our First Quarter of 2024 Result Presentation.My name is Jacob Broberg. I'm heading up Corporate Communication and Investor Relations. And with me, as always, I have Fabio Zarpellon, our CFO; and Alberto Zanata, our CEO.I leave the word for you, Alberto. Please go ahead.

[Alberto Zanata, executive]

Thank you, Jacob, and good morning to everybody. 3 highlights from Q1. The first one is that, the comparable profit increased. If we exclude the integration related cost for TOSEI, the margin improved sequentially. I would say we are constantly improving the margin.In the -- and this is coming, because of -- this is a quarter where we have not an easy comparison with the last one. Many things have been different. The first one, obviously, and the large one is the acquisition of TOSEI.As you know, we acquired TOSEI in January, so we have a full quarter of contribution, both in sales and in earnings, in profit. And this has been a positive contribution because, we added roughly 7% in sales, and the margin of the business generated by TOSEI was higher than the average of the entire group.But at the same time, we had the acquisition related cost. And in this case, clearly, the contribution was negative. The SEK 38 million contributed negatively to the overall result.The other thing, to be said in the difficult comparison is that, we reported a decline of organic sales. So this decline contributed negatively to the result, but it is a decline that has also to be seen in lieu of the different -- the fact that we were ahead of last year until February in term of organic development, and then the gap was created in March.And March last year was an extraordinary strong month with between 10 to 15 more working days than March of this year. So comparable profit increased.The second highlight of the quarter is that, we clearly see sign of recovery in the U.S. Still, sales in the U.S. are down compared to, Q1 last year, but the order intake is higher. The pipeline with the chain business is increasing. So we see sign of recovery in the U.S.The third, highlight is about Laundry. In Laundry, we decline volume and we decline margin. Beside the fact that, that in Laundry majority of the integration related cost for TOSEI are in Laundry. In any case, also excluding this cost, the margin decline, and this is mainly because of the missing volume.Same comments, I made in relation to the overall picture of the group. Until February, we were ahead of last year. Then in March, we created a gap. That in Laundry was even larger than for the Food & Beverage business, because we had some delays in delivery of some specific product. Not months of delays. There've been some days or weeks of delays, but enough to create the gap in the month of March.Last things, as in the past quarter, we had a strong cash generation. A comment about the sales, I already made it. So, organic sales, as I said, are down. They've been down mainly in the month of March.I would like just to underline one area that is Europe Food & Beverage, because whatever I said about the working days, about the length of the March -- of the month of March is valid, obviously, also for Food & Beverage in Europe.But in this part of the world, we have been flattish compared to last year, and this is a remarkable performance, also because we were expecting a decline business in Europe because of the missing incentives from governments. In reality, the business is holding very, very well. In all this area, despite the decline of the business, order intake is up compared to last year.Now let's have a deep dive on Food & Beverage. Food & Beverage, also in this way is comparable business. The margin is up. In this case, it is up even considering the acquisition cost. So it is a sequential improvement of the profitability of this part of the business. It is a good one.Europe is the one performing strongly, but also the other two part of the business, United States and Asia-Pac improved the margin compared to last year. You know that we have a lot of focus on improving the margin, and this is proved by what is performing in Food & Beverage. The order intake is higher than what it was last year across the different region, and in particular, we are seeing in North America.Laundry. Laundry is the area where we had a decline of the sales and a decline of the margin independently from the negative contribution of TOSEI. And this is explained mainly because of the missing delivery during the month of March.As I said, it is related to some product, specifically our semi-professional product and some product are coming from the Ljungby factory that, by the way, are the high margin product, but it is delays that we already recovered. So it is not something that has to worry us in the coming future. The order intake is significantly higher than a year ago.With this said, I would let Fabio comment the financials.

[Fabio Zarpellon, executive]

Thank you, Alberto, and, good morning to everybody. As anticipated by Alberto, quarter 1 was an important quarter for the Electrolux Professional, where from one side, we have finalized another important acquisition with TOSEI in Japan, but also we have been able to further strengthen the comparable profitability before the integration cost.Thanks to TOSEI, the top line has been increased by 2.9%, compensating the organic decline of the traditional business of roughly 4%. Reported profitability was 10.7% in the quarter, and this amount include, from one side, SEK 6 million acquisition cost and then the onetime event when you run an acquisition that was a SEK 32 million of cost in term of inventory step up.Without this, let me say, onetime cost, the comparable profitability was SEK 364 million, 11.9%. Let me say 0.5 percentage points better than quarter 1 last year and plus 7% in value.To be noted, that the comparable -- the improvement of the comparable margin came both from TOSEI that was in quarter 1 accretive for the group profitability, but also in the remaining part of the business. While despite the declining sales, primarily in U.S. and in Laundry, profitability improved.Positive contribution continue to come from price, more than compensating the inflational item like the labor cost, but also from a lower direct material cost. Customer care that grew significantly last year continued to grow also in the quarter.On the -- also, on the positive side, currency transaction that, if you remember, negatively affected the profit and the profitability of this group, in particular, in the second part of last year, positive contributed this quarter.Few words then about the impact of TOSEI on the group. As I mentioned earlier, the contribution was positive and accretive in term of margin in quarter 1. To be said that, historically, in term of seasonality, mainly related to the business of Laundry of TOSEI, quarter 1 and quarter 3 are the largest quarter in term of sales and, therefore, the most profitable quarter within a year.But, also, I believe that it's remarkable the rebalance of the group, thanks to TOSEI, from a geographical and business perspective. Meaning, if you look into the performance of the quarter in terms of sales, currently, the dependence in Europe is below 60%, and the remaining 20% are equally -- remaining 40% are equally split between Americas and APAC and MEA.So, definitely, a much better balance from a geographical perspective. But also, remarkable is the weight of Laundry business that is now close to 40% of total group sales.Still in the quarter, despite the higher borrowing, we have been able to reduce the finance net to SEK 32 million. SEK 38 million was spent in last year, thanks to a reduced funding cost structure.Tax rate for the quarter was 28%, slightly above the historical average, mainly related to country mix. Earning per share reduced year-on-year, but this is, I will say, only due to the onetime cost related to TOSEI.As anticipated by Alberto, and this graph is showing really the consistent delivery on the cash flow. Operating cash flow was over SEK 180 million in the quarter, and also, TOSEI, acquired company contributed positively to the cash generation.When it comes to the balance sheet structure, first, all this data for this year include also, TOSEI. Overall, starting from the operating working capital, the rolling 12 month operating working capital on sales reached 17.7% in the quarter, down to over 18% that was already at the end of last year.The major part of the improvement came from inventory, where, as we anticipated during the previous call, the action we put in place to reduce inventory and inventory weight on sales are really now paying off.Our finance position, also after the acquisition today, remains, I would say, pretty strong with a ratio net debt on EBITDA at 1.9x. And the group, at the end of March, had cash available close to SEK 900 million.Last event, let me say, related to the TOSEI acquisition on the funding side was the launch in March and the successful launch of an MTN program in the Swedish debt capital market. The overall frame was SEK 5 billion. We got a pretty good response from the market, and we issue SEK 900 million part of 3 years, and 5 years duration. And this successful response was show by an order book that was 3x the available issuance we put in place.Definitely, with this program, we provide an additional diversification our funding source. We increase our refinancing capacity, strengthening our credit profile.So, overall, even after this recent acquisition, thanks to a pretty solid balance sheet, consistent cash generation, this diversified funding, we have the structure and the means to continue to support the organic and inorganic development of this group.And with this, back to you, Alberto.

[Alberto Zanata, executive]

Thank you, Fabio. Few words about TOSEI. As we have been saying since the beginning, the result that we've been reporting included TOSEI. TOSEI in Q1 had a positive contribution, obviously, in sales, but also in term of earning and margin.At the same time, we had the acquisition cost during the quarter, in particular, what Fabio described as the step up cost that are only in Q1. The other acquisition cost, we will continue to have some way along the years, but not in a significant way as they've been in Q1.The comment I want to make is that, first, Q1, the seasonality for -- in TOSEI Japan is different compared to the remaining part of the group, and Q1 is historically the strongest quarter of the company. So what we are expecting in Q2 is not to repeat the same contribution from TOSEI that we had in Q1.Secondly, the activities both to integrate the company, we reported all the data, so it seems that it's proven that they are going well, but also the activities to create value are proceeding very, very well.I've been there a couple of times during the quarter, and I found a team engaged, enthusiastic, and willing really with the desire to work together. So we are still confident that as soon as this synergy will be generated, we will be -- we will have TOSEI contributing to more than -- to contributing not only to achieve the 15% target, but also above that one.The other thing, still in Asia, is that for the first time, we presented the Electrolux Professional Group altogether. So both the Electrolux Professional brand and, the Veetsan brand at the major exhibition in China, where we presented a lot of new things. Our renovated dishwashing program that we sell under the Veetsan brand in the Chinese market, produced in China, in our factory in Shanghai.But even more important, we presented the horizontal cooking range or as we call modular cooking XP range. That is a product that we started to produce in our factory in Shanghai, but it is the product that we sell basically all over the world.This is to further enforce our leadership on the western cooking product category in that part of the world, very well accepted by the market. Now we are ramping up production and improving and enlarging the range of product to manufacture there.The other thing that I want to show is that, because we have been always talking about digital tools or digitalization of the business that is creating competitive advantages. This is a tool that we have been developing together with the logistic provider.And, I believe nothing new to see the different ships, container ships traveling around the different sea of the world. But the difference of this tool is that, independently from the ships, the dots that you see in the map, in reality, are identifying where our product and the components that have been used or is going to be used in the factories in our product are loaded in the different container in the different ships.So this is giving the possibility to our planning department and to our order processing department to better plan production and to better keep inform, our customer about the delivery of the product. This has been very, very helpful in particular on these days with all the trouble that we've been going through due to the Suez Canal crisis.With this said, I would come to the conclusion, trying to summarize in few words a quarter. A quarter where comparable profit increased, where sales were up roughly 3%, thanks to the acquired business, TOSEI. Sales that organically decline, and I already commented, mainly because of the month of March.A quarter where we integrated TOSEI with a positive contribution both in term of sales and in term of margin. A quarter where comparable profitability, as I said, beginning increase and got very close to 12%, 11.9%. That is 0.5% better than last year.It is a quarter where we have a strong order intake in Laundry and an improved one in Food & Beverage, including, United States. United States where we saw sign of recovery, in particular for what concern the pipeline of chains business and the order intake.It is a quarter were also operationally, and the basic things about being excellent in operation, we improve reducing the inventory, generating -- continue to generating more than 100% cash conversion, and where we launch the MTN program that improved our ability to finance additional activities, inorganic activities for this company.So in some way, summarizing everything in one sentence. The improved comparable profit demonstrates that the quarter was another step in the right direction.With this said, Jacob, back to you and open to answer questions.

[Jacob Broberg, executive]

Thank you, Alberto. As said, we open for questions. So I'll leave it for the operator. Please go ahead.

[Operator]

[Operator Instructions] First question is from Gustav Hageus with SEB.

[Gustav Sandström, analyst]

If I may start on the order intake, you're right that it's -- I think, the wording you used was significantly better in the Laundry. Would you confirm that, that would sort of resonate with a number of, say 10% to 20% or what is the threshold for that sort of comment? That would be helpful.

[Alberto Zanata, executive]

Yes. I would say that it is a good double-digit order intake growth that is continuing in April.

[Gustav Sandström, analyst]

All right. And in terms of -- because you had, I think, 3 quarters in a row now of quite negative growth in the U.S. Is it -- from what you can see now, is it a fair assumption that, that should sort of fade to, say, flattish in Q2 and then if all goes well then grow in H2? Or how do you see that phasing of the U.S. given that order intake. That'd be helpful.

[Alberto Zanata, executive]

We expect in Q2 to see additional steps, sequential improvement, let me say. Still, I believe Q2 will be -- flattish probably could be the worse, but I'm not so convinced that we will turn completely the curve in Q2. Very close to where they're at, more confident about Q3.

[Gustav Sandström, analyst]

Yes. And then if I turn to cash flow then, it came in a little bit better at least than we internally here had expected net debt now below 2x. So, thinking about sort of M&A now, again, do you think, do you have the -- is that a priority now this year for additional M&A? Or do you feel that you have your hands full with TOSEI and that should perhaps more be a focus point next year? How do you envision that both financially, but I guess, more with the management focus and so forth?

[Alberto Zanata, executive]

Now, I think -- again, we are already working on -- or we have been working constantly to build a relation, to scout the market, to look for other acquisitions. We didn't stop with the acquisition of TOSEI. You know that it is one of our priority. Then we have to be ready.The point is that, you cannot say now pause and let's start the next year because these are things that are -- that tend to be cultivated day-by-day and the opportunity pops up, and we have to find ourselves ready.I believe that financially and also management wise, you touch a good point, but also management-wise, we are in the condition eventually to be ready for additional acquisition.

[Gustav Sandström, analyst]

And then finally for me, sort of another progression towards your margin target. And the way you look at it now, if you sort of take away the integration cost, so to say, and perhaps add on what you can see now in terms of synergies for next year, what additional steps do you feel that is necessary for you to take on top of those 2 items for you to reach that 15% target eventually?

[Alberto Zanata, executive]

You know that in the bridge that we have been presenting always when meeting, 50% of the contribution to reach the 15% target comes from volume. So that is -- indeed, it is the point where, yes, if you want to finger point something in the quarter, that's the point, the volume. So volume is the area where we are focusing to growth, volume of high-margin product, because it's not enough to grow volume generically.The order intake that is growing in such a way is a sign that we are in the right direction to get the volume back. So, volume is 50% of the contribution that we needed to reach the 15% margin. The other 15% is coming from all the other elements. And the fact that the comparable profit increase, despite the decline of the volume, is proving that at least that 15% of the target is -- I don't mean given, but I mean, we are absolutely in the condition to manage that part of the contribution. Now it's the volume, and we know about that. But that is the point.The other thing that I believe is important to underline is that volume mixing up. To have customer care growing 4% in a quarter where we had volume down or organic sales down minus 4%, so we have a gap of 8% of a business. That is, I don't need to say so, is a very high margin business.

[Gustav Sandström, analyst]

And then if I can sneak in one final question. I believe you alluded to on the Capital Markets update that TOSEI was sort of hurting from the currency and so forth in Q1 that you had initiated cost or price measures that would kick in Q2.The Japanese yen, obviously, continues to deteriorate a bit. Could you give us an update if you see -- I appreciate the seasonality, but underlying that you see a margin improvement from TOSEI those price increases and if you think there's really more need for further price increases given the FX?

[Alberto Zanata, executive]

No. But the price increase that have been announced have been implemented.

[Gustav Sandström, analyst]

And did that affect already Q1? Or is that a Q2 and beyond?

[Alberto Zanata, executive]

No, no, no. It's mainly -- it will come -- it will have a positive contribution in Q2. But remember as I said, Q2, the seasonality is different. So while for all the other business, Q2 is typically the strongest quarter, for TOSEI, Q2 is typically the weakest quarter.

[Operator]

The next question is from Johan Eliason with Kepler Cheuvreux.

[Johan Eliason, analyst]

I was wondering a little bit, just your gross margin was down slightly. Was that mainly because of the Laundry volumes? Or were there any of these TOSEI costs in the gross margin as well?

[Fabio Zarpellon, executive]

Correct. I would say the gross margin, you see, gross margin is somehow flattening year-over-year. But it includes the SEK 32 million step-up cost. Meaning, roughly 1% like-for-like in comparable term, gross margin improved roughly 1 percentage point year-over-year. And the improvement, despite lower volumes, came from the ingredient that I mentioned earlier. Meaning, good and solid price execution across the different categories, decreased material cost and also warehousing cost.Within the activities to deliver on the 15% EBITDA margin, you recognize these items. And on top of it, we started to have also positive and significant contribution from productivity in the major plants.

[Johan Eliason, analyst]

Excellent. And then while we are on the margin, you mentioned TOSEI its accretive to your EBIT margin. Is that also in both of the divisions? And is it also on the gross profit margin?

[Fabio Zarpellon, executive]

So, overall, TOSEI was accretive on the performance of the group in quarter 1, excluding the acquisition cost. The underlying performance was accretive for the Food & Beverage business that we anticipate is tough. If recall, is above already the average of the group and close to the financial target of the group. Whilst, the Laundry one was somehow accretive for the margin of Laundry in quarter 1.But also here, the initiative that we are putting in place to generate synergies are created a means to -- that also the Laundry business of today's will be in line with the financial target. Where, by the way, it was, if we go back a few years, TOSEI Laundry business was already on the financial target.

[Johan Eliason, analyst]

Excellent. And then just finally, trying to understand your comments about orders growing in Europe and the U.S. in the quarter and also into April and then you have this working day seasonality this time around. Should -- is it fair to assume that on the back of these comments, we should expect a positive organic growth already in Q2 now on the sales side.

[Alberto Zanata, executive]

Let's say that. And we are talking about the 24th of April. So in the month of April and during Q1, we had a positive order intake. And the order intake is in value, clearly. But I would say that the order intake in value, considering that this year, the price is not so different. So we had the contribution or the effect of price is not so significant as it was last year. You remember that last year, the difference between value and volume was pretty large. This year, it is not. So this means having a positive order intake, we assume that we should grow the business. Now we are talking about 24 days into a quarter of 3 months so.

[Operator]

As a reminder -- yeah.

[Jacob Broberg, executive]

I have a question from the web here from Karri Rinta at Handelsbanken. And it sounds like your definition of comparable earnings include the revenue and EBITDA contribution from TOSEI, but excludes the integration costs. Is this correct?

[Fabio Zarpellon, executive]

No, when we look at -- exactly. So we include the contribution of TOSEI in the quarter that we mentioned was accretive to the group performance and exclude specifically the SEK 6 million acquisition cost and SEK 32 million inventory step up.

[Jacob Broberg, executive]

Any other questions from the phone, Operator?

[Operator]

There are no more question at this time.

[Jacob Broberg, executive]

If no more questions, I would like to say thank you for today, and speak to you next time. Thank you, and goodbye.