Beijer Ref AB (publ)

STO:BEIJ B

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the Beijer Ref conference call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to the CEO, Christopher Norbye. Please go ahead, sir.

[Christopher Norbye, executive]

Thank you. Hi everyone, Christopher together with Ulf. Welcome to our Q2 call.

I think we'll get started right away. So we'll start on Page 3, which is more our rolling 12 months. We show this on a regular basis. As we continue to grow our sales, we're now almost rolling at SEK 20 billion. We added some countries through acquisition this year, and we'll continue to drive our business through our 450 branches.

So let's move on to the next slide, #4. We reached sales of SEK 5,938 million. So we had a very good sales quarter, I would say, plus 30% in total. Organic sales, plus 13%, then we'll come back a little bit the buildup what's of that. And also a good summer season for our acquisitions that we made over the last year. So we had a very positive support by plus 11.5% on the acquisition side. And it is acquisitions, some of the bigger ones that's European-based like Inventor and Deltron that had a strong start here into the summer. And then we'll also get some tailwind to FX, as you know, around 5%, which adds up to the plus 30%.

If you look then on the EBITA, SEK 618 million, which was also a very good growth of plus 43% and a margin of 10.4% versus 9.4%. So we did pick up 1% based on, of course, higher sales volume. I would also say good development in the gross margin and also good development in acquisitions. So all in all, on the margin side, I would say, a very good continued development in all categories. The cash flow is negative as it is during our Q2 and also go a little bit deeper into that because, of course, a lot of the cash flow is now moving from inventory into accounts receivable as the business model for Q3 and Q4 is more cash positive. Now earnings per share that increased by 35%. So on the financial side, I would say a very solid quarter for us.

So moving on to Slide 5. If we then break down the business a little bit more. We also think it's a good reference point that we did have a very good Q2 last year that we grew almost 34%. So I think that's extra happy that we could deliver these numbers compared to a very strong Q2 last year. If you then go per category, we see our commercial industrial cooling growing 13%. So continued good activity in the branches on replacement parts, service and aftermarket, also continue, I would say, good development in our business around different type of CO2 and other solutions that we continue to sell through this channel. Then also on the OEMs plus 6%.

I think here is where we continue and be challenged with the supply chain issues, but also during the quarter, a lot of closing down our factory in China as well. That's now opening up again, but almost being closed all of Q2. So plus 6%. We expect this now to be double digits as we move into Q3 and Q4 as we see some better development in this area. Then on the HVAC, I would say, a very strong plus 15% in the quarter. We had good development in most regions, very good in East Europe, but also in other parts of Europe, also in APAC. Of course, APAC now is more in winter season and will ramp up as we come into October, November.

We do see here also, we'll discuss a little bit later that that's an area we don't expect to be growing at these high levels as we move into Q3 and Q4. And then we said, all regions good development with double-digit growth and especially Eastern Europe continues to be very positive here as we made acquisitions around Sinclair and Deltron and Poland and other markets continue to be strong, also some of that driven by also accelerated into heat pumps in these segments. So all in all, all areas, I would say, very good and the OEM, we expect to be back at double digits now as moving to Q3 and Q4.

Moving on to next slide, #6. What are we seeing a little bit in the world out there. I think the big discussions that's on everybody's mind is, of course, inflation that keeps being very high and now also as interest rates are coming up. I think, as I said on the call this morning that it does create uncertainty for us. I mean, closed off Q2 very good. But of course, in the short term, I would say we would have more uncertainty to the market related to this, which I think is very normal what we see on the long-term journey, we see both on the HVAC side and also the OEM side, very good trends. But I will be cautious about the short term related to the interest rate and inflation and see how that plays out in the market and in the world going forward.

The Kigali is getting more traction in the U.S., and we see that also as we are meeting companies there and interest in CO2 and other type of solution as they are, by 2025, moving into more regulated markets for HFC gases, a little bit different structure than in Europe, it's almost like every state is still making the different type of solutions, but they also market them more and more into this type of regulation as we have now in EU for quite some time.

This is interesting on Greece, I think I mentioned before, they have now signed off. And if you today Greece replace your AC, you get 70% back of the government on the back of more energy efficiency on driving that in the market as today's solution is about 30% more efficient if you bought something 10 years ago. So it's also an interesting trend we see in a lot of countries working on how do they reduce the need for electricity and balance more on the basis of what's happening in the world. And we can see also that, of course, on the heat pump side, as you see on the right side, still not a huge segment for us, but continue to grow very fast as we see a lot of demand, I mean, in Southern Europe, but now also in Eastern Europe in countries like Poland, where they're not replacing a lot moving in heat pumps. It's a very interesting segment long term for us.

Moving on to the next slide, financials, Slide 8. Here on the sales, it's more a summary. We're about 30% sales growth, organic growth, 13% and 43% EBITA and EPS 35%. So for us, a very positive quarter, and we're very proud of the numbers that we could produce in this quarter also, especially as Q2 last year was very strong as well.

Move on to Slide 9. Here you see the buildup from different, but I think I've gone over it, it's more we see in a format building the SEK 4.5 billion to the SEK 5.9 billion on the FX, organic and M&A. So I mean, good development, everything and good tailwinds from the currency, especially as the SEK has weakened against the euro, which is the big currency for us.

Then Slide 10. We can see the trend. Of course, here if you go back to after COVID, the balancing out as you -- Q2 '20 was the big negative quarter for Beijer, when everything stopped. And then it restarted already in Q3, Q4. And since then, if you look at both organic growth, I would say, especially organic growth, I mean the acquisition is adding a lot of value, and we'll continue to do that, but we're also very proud of the trend that we have succeeded to achieve over the last 6 quarters on the organic side. So I think it's a very impressive slide, if I may say so.

Then we are to region. I would say also solid development. Nordics, a good quarter and a good backlog, I would say. Central Europe, a little bit weaker. We see some markets there. In Germany, it's not our biggest market, but has not been strong all year. Southern Europe had a positive development also a new acquisition coming in there in Inventor. East Europe, fantastic development, both organically and in our acquisitions. We're also happy to say that we succeeded to be a little bit better here in Africa, especially South Africa.

So we're also hoping here that we have a positive trend moving forward. It's been a tough economic market for the last 2 to 3 years, especially since COVID. Also in APAC, we see good development in main markets there. I mean, in Australia, very good also together with the acquisition we made in New Zealand continues to be strong. Markets like India and also Southeast Asia has opened up in Thailand, Malaysia, a smaller market for us, but good growth. China, fairly negative. We're closing down. And of course, our end customer in hotel and restaurants and et cetera, is not doing a lot of business right now. But all in all, we're very happy with the development in all our regions.

On that, I will leave it over to Ulf to go over the results, cash flow and some other things.

[Ulf Berghult, executive]

Thank you, Christopher. So on Page #12, you then find the EBITA development. As you can see then, as also Christopher mentioned that we had a very solid growth of 43% in the quarter and with a return on sales of 10.4%, which is 1% better than Q2 2021. And that is the result of that we have a good drop-through on the organic business, but also a good contribution from our acquisitions. And as also, Christopher said, we had a good control of pricing management. As you know, we have the pricing treatment coming in, but we handled them very, very well. And also, we have the fixed cost under control.

I will then turn over to Page #13, where you see then the EBITA development quarter-by-quarter. And you can see then that we compare with the previous quarter, let's say, in quarter 2 '21 and '20, this is a very good performance. And also, I want to just point out that even though that in the Q2 '20 in COVID, even despite that we had a 17% organic decline, we still manage them to report a return on sales of 7.6%. So it shows that we are quite resilient in downturns.

So Page #14, you see the EBIT by region, again, also a very good drop-through from the volume. And particularly then, we have a good development in South Europe and East Europe and of course, then supported by the acquisitions that we have done in the last 12 months. But also then, as Christopher mentioned that APAC, it is a winter season, but they are also managing that very, very well. And also then the other markets outside Nordic is also performing very well.

So if you then turn over to Page 15, where you see then the P&L statement for the group. We have an impact of the FX on EBITA on the SEK 19 million. Interest is slightly higher in the quarter, coming from first that we had higher debt than the previous year. But also then, we had a negative FX impact in the quarter, which then is accounted under the net financial income and expense. Tax is in line. We had a tax rate of 25% in the quarter, and of course, it's a higher amount due to that we had a higher profit than prior year, we had a tax rate of 23%. So all in all, very solid and good numbers.

Earnings per share on Page #16. And of course, that's slightly then impacted by the financial net of this FX loss effect to cost, but also then slightly higher tax. But otherwise, it's a very solid performance in the quarter, 35% and 20% on the full year.

If I then turn over to Page #17, on the cash flow. You can then see that we have a good operational performance from the EBITDA point of view. This -- then if you come to the working capital, this is a normal seasonal pattern that we have that we are then transferring the inventory into accounts receivable and then accounts receivable then in quarter 3 -- Q3 and Q4 should then turn into cash. We still have issues on the inventory. We are very cautious, and we want to have good delivery performance. So we still have some reasonable high inventory, but those started to deliberately -- deliberate decision from our point in order to have a good service.

If I then turn over to Page 18, which is then the quarterly cash flow. But then, of course, you see impacted the last 3 quarters by the working capital in order to have this not to be able to have a good delivery service to our customers.

And turning over to Page 19, where you see the net debt development. That is all in all and of course, it's impacted by the acquisition that we have done in the last 12 months and also then the higher working capital. So we are now on a leverage all in on SEK 2.8 million. But again, under IFRS 16, that is mainly then coming from a rental contract on our 450 offices.

So all in all, now, so I will then turn over to Christopher on Page #20 to conclude.

[Christopher Norbye, executive]

Yes. So we know that is good profitable sales growth, so we see it both on the top line, but also the bottom line, which is, of course, extremely important. That also shows that we have a business model that manages these type of complex situation in the world from both supply chain and also pricing and timing on that. So we feel very confident in our decentralized business model continuing to work in this type of environment in a good way.

Also the EBITA, both strong growth in money, but also a margin of 10.4%. I think it's a good achievement. And this is our top quarter, so it should also be our top margin, but also a good development sequentially and also compared to last year. And also looking at all regions, double-digit growth in all regions. There's nothing really sticking out on issues in region. And I said also South Africa or Africa seems to have turned the corner. Let's continue to follow that. We're also developing acquisition according to our plans. So good development both on the sales side and on the profit side, they continue to support the Beijer Ref journey now and going forward.

And as I said, I think we have continued to manage the inflation and pricing in a good way and also on the supply chain. And I think a little bit alluding to what Ulf said, we still see issues in supply chain, but I think it shifted a little bit now from uncertainty to more certainty, but still very long lead times. So we still see long lead times in the supply chain, but at least it's being more accurate, which gives us the opportunity to plan a little bit more going forward. But we're now back to and I mean, to where we were before the COVID pandemic.

But then I also want to highlight a little bit short term, we're moving now in more uncertain markets. We're very confident on the long-term trends. We see continued development in the electrification and moving on the heat pump side, the penetration and the replacement of AC around in Europe and also how we grow the business, the OEM business, we expect to accelerate. But on the short term, we are a little bit uncertain how the market will react to inflation and interest rates around here, especially on the European side in South Europe and some of the Central Europe region. So we are a little bit cautious. And we are following this very closely as a company, and we do have this on the agenda now on the short term. So that's something I'm sure we'll discuss here in the Q&A as well the short term and the long term for us.

So in summary, great start to the year, both Q1 and Q2, but moving in short term, a little bit more uncertain times until we know what the world will be developing now with the interest rates and inflation pressure out there.

So based on that, thank you very much for listening. And now we open up for Q&A. So we're ready.

[Operator]

[Operator Instructions] Our first question is from Viktor Trollsten with Danske.

[Viktor Trollsten, analyst]

Firstly, I'm just a bit curious on the weather effects that you mentioned on the [indiscernible] in Europe during Q2. Just to understand how fast does that flow through into your P&L, either it could some positive effects also in Q3 during the high season from this? And also, secondly, if you could elaborate a bit on the positive impact on the acquisitions that you mentioned, this in any way accelerate your private label launches, so you are basically ahead of what you initially anticipated? That's my first.

[Christopher Norbye, executive]

I think it's lovely talking about the weather, but it is a part of our business. So I now have my app looking at especially Southern Europe weather and development. And we do talk about it in -- with our market as well. And it's, of course, not 100% scientific. But a little bit what I understand now is that the weather patterns for June, where we had a lot of heat waves is that they were a little bit too short to really make a difference. They need to be supposedly a week or 10 days. And if the 3, 4 days, it doesn't change that much. So we didn't see a huge impact of it. And I also think the way the system is built up -- right now, it's also that most bigger customer has stopped up fairly well because not only for the season, but also for because of all the issues that's been in the market.

So I think it's more now as we move into July, we know there is some longer heat waves coming in here inside of Europe, and we're following that closely. So I mean, there's no negative effect. We haven't seen a huge impact, but I think it's more related also that it's been fairly well stocked up in most of the regions even higher, same as we are. So -- but we do see that -- I mean, of course, not from a weather or human point of view, from a business point of view that will continue to support and drive our business. That -- sorry.

[Viktor Trollsten, analyst]

No, please, go ahead. Just on the private label launch, if there's a potential acceleration.

[Christopher Norbye, executive]

No. I will say the private label continues and follow up plan a little bit what I said last time, especially on the HVAC side, as we're launching now Sinclair as a private label in Q1 and Q2 -- or Q1 and Q4 was more labeling stock in our Southern European countries. Now we're going into launch mode. And it is developing well according to our plan, a little bit ahead of plan, I would say. So it's not changing the world yet for us. It's more a long-term journey. But now in Southern Europe, in countries like France and Spain and Italy and the main large countries, we have launched the product and it's selling well. So we'll continue and develop this journey. And also in step 2 here in the Sinclair, we're also going to launch a heat pump as part of that package, especially in step 1 in Southern Europe. And that should give us a little bit more opportunities long term also in the cooler season of the year. So, so far, so good. I would summarize it.

[Viktor Trollsten, analyst]

Okay, that's clear. Then secondly, just thinking a bit about your price hikes versus cost inflation. And sorry if this is a tricky question, but just thinking about your sort of inventory turnover, I'm just thinking about, are you still in the part of cycle where you are selling products at lower input costs with your recent price hikes so you have a positive margin impact from this and basically meaning that cost inflation will accelerate up ahead? Or would you say that cost inflation is fully in the figures, if you understand my question?

[Christopher Norbye, executive]

Yes, I understand it. And I, of course, can't answer it with a 100% accurate. The way we see it and follow it is that there is positive and negatives, right, in the system. You have some price increases. We even have some of your suppliers raising prices on your order book. So we do not do that towards our customers. So then we have a negative effect on that side. We have some of the inventory that we bought cheaper and have been able to pass on a price increase. So we see, I would say, as more of a zero-sum game, but hopefully with a little positive timing.

And we don't -- when we talk now to our suppliers, we don't see -- if the world doesn't change again and again and again, any big price hikes coming for the rest of the years, rest of this year, it's been fairly stable here after, I would say, mid-June. Most of them are done with the cost aligned right now. So I would say it's more a zero-sum game. We're some positive and some negatives. I mean, there's no huge differences in our underlying margin per product group, where some areas that we improved and some that we lost in total, I would say it's fairly stable with a positive -- maybe a positive edge on the situation.

[Viktor Trollsten, analyst]

Okay. That's very clear. And I guess, confident message given that at least I was impressed that margins were up year-over-year in that extent. And it sounds like we shouldn't expect any further pressure at least ahead. And then just finally on my side, and you touched upon it, but that you're saying that OEMs should double-digit growth ahead. How much of that is just from a comparable perspective and how much is that you actually are saying easing in component shortage?

[Christopher Norbye, executive]

I think it relates, as you said, too, that we are growing, and we have been growing through this situation in our European [indiscernible] a big part of the business double digit all through this. But we had negative development in China, which is also a big part of our supply chain when it comes into the APAC region. So it's more based on that. Europe will continue mid-double-digit and that we get some opportunities to produce and sell parts in the APAC region as we move into Q3 and Q4. Of course, a statement like that can change if everything closes down again for 3 months in China, but that's what we're seeing right now. So it's more the mix between the APAC and Europe that's been holding it back from a double-digit, the underlying order book and activities continues to be high.

[Viktor Trollsten, analyst]

Okay. That's very clear. I'll step back in line.

[Operator]

Our next question is from Carl Ragnerstam with Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. A few questions. Firstly, looking at the margin, the EBITA margin is up some, I think it's 100 basis points year-over-year. Could you perhaps give some comments on how much of that is driven by margin accretive acquisitions, as you have seen, volume drop-through as well as other operating measures you're currently working on?

[Christopher Norbye, executive]

Yes. I think we won't divide on the acquisition and organic, but we do have a slight pickup in the gross margin, and that falls through to the bottom line. And then we're also running a good 20% drop-through on the sales -- on the organic sales. And also, we expected the acquisitions, especially the Inventor and Deltron that are HVAC companies to have a strong market in Q2 was that absolute high season out there. So it's a combination of, I would say, of those 3.

And of course, as we move into Q3 and Q4, you have less the strength on the HVAC business, as you know, as the seasonality. So I would say that this was a combination of the organic drop-through in our existing business, double-digit margins in our acquisition as expected in Q2, that's a very strong HVAC business. So I think those are the key parts. In a little bit, we'll continue to talk about being good on developing the long-term trends in private label and other. And I would say it still has a more minor part still in development of the margin. So summary is a high sales quarter. I mean, very high, and that gives us a good drop through, when it runs through the bottom line with these type of sales volumes.

[Carl Ragnerstam, analyst]

Okay. Very good. And also, we have seen inflation in many commodities. Could you comment where we are on the transitional refrigerant prices currently? I guess you had a slight EBIT tailwind this quarter, right?

[Christopher Norbye, executive]

Yes. I mean, it has -- I would say the way we see on the refrigerants, as we discussed that many times, and the significance of it is, of course, less than it used to be in '17 and '18. But the prices we said in Q1 and here in Q2 have stabilized on a positive level. So it continues to be up 20% plus versus last year. And I would say a couple of percentage sequentially. So it's right now fairly stable, but it has been a positive trend for us versus negative [indiscernible] there's nothing revolutionary. It's fairly stable at a good level for us at this moment and also in Q1.

[Carl Ragnerstam, analyst]

Okay. Very good. And also, of course, your remark on the inflation's impact on demand. Is it anything you have seen so far during the quarter or entering Q3? Or is it more of a thing that could happen theoretically, I mean, in the coming months or?

[Christopher Norbye, executive]

So I'm going to ask that question because I would like to answer it, but I don't have the crystal ball, but I would say that you released the Q1 report, and I didn't see any really clouds on the sky, which has turned in also to a very good Q2. Now I am more cautious, and we are looking closer. I think I would want to answer it in this way. But no, I don't have specific issues right now, but I believe that on the HVAC side has been growing a little bit faster than the market related to also our big customers building inventory to manage the season and being an extra start. So I would say on the HVAC side, I don't expect this type of development here as we move into Q3 and Q4.

The OEM side will, I think, will have a possibility to double digits because it's still less driven by inflation and the market, and there's not that much stock out there because of issues. And the refrigerant, they are rough business will take on. But I would be a little bit more cautious here in -- if you just talk about Q3, Q4, we're still positive, but not at the pace that we delivered here in Q1 and Q2, if that helps a little bit. So there are clouds on the sky, there's no rain or storms yet. But I think also that we need to understand that we need to be cautious, a little bit more cautious as we move in here in Q3 and Q4 because I think it will affect our business.

[Carl Ragnerstam, analyst]

I mean it's super helpful comment. And also the final one from my side. Your net debt to EBITDA is SEK 2.8 million at the end of the quarter, a bit lower on a pro forma basis, I guess. But do you feel that you have the means to execute on your M&A pipeline still? Or is it constraining you in any way?

[Ulf Berghult, executive]

No. We have available facilities. And of course, on SEK 2.8 million, we have at the leverage that is included in IFRS 16 and not on a pro forma basis on those acquisitions that we have done. So we still believe that we have the means, and then we can -- we will -- we don't see a hinder of continual M&A track.

[Christopher Norbye, executive]

No. So I guess when you align for the underlying EBITDA and the generation, we expect also in Q3 and Q4 on cash and development business, we continue to drive our M&A, and we are looking to be fairly active in Q3 and Q4 on that. So I would say right now, we still feel comfortable with the business model, how it looks and the acquisition we have in the pipeline, and we also see [indiscernible] so the short answer would be no. But of course, we continue to look at our net debt and need to manage that in a good way.

[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 thank you very much for calling in here on a summer's day and a very busy day. I'm sure for the people on the call on all the reports here, I think summarizing great Q2, great start to the year, and as we said, I think the organic growth over the last 6 quarters shows that Beijer Ref is a very good business, and we see the underlying long-term trends on our products being very good in combination also with opportunities to continue the M&A pipeline. But I just want to highlight without any strong signals or anything like that, that I am a little bit more cautious about at least the short term in relation to interest rate inflation and how that will affect [indiscernible] at least give that view as we look at short term and long term, and we, of course, run our business long term. But I think also we do have a very good business model to create value in both areas.

So on that, I would like to wish everybody a good summer. And if you need any more clarification, me and Ulf will be around, or at least I will be around the rest of the day. And if not, then we'll talk soon and have a great summer as well when it comes to you. Thank you very much.

[Operator]

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