Beijer Ref AB (publ)

STO:BEIJ B

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the Beijer Ref First Quarter 2023 Earnings Call. [Operator Instructions] On today's call, we have Christopher Norbye, CEO; and Ulf Berghult, CFO. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christopher Norbye, CEO. Please go ahead.

[Christopher Norbye, executive]

Welcome, everyone. Christopher and Ulf here, going over the Q1 report so I think we can start and move on to Slide 3, Beijer Ref at a glance. I mean the main thing added here is, of course, that our rolling 12-month sales continues to increase a lot and here's also part of the U.S. adding more market, branches, and customers. So we continue, I would say, to grow at a rapid pace, which we, of course, are very satisfied with.Moving on to the next slide, the highlights. If you read the report, I would say, amazing sales development here for Q1, an increase of 50%. Strong on organic side, 15%. Of course, with our acquisition of Heritage starting to add value here from January 20 and the continued positive EBIT effect. So almost SEK 7.4 billion sales in Q1 and a new record level and the way we're structured now, that's going to continue with good development throughout the year.EBITDA of SEK 702 million, which is a margin of 9.5%. So, we continue to, I would say, track well on our both cost and gross margin and our plans here on improving the margin step by step. That's, of course, also a very good growth of 72% on the EBITDA, both driven organically, driven through our acquisition, and also good initiatives to continue to work with our gross margin.We do have a one-off as we communicated before, related to the bridge loan on Heritage that's now being sold to the rights issue of SEK 138 million. So that's, I would say, a little bit better than expected as the time line was very, very good.On the cash flow, as expected in Q1, we do build inventory to support as we're moving into a high season on the heating side. So, we're in a good position. Supply chains are improving to be set up for a good support for our different markets. And also, as we have strategically launched our private label now in 11 markets and driving that through also the Freddox side and then also the U.S. moving into high Season where you continue and build inventory where you can because in the U.S., you still have supply chain issues. So, for us, it's a very good development in building up for the season.Acquisition. We'll probably talk more about, we just closed one today, and we'll continue to have a good pipeline to create value and strengthen our business model. And then you have an EPS increase of 67%. So I mean highlights for us, this has been a fantastic quarter and strong and good development across the board. So, we're very satisfied with execution that we have both in different regions and of course, also in the U.S., we will come back a little bit as the newest member of Beijer Ref.Next slide. Here, you see that the organic growth by product group I would say, very strong across the board on the commercial, industrial cooling side, good activities also in -- especially in the APAC region, the OEM. We also say we had some, as I said before, supply chain increases and some pent-up demand shipping out, but still a good development. Also, in our newly acquired business to support this growth level, so that's also strong across the board.And then on the HVAC side, rounding out the high season in the APAC region, but also I'll come back to a good tailwind for us in Q4 and Q1 as we're more active on the heating side as well as we're getting more present there. But of course, now we move into Q2, Q3, our focus for us will be on the cooling side as that becomes the high season.Also in North America, I'll come back to, we believe, came in at a good level. So stable and good, and we'll come back to the replacement market and the margin side also, [I] would say good. We also had our first quarter ever transport calling in South Africa, continue to do well. And then the right issues we closed the end of the quarter, as you know, in a very successful manner. So, I would say also, if you break it down by product group, it's a very solid quarter for us.On the next slide, going into the new structure, where we go through the regions. As we said, we're going to start now here in Q1. EMEA strong across the board in their regions. You saw the HVAC growth there is very good and it relates to being more active on the cooling; the heating segment that we have not been driving that much in the past. So that, of course, gives you a good tailwind but that's especially in the Q4 and Q1 segments. And now in Q2, we move into more traditional heating season.OEM continues to deliver well. Fenagy that we acquired some years back, I talked to before, continues to grow at a very good pace, both from an order side and delivery side. So of course, that's a very, very strong number, plus the 38%. So, we have double-digit sales in all of our main regions and of course, a very good EBITDA increase. So, EBITDA of 10% in Q1, I would say, is a very good level for us in EMEA as that's still not the high season for us.Executing on the plans we have, both on the growth and also on the EBIT improvement, we feel very good about the execution in Q1 and of course, the last couple of years in EMEA setting up well for the future.Moving into the APAC region, who is just finishing their summer season. So also here, good growth in all the segments. HVAC here, extremely good, but also driven by the acquisition side as we acquired last year, AAD, that continues to grow very well, and integration together with our existing business is positive. So very happy with that acquisition and the integration process. But also in the commercial and cooling side, high activity on the project side of the business. And of course, partial Southeast Asia opening up and China opened up. We haven't seen much activity in China. We expect more of that coming into Q2.Australia, very solid for us. It's the largest market in the APAC region, and then you also have a very good EBITDA growth and also margins. Step by step, if you follow us historically, we continue to improve the margins here in the APAC region and moving towards a better profitability. That's been part of our plan all along.Moving on to the next slide, our newest member of the family, North America. Most of you following the call has, of course, been following the process of Heritage, the acquisition that we did close, January 20, the share issue to support it. And of course, now after the prospectus and everything is behind you, continued focus on the business.What we see in the market in the U.S. first quarter is very much as expected. A softening on the new construction side, not a big area for our platform that's mostly active in repair and replacement. This market continues to be stable and that's, of course, it's 90% to 95% of the business we do as a wholesaler distributor in the U.S. So this continues to be active.The difference, I would say, in the U.S. compared to what we see now in Europe and a Pacific is the still constraints on the supply chain. I would say, commercial, HVAC is still very long lead times. Again, it's not a huge segment for us. Then of course, with all the new regulation in Series 15 in the U.S., also on the residential side, we're waiting on products to make the complete offering to our customers. But this is what we expected the market development. We continue to have a positive development in the U.S. here in the market and also, I would say, very good profitability for being in Q1.And of course, also, they are moving into the high season now also in Q2 and Q3 on the heating side. And just mention integration, we continue to do well on supporting their platform, looking at CO2, looking at suppliers and pricing. It's a long-term plan that we'll see effect over the next 2 to 3 years. But I would say a very positive start for us in North America as well.Summarizing Q1, I mean, we personally think it's fantastic numbers with sales growth of 50%, EBITDA growth, 17% strong organic growth, I would say, higher than expected here in Q1, and of course, also falling down to the bottom line. So, a very good Q1 for Beijer Ref.Then moving on to next slide. You can see the bridge here, where we had the organic 15%, M&A 30%, and of course, we know and expect to Heritage so we'll have a very good tailwind throughout the year on the M&A growth in the business and especially now moving into high season and we also have, of course, a good margin developing, leveraging a fixed cost. FX continues to be positive at 5.8% here in Q1, which adds up to SEK 7.4 billion, which is a very good Q1 for us.Next slide. If you look at our sales development for quite some quarters now, you can look at very good organic growth, very, very good acquisition growth, and we'll come back to the margin development. So very solid development. Well, of course, know and expect the acquisition growth to continue here and also adding a lot of value for us.As we move in now to Q2 and Q3, focusing on the cooling side will get tougher and tougher comps. Of course, we expect that the organic growth rate will start be shown now compared to very high comps here in Q2 and Q3. So, we'll come back to that. But still in a positive mode and gearing up for the season here in Q2.And the sales growth, I think we continue and show very EBITDA growth higher than our sales growth as we continue to work with our margin, leveraging our fixed cost base, also driving our private label strategy, and driving our mix. So of course, we're very proud of continuing to have an improvement on our margin side and creating a lot of value in the business as we also grow the organic side.So of course, for us, it's not just about growing sales. It's also growing the right type of sales and leveraging our assets to continue and drive and improve our margin compared to last year. So of course, very, very happy with the development on the margin side as well. And also remembering this being in Q1, and of course, as we move into the bigger quarters for us, it should continue to be positive.Moving over to the next slide, EBITDA. Here, you can follow the margin development for us in EBITDA. So also, a very positive trend and also margin, I would say, stabilizing on a higher level than our history in the market. So, I think we feel good about the initiatives and driving the margin as we've done over the last couple of years to a higher level for Beijer Ref.Okay. Moving over to the next slide. I'll hand over to Ulf to go a little bit more in detail of the P&L.

[Ulf Berghult, executive]

Okay. So we are on the Slide 14. That is then the P&L. So the top went through the operations down to EBIT, EBITDA, now you can see the EBIT and items affecting comparability. That was then reported in Q4. So that has an impact on the rolling 12 months. Then we had the financial cost of the heritage, the short-term financing cost, which is then SEK 138 million. That was the cost of the bridge that we needed in order to -- before we got the right issue fully into the books in the end of Q1. So that has burdened the profit.And then the normal net financial that is SEK 69 million. That is higher than the previous year. That's coming from then we have a higher underlying debt and also then that the rates are going up so we are having a higher financial cost. Tax is in line. It is at 23% in the quarter so it's basically in line with what we have reported earlier.And then if you then take the earnings per share on the bottom page here, you can see excluding items affected operability and including that is also then the impact from the Heritage financing costs reported under net financial income. So, it's -- excluding that, in the quarter, we have the 67% tracks.In the next slide, in Page 15, you can see then that -- so it's an increase of 67%, and that is including both the -- excluding the financing cost of [indiscernible]. The next slide, the cash flow on the Page 16. We have to this is then showing year-on-year performance. Last year, we had a minus SEK 295 million. And then, of course, we have an improved performance in EBITDA. We had a seasonal impact in working capital of minus SEK 162 million, slightly more CapEx SEK 25 million, and leasing then IFRS lease in SEK 23 million, and then others 41 million, ending up on minus SEK 209 million for the quarter.And also, then I need to remember also now we have the Heritage and Heritage is also moving up into their season. As Christopher said, that we will have a main season in Q2 and Q3. Which you can see on the next slide, on Page 17. Here, you can see that from a seasonal point of view, it's – in the last year, we had minus SEK 295 million. In Q1 '21, that was impacted by COVID impact to a slightly odd from a seasonal point of view.Then moving on to the Slide 18, where you see then the net debt and leverage. We have then added a new KPI or leverage, which we have included in leasing and pension. The reason for that is then the leasing, and that is basically all IFRS 16 leases and only leases that we have, that is a normal rental contract. So, there's no hidden financing or machines or et cetera. So, it is basically a rental contract. So, if I look at excluding the items of taking comparability, we have 2.38 leverage and then if you exclude leasing and pension. So, the underlying net debt versus kind of interest-bearing liabilities that would be 1.86.Well, then I hand over to Christopher who will be making the closing remarks.

[Christopher Norbye, executive]

Yes. So, I mean, running through the numbers, it continues to be very solid for Beijer Ref and plus 50% on the growth, strong organic, strong acquisition, even better execution on driving the margin to our cost base and our initiatives that we been working on for the last couple of years and as you saw also very solid in all our product groups and regions. So, a very, very good Q1 to start of the year. So of course, this fantastic to get off to a good start to the year compared to, of course, very good development in the last couple of years.So, what we see in the market continue in long term as that's how we run, invest, and drive our business. We, of course, continue to see the drivers on sustainability, electrification in a lot of countries. Also, what we expect long term, these trends to continue and even accelerate on most of the plants that we have in the EU, but also, we see drivers of this on the CO2-based development in APAC and also the first time here now moving into the U.S., where we have a lot of discussions and possibilities within the refrigeration, the CO2, the different regulation that will happen over the next 5 years.And of course, also, when you look at the heat pump and natural refrigerants we move into that in Europe, that's happening already 2025 in the U.S. So, the long-term trends continue to be very good, and that's how we're investing in our business as well to make sure we can be part of this development.We are moving into high season. I would say Q1 and Q4 that we just went through, has a lot of tailwinds on us moving also into the cooling segment, both from air-to-water but also air-to-air solution where people now are also using that type of solution in the heating to reduce the dependability on direct electricity or gas or other type of pellets and asset type of very expensive solutions. So now we're moving into Q2 and especially Q3. I mean it's focused on the heating season and the less capacity or focus on this type of solution until we move in and ramp up in Q4.We'd like to highlight that we're moving into very strong comps here moving forward as growing 16% last year, very strong in HVAC. We have one less trading day also in Q2 so we still feel very good about the market, but it's more of -- we're crossing a lot of very, very high comparables over the year and also in Q2 having less of a trading day and being a trading company that makes a difference for us short term.On the acquisition side, close on today will continue to be very active, both in three regions in the world. Good discussions in the U.S., good discussion in Europe and APAC, so we also feel very good, but the possibilities to continue our journey of consolidating the market and creating even stronger Beijer Ref. And also, as we can see here, we'll see here during the year, we'll continue and deleverage the company as we move into Q3 and Q4 with strong cash flow as we start releasing the inventory that we're building for the seats and so we feel very positive we have possibilities on that side as well.And then maybe just wrapping up with Heritage as it is a big new member of the family. We say we had a good start, good EBITDA margin so executing very well on the plans that we have there on top of the long-term integration with good activities in the region, especially continuing the replacement market, which is the main part of their business. New construction is a bit weaker, and that's what we expect, and we expect that to continue, but it's not a major part of their business model. So, this will not have a major effect on our business.We do have a healthy backlog. We are missing some products. We are actually trying to find ways of building inventory before the season so we can service our customers in the best way as the supply chain continues to be challenged. We think it's going to start eating up towards the end of the year. Of course, that also creates, I would say, pent-up demand moving into 2024 as you have long lead times in the business.And then we'll continue to invest there. We're setting up the company on the same platform, getting our RBI systems in place, but also looking into the pricing, our global supply agreements. We're now going over to suppliers. We also have a lot of interest for our other suppliers to enter the U.S. together with us. So, a lot of activities. So, I just want to summarize, it's a very good start, both financially and also on the integration work together with Heritage. So, a very positive addition to Beijer Ref for the long-term future as well.So with those work, we have wrapped up our presentation, and we can open the forum for questions from people on the line. Thank you very much for listening.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Carl Ragnerstam with Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A few questions from my side. Firstly, I mean, in the U.S., you said that the market is characterized by slightly lower volumes, especially for the new production. So could you maybe help us understand how this impacted Heritage during the quarter as we have no comparables. And I mean, how -- to what extent the replacement market so far managed to offset the weakening in new build sentiment?And also, if you could sort of give any comments on current trading now entering Q2 for heritage, which is inevitably a quite strong quarter some?

[Christopher Norbye, executive]

Yes, you don't have any comparison. I would say if you look at the historical numbers, it's a very good Q1 and it's positive on the organic side as well for them. So, a solid Q1 in most of their regions, Tennessee, Alabama and being very active. So, it continues to develop well. As you said, we do see most of the shipment data going down. That's more from an OEM point of view. So, if we talk to -- we were just there last week, we met with all teams. All their installers and most of our customers are fully-booked business. So, it's more of us getting more products on the residential side and replacement market to support them. So there, we don't see any weakness in the market.So, it is positive. We still are fighting it to supply chain issues also related to all this new regulation and new products be launched from our suppliers. But in general, a good sentiment in our core part of the market. And of course, also the replacement market is our most profitable piece of the market. So, we continue to be positive.On the trading year in Q2, April is not -- I mean, it's a month in between. The big month here is when you move into May and June, and then you have Easter in holiday so April is not a very strong month for us in general. So, there's nothing that's really changed since Q1 continues to be active, continue to be looking for getting the right inventory at the right places to support the customer and especially now as we -- when it starts getting hot, you get a big boost on your sales as well. So, we're happy with development. We think the market continues to be stable for us and I think the margin is very strong. So all in all, we continue to be solid belief in the U.S., both short term and long term.

[Carl Ragnerstam, analyst]

Okay. Very good. And speaking about the new regulations on energy efficiency standards in the U.S. I mean we have heard quite a few of the or maybe all of the OEMs raising prices by mid to single digits in January and March. Will this burden your margin in Q2 for Heritage or were you prepared for increased prices from the OEMs being that we will get a flattish margin, but an organic growth boost from it?

[Christopher Norbye, executive]

Yes, it's more on the second side. We're comfortable with the margin we have in the pipeline and in our products. So, there's no surprises. We know what's happening. We know how to work with it. And to be honest, that's the way it's been in the last couple of years in the U.S., right. So no, we don't see any -- I mean, our biggest, I would say, thing is that we would need more products with shorter lead times, that would support the business. But hopefully, that clears out during that Q3 and Q4. But the other part is not a big concern for us.

[Carl Ragnerstam, analyst]

And also a bit on the margin, group margin, if we exclude Heritage, I mean quite still a solid year-over-year uplift. To what extent would you say that it's driven by the quite good volumes? And to what extent is it driven by maybe a higher share of own product as well as maybe better efficiency, for instance, wrote that the e-commerce side of the business is growing quite rapidly.

[Christopher Norbye, executive]

Yes. I think it's a little bit of a combination of everything. It's good discipline in the market. It's focused on the pricing initiative we're doing, leveraging our fixed cost and the volume and also, of course, private label, especially on the HVAC side. If you take those 4 or 5 things, of course, you want your volume growth to leverage your fixed cost base no matter what because that's a healthy market you're running in, and these are adding sustainable margin improvement, as you can see now as we move into Q1 comparing to very good margin development last year.So of course, for us, it's not continuing to improve margin to infinity, I think we're starting to get to a solid level, and we still see we're going to have higher volumes in Q2 and Q3 than we have in Q1. So of course, we'll -- if you use this as a baseline, it will be a good development going forward as well.

[Carl Ragnerstam, analyst]

Okay. Very good. And the final one from my side is maybe on the HVAC segment. We obviously read from everywhere about the weakening consumer sentiment. On the other hand, we have subsidies on both air-to-water heat pumps, air-to-air heat pumps and also -- I mean, other AC products as well. I mean, will it be enough to offset the weakening consumer sentiment, would you say? Or will it sort of be tougher during the second half? Or do you have any view at all? I mean, I know it's difficult.

[Christopher Norbye, executive]

Yes. But I think it's a valid question or comment. It's a little bit of a mixed picture. If you really go down to details, you can see that you have larger countries in Southern Europe, where water heat pumps for the first time in March shipment was below last year because you changed the incentive models, et cetera. So, you'll have a mixed bag supporting your business. But I think as we know at Beijer Ref are moving into high season for cooling and replacement market. The bigger things for us is that we have extremely high comps. We know it's going to be an active summer. You have the weather and one day less.So, it's a little bit of a mixed picture, but a little bit tense. There are no big signals either because right now, you're ramping up. We're building the inventory. We're working with our suppliers in wholesale, and they continue to be active in the market. Then, of course, you have things around it. Will it be a really hot summer? Will the hot spell start in May or in June and July? So, you think that will affect it. But we still expect a solid development from what we're hearing out there in the market. But you have some factors on whether one day less and the comps that you need to consider, of course. But all in all, there's no signals out there that you have any major changes in the market sentiment.

[Carl Ragnerstam, analyst]

Okay. Very good. That's all for me. Thank you.

[Operator]

The next question comes from Douglas Lindahl with DNB. Please go ahead.

[Douglas Lindahl, analyst]

Thanks for taking my questions. Starting off with one that I know you heard several times before on the organic growth side, if you could break that up in price versus volume in the first quarter that would be very useful. Thank you.

[Christopher Norbye, executive]

I think you asked that before, have you Douglas?

[Douglas Lindahl, analyst]

Exactly.

[Christopher Norbye, executive]

A fair comment to make is that we continue and we don't disclose or break that out. But I think we've said it before, as we move throughout into Q2, Q3, and Q4, the pricing component will continue and be a less part of the number. We always said and in Q1, it's the same that the majority is still volume, but the pricing component, you will see it start coming down here in Q2 because it's catching up, right? And as I said before, I think that's healthy is that what we're seeing in the market.And now I think we're in a market where you can see most of the trend is a stable, price development going back to historical numbers, both on rep components and HVAC in low, low single digits. So, it's stabilizing. We think it's at a good level. So, I would expect this component if nothing extreme changes in the market, but we don't see any of those signals right now. We just went through the season in APAC and now moving in season in Europe. So of course, we have the pricing set for our suppliers and the inventory already set up and the market and what competitors are doing, it's a stable historical level.So, the pricing component will decrease -- starting to decrease in Q2 to Q3 and Q4 to more normal levels. So, you will, of course -- it's part of the component and the strong growth here in Q1. There will be less of a pricing component as we see right now in the rest of the year.

[Douglas Lindahl, analyst]

Okay. That's very -- that's understood. But you still see that the majority is coming from volume in Q1, that is.

[Christopher Norbye, executive]

Yes.

[Douglas Lindahl, analyst]

Okay. And just another question on the pump -- HP exposure. I believe you previously said that your ambition has to be to break this out sometime during 2023. Can you give some sort of time frame when we can expect some more indications on that? Or any numbers to comp exposure essentially?

[Christopher Norbye, executive]

We're working on setting days here in towards October, November on the Capital Markets Day, and then we'll come back to more breaking it down in detail. I think that -- so you'll get it towards the -- in Q4, more accurate than today, and we'll break down some other things also on some other segments to make it easier if you also to analyze the company.And it's a little bit that we still, as I said before, as the segment has been growing a lot for us, especially made a difference in our Q4 and Q1 numbers, but now we're moving to Q2 and Q3, most of our installers and the customer saving we're focusing is all driven by the heating, the cooling side. So of course, Q2, Q3, we're not -- it's not a big segment and then it's ramping up after the summer for setting up Q4. So, we'll get some more details. And it shows in our Q4 and Q1 numbers that's been, I would say, very, very strong, and it's driven also by people using our products for heating and not only for cooling, of course.

[Operator]

Okay. It looks like he had disconnected, so we'll go to the next question, which is Andreas Brock with Coeli Global.

[Herman Ohlsson, analyst]

Hello. Can you hear me?

[Christopher Norbye, executive]

Yes.

[Ulf Berghult, executive]

Yes.

[Herman Ohlsson, analyst]

Great. This is Herman from Coeli Global on behalf of Andreas Brock. So just a quick question. What are your plans for the American market going forward? I know you recently closed big acquisitions, but just wanted to know what are you seeing going forward here? What's the plan? Are you hungry for more acquisitions? And what's the M&A pipeline looking for? Are there a lot of targets out there on the American market for you to go after? Just curious.

[Christopher Norbye, executive]

So we closed it. We had it now for a couple of months' time. But of course, as you get to know us in Beijer Ref, we move in a fairly quick manner in a lot of things in a good way. As we closed the acquisition, we already had a pipeline that we sold was very good and also did the company that we bought. So, we continue those discussions. We are spending time in the U.S. meeting companies. So, it's created a lot of interest, of course, as we closed this acquisition and the profile and the strategic targets that we have.So, for us, it's a combination of three things that we are working on and according to the time line and plan is, yes, we'll continue and do consolidation in the market of what we believe strategic opportunities. It could be strengthening the position where we are, strengthening with more refrigeration out of type of products that we're going to build into our platform, and also expand into new states with market-leading companies. That will continue for the foreseeable future and be part of ARF growing here over the next 5 to 10 years.But then, of course, we also have an organic journey where we're looking at white spots to open up branches. We can't do that right now because we don't get the products to support it. That will happen more in 2024. And then we're also looking at the synergies right now on CO2 as started the phaseout of HFC gases in the U.S. and also on private label and some other initiatives.So, it's a strong playbook. It's more of prioritizing having the right timing for the different things. So, it will be a combination of both organic initiatives and acquisitions that here as we move forward during '23 and in the future.

[Herman Ohlsson, analyst]

Thank you very much.

[Christopher Norbye, executive]

Thank you.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Christopher Norbye, for any closing remarks.

[Christopher Norbye, executive]

Yes. So thanks all for calling in. Thanks for listening. I mean, things summarize in Q1 is fairly easy for us, an amazing start to the year, solid performance in all regions, product groups. Moving from Q1 where we have been very active and driving the growth through also the cooling side or the heating side, but now moving into high season for us in Europe and the U.S. and of course, building the inventory to support that development over the next couple of quarters. And then APAC moving more into normal season and also, we can see releasing the inventory starting here in Q3.And then moving into the next, we still see a good market out there for us short term. Of course, Q2 with some one day less and high comps, but still good market sentiment out there from our customer and a good activity level. With that, I'd like to wrap it up, and thank you for listening, and of course, any specific questions. We have our AGM today, so we might want to find time for that later this week. So, thank you very much for listening.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.