Beijer Ref AB (publ)

STO:BEIJ B

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and welcome to the Beijer Ref Audiocast with Teleconference Q3 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Christopher Norbye; and CFO, Maria Ryden. Please go ahead with your meeting.

[Christopher Norbye, CEO & President]

Hi, everyone. Chris here seated here with Maria in Malmo. First of all, I would just like to start and welcome you all, and also, this will be my first call. I read the transcript for the last call in Q2. So just a short update on my journey in the first 1.5 months. Of course, I spent a lot of time out in the organization with all our countries and some businesses, and we'll come back to that in the presentation. But also confirming that I believe Beijer is in a very good position with strong tailwinds going forward, both from the green product side, but also the positioning with a growing segment within HVAC. So I believe it's in a good position, a good strategy, and we'll continue that journey together going forward. So with that, I would like to start and maybe move over to Page #3 in the presentation. A little bit on the highlights in the quarter, but also commenting a little bit on the year-to-date development. And as you all have seen in the presentation or the report released here this morning, we did increase sales by a little bit more than 13%. I believe on the organic side, it was a good growth despite the challenges we had, and I'm sure we'll come back to that with a little more explanation in the Q&A, both on the component side, especially affecting our OEM business, but also on the side of a challenging closure in markets like Australia and New Zealand. That's big markets for us. So we'll come back to that later on in the Q&A, I'm sure. And I believe we had a continued good development on the acquisition growth. We can also see, and Maria will come back to that, that the acquisitions we do, we have very good leverage on expanding growth and margin indeed as we continue to more and more integrate this acquisition in our network and in our platform. And we'll also come back a little bit to the latest closing of a fairly substantial acquisition, Inventor, which is similar to Sinclair that we did about a year ago. We have high expectations for that. If we look into the quarter, it was a mix month-by-month with, I would say, a good start demand and then a fairly weak August and then a strong finish to the month here, as you can see, with 14% growth in September. So that balanced out and gave us a 6.4% growth for the quarter. I can't comment, but still early days in October has started well. So good activity level in October. But of course, we're only a couple of weeks into that month yet, but at least it's continuing on a good level.If we go into the product segment, we have growth in all segments. But what we can see, especially in the OEM segment, is that, I would say, only 3% growth in that segment, but the majority of it related to a backlog that's up almost 40% and issues to ship products because of missing components. So that's also something we see will continue in Q4 and Q1. We're seeing getting components to some of these critical items. So we, at this stage, don't have a timing on when that will be flushed out and coming back to normal time. It's, of course, also longer lead time on these products and all the shortage general and supply chain affecting mainly OEM business. The EBIT margin came to 8.2%. And of course, that's been one of the topics this morning on the EBIT side. I do see that it is affected of challenges, of course, in the supply chain, as we said. When you are producing products, you have the cost, but you can't ship them. That is an issue. We have closures in markets, especially in Australia and New Zealand that you have all your costs, but you can't sell your product. Then also, as we said, a one-off items, which is mainly related to -- and high level but also on acquisition costs that we're closing out an acquisition and some recruitment costs. The way I would describe this is pretty much 1/3rd each on the supply chain, on the freight cost, and the one-off items for your guidance. And also, of course, what we see here going forward in Q4, I would say, we still see challenges on the freight cost side that we have aligned prices, but we do believe it's going to take through Q4 to balance out the very extreme changes on short term on supply chain and freight costs. And of course, on the freight, we're now working hard to make sure we get the products. But we are aligning prices, but I believe we will have a lag through Q4 on the freight charges as well. On the acquisition side, you can see we came in at 7% and that we also closed some time ago the Inventor from the competition authorities, so that will start rolling into our numbers here in October. And also really happy with the development in Inventor during the year and having had a very strong year, which, of course, is positive for us, plus some other acquisitions that we will come back to later on in the presentation. So that will be the highlights for the quarter. And then just balancing out on year-to-date, of course, with a very special 2020. But still, I would say, good development on the organic side and on the acquisition side. And of course, concluding 8 acquisitions so far year-to-date. And you can have a controlled timing, but we believe there's more to come here also in this year to close out, I would say, a very good year on the acquisition side. Let's move to the next page. I've touched a little bit on the external side. I think you've heard it from most companies on the industrial side on the shortage, but what we saw was balancing out pricing on containers in the summer, then start spiking again here during Q3, where we had to transfer over the pricing to our customers with a certain time lag, which has caught us here in Q3 and also in Q4. So that will continue to be part of our P&L until, I would say, flushing out in Q1. But also finding hard to get the components, both lead times and missing components in the supply chain. I believe we have a fairly good setup with being our scale. We can also manage component issues within our regions and within our own supply chain as we can move things around from Spain to France to Sweden to Denmark and Norway. So we're leveraging that to minimize the effect of the issues in the supply chain. Then I think you all know copper is a component that we do sell with substantial price increases that we are adding on to the market. Then on the refrigerants. You can see here now a stabilizing pricing compared to some time back. We do have a slightly negative effect during Q3. But we're also seeing a -- we expect a slight improvement to continue here in Q4 on the pricing of refrigerants from the market, what we're seeing right now. It is going up, but it's not a trend yet. So we'll take it month by month, and hopefully, have a clear new sale when we come into reporting in Q4.Then we also see that the climate focus continues and accelerates. And I know there's a conference for UN in the U.K. with increased ambitions. And we can also see countries, not only Europe, but also, I would say, a large market for us is Australia, where the commercial side and the supermarkets are accelerating the change over to CO2, also from a greed profile to the consumer, which is, I would say, positive for us. And then you have the lockdown that affected us. We're not completely over it, but it is improving in the Pacific, which is a critical time for us, as in the Pacific the high season starts now here in October at least through February. So it's important for us that they continue and improve versus closures.Let's move over to the next page on acquisitions. We did mention that we did the closure of an acquisition where we also now have majority ownership in Fenagy. And I have visited the company and I think it's an extremely interesting solution for us, and we have some real breakthrough orders here when it's an industrial CO2 solution instead of the ones in the market. It's a similar solution on the commercial side, but of course, with higher output on several megawatts, which we also see now will have a potential to be a big part of our business long term. Right now, we're just expanding it in Denmark, where it started, but we see good potential in the industrial side in the next 5 to 10 years. So very happy with that acquisition.Inventor, we talked about, we finally got over the competition authorities. So now it's part of us and we're working on the integration and the plans for the foreseeable future. Both with Inventor and with Sinclair, we now have a very strong portfolio on the HVAC side to continue and integrate our business. And this is also one of the market leaders in Greece and have a very strong market position around that region, which is a market we haven't been before. So I think it complements us in a lot of ways with a good profitability. And then we had some smaller complement acquisitions in Australia and New Zealand. And I have to say that too because the platform in Australia and now New Zealand is getting better and better, which means we can make smaller complementary acquisition from a product side, which, of course, gives you a lot of opportunities to increase synergies and sales when you have products in a strong network. So we are right now to acquired sales of around SEK 1.6 billion whereof around SEK 800 million to SEK 900 million will impact 2021, and then you have an overflow, of course, on the rest of 2022. So very happy on this side. Go to next page. I will not spend a lot of time on this. I've been on a lot of sites and a lot of businesses around, which is fantastic to meet the people and meet the organization. And just wanted to confirm a very strong culture in this company and entrepreneurial, motivated, focused people, and that will continue also during my leadership. So just to confirm, if people had any questions around that, I love this kind of organization. And I think it's fantastic people around there. So that's all on to that. So the final page on the high-level update. And I know you've seen all these mega trends. And I would say they will continue here for a long time. We can see the phaseout has gone into the next level, but also a lot of other countries around the world looking into changing from these HFC gases. And that will continue and accelerating, I would say, around the world.And then also on the digitalization, we've been spending a lot of time also on how we develop our e-commerce, but also saying that we're almost now 10% of our sales within e-commerce currently. And we also see the digital channel will help and support our business long term, but also differentiate us also from some of the competitors how you build an efficient e-commerce channel. So I think it's an important part of our strategy going forward. So with those words, I would hand over to Maria to go with some of the financials, and then we'll get into a Q&A. Thank you very much.

[Maria Ryden-Persson]

Thank you, Christopher. And we are now on Page 9. And as Christopher mentioned, we have a sales increase of 13.1% compared with last year where it was negative 2.9%. And it's the split between organic at 6.4%, acquisitions contributed 7%, and we have a limited impact on FX of minus 0.3%. EBITA 8.4% versus last year of 9.2%. And it's important to say that during 2020, we were very good at reducing our costs temporarily. And that has impacted last year with SEK 8 million, including grants or subsidies that we get from government. In this year, as Christopher mentioned, we have SEK 30 million that impacts the margin from June 2021. Net debt, still a strong balance sheet and a net debt/EBITDA of 2.1, despite that we have increased debt and pretty sustainable on that ratio. Earnings per share is SEK 0.65 and in line with last year. Moving to Page 10. You can see the organic split. We have organic growth in all our product segments, the organic growth is 6.4%, as I said before. And you can see that the organic growth in OEM is somewhat lower than what it used to be, it's 3%. And it's due to that we have a good demand and also that the conversion to green technology is ongoing right now, but we have a shortage of components here. So we have built up a good backlog position for the coming quarters. Sales split, we have almost an even split between HVAC and commercial refrigeration. And OEM is on 9% of our total sales for the quarter. Moving to Page 11. We can see the third quarter in a 5-year perspective that we have grown the business year-over-year. And you can see the dip in Q3 2020. And looking to the right, you can see also how EBIT has performed over these years. And we are now targeting about SEK 1.12 billion in rolling year EBIT. Looking into Page 12, we have a bridge of the drop-through from acquisitions and they have contributed with SEK 269 million in sales and SEK 39 million in EBIT. And that is roughly about 14%. One needs to bear in mind that they will continue to contribute, but also that they have had good sum amounts during the quarter here. FX has almost no impact on the results. And the organic drop-through is also impacted by the SEK 30 million and somewhat lower here. but you also got the explanation from last year when we had the temporary savings of SEK 8 million.Okay. Looking into the regions on Page 13. We can see that we have sales growth in all regions, which is positive, and we have a great increase in Eastern Europe, which is mainly related to our acquisition of Sinclair. I can also mention that in the Nordics, we had a positive sales development and that is very much related to OEM and HVAC. So we tend to say that the HVAC is growing and that's true. And also that colder countries like the Nordics and Sweden are increasing their HVAC penetration, which is very positive. And on the EBIT side, you can see good contribution here. We had some drop in Central and South Europe and that is also related to the increased freight charges that we have said as part of the SEK 30 million. Okay. Looking into Page 14 on the cash flow. So we had an EBITA of SEK 366 million versus SEK 353 million last year. And the rolling 12 shows about SEK 1.3 billion in EBITDA. The balance sheet is still strong, liquidity is good and we have had a positive cash flow. Even though we have increased our working capital, we are building inventory in the countries where we can, both to be prepared for increased demand next year and also to have stock on hand because that is very crucial on the availability side for a distribution and wholesaler like Beijer.Okay. On the Page 15, we have the net debt. As I said before, we have increased our net debt and done some acquisitions and we also completed Inventor here after the quarter end. So net debt is SEK 2.1 million. And that has been that for the last 2 years. So we are able to increase the net debt/EBITDA ratio in conjunction with acquisition and we start earning the money to pay. It could be so that we will increase that in the future when we have good prospects and opportunities to do additional acquisitions. Okay. Looking on Page 16. I think the main message here would be that we focus a lot on having organic growth in our business and we have been good at that. We had a tremendous organic growth in Q2. So maybe you should look into Q2 and Q3 combined here. You see also that we had negative organic growth during the corona in Q2 2020. But we were also quick in getting back to business. And I think that is the strength of our business model that we are not so dependent to business cycles. Of course, everything that's happening in our surroundings impacts us. But the business per se is repair and maintenance and day-to-day business that goes quarter-by-quarter. So in the long run, we have had organic growth and that is also part of our strategy to have both organic growth and also to do a lot of acquisitions, as Christopher mentioned.So looking on Page 17, we have a summary of the 9 months and we have had year-to-date, the 9-month figures, you can see growth is 18.6% with an organic growth of 15% and EBITA of 8.5%, which is above last year, and net debt is the same, of course, and then earnings per share of SEK 1.9, which is an increase from last year. So I think it's good also to see the combined figures for the entire 9-month period. And finally, before letting in for Q&A, as Christopher mentioned, we are right now in the market that is transitioning to green technology and we are part of that. And we've got some good help from legislation, both within commercial refrigeration, but also within HVAC. We have a clear strategy and focus and a very strong corporate culture with a decentralized organization. But on the same side, we try to work common and unified together within the functions where we can benefit from it. And we have performed and have had a stable development over a long time and we'll continue with a strong owner base as well. Okay. So I think we are ready for questions.

[Operator]

[Operator Instructions] Our first question is from Carl Ragnerstam of Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. A couple of questions from my side. Firstly, you mentioned that you have roughly SEK 30 million headwind from COVID, freight rates, nonrecurring items. Could it be possible for you to split it up by those factors and explain what the nonrecurring items are related to if it's acquisition costs?

[Christopher Norbye, CEO & President]

Yes. So as I said before, we would estimate it to be 1/3 each. We have around SEK 10 million on extra freight costs in the quarter, SEK 10 million related to extra costs that we haven't been able to closing down in Australia and especially New Zealand to be able to sell new products having the cost both in assembly and on the site. And then SEK 10 million on nonrecurring, I would say, will be majority on the acquisition side and also finalizing some of the recruitments we had in the past. So I would say it's SEK 10 million each. And then I would say the SEK 10 million on the freight costs we expect to continue through in Q4 as those prices are aligned, but will flush through Q4 to get it into the market. And then on the closure, we expect that to be less in Q4. Of course, if nothing unexpected happens, they won't close down the market again in especially Australia and New Zealand, then we would not need to line up. But currently, now the markets are opening up versus Q3.

[Carl Ragnerstam, Analyst]

Perfect. And could we expect a catch-up effect in Australia and New Zealand? Or...

[Christopher Norbye, CEO & President]

Yes, I talked to our guys there and I think it's trending well. And of course, I expect this to be catch-up. But we're still only 2 weeks into the month, so I'm still waiting and seeing where that happens and if. So that would be my expectation, but I need to see Q4 first before I can confirm that that's happening, but that will be the normal reaction.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And on the component side, you mentioned that you grew 14% organically in September. You also mentioned that you had a good start into beginning of October. Should we expect a worsening impact from components or a flat impact from components on the special OEM side in the coming months?

[Christopher Norbye, CEO & President]

I would say we could expect a flat, which means it is a complex situation. And I would say it will continue -- I mean, I don't see right now accelerating. But it is a complex situation in getting the parts in. So I would say it will continue on a high level. But right now, it's not accelerating, it's on a high level. And also, of course, related to that is lead times on special components, which does also that all of our backlog will not be flushed out in Q4 because you also have lead time on the component side. So I would say we'll continue for the foreseeable future right now.

[Carl Ragnerstam, Analyst]

And did you have an impact on the other segment? Obviously, we can see that the OEM is quite impacted. But on the HVAC side as well? Or is it primarily OEM?

[Christopher Norbye, CEO & President]

I would say It's less on the HVAC side. Of course, there are -- I would say, the HVAC side is mainly related to a cost issue on freight versus an impact on missing products. Then, of course, you have some countries that had not a super warm summer, in Germany, in Netherlands, and somewhat in France. That affects our business on a seasonality level. But I wouldn't use the missing components as part of HVAC. It's more a cost on freight on HVAC side.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And on the backlog side, you mentioned that it's obviously strong. Could you give any flavor on the year-over-year development or order intake development during the quarter?

[Christopher Norbye, CEO & President]

Yes. I mean, I can give you some flavor. Of course, the majority of our business, as you know, on the industrial ref side is a day-to-day business, where you sell day-to-day and replacement, et cetera. So it's mostly looking at the HVAC side and also on the OEM side. And there we can see a backlog that's up about 40% over last year.

[Carl Ragnerstam, Analyst]

Sounds quite promising.

[Operator]

Our next question is from Henrik Milton of Coeli.

[Henrik Milton, Portfolio Manager]

Thank you for a very nice report. It's very nice to see that you're up through organic growth again. I have a couple of questions regarding then. First, if you can elaborate a little bit about the acquisition in Australia, this Armcor. If you can give us a little bit more information about that.

[Christopher Norbye, CEO & President]

Yes. So I think it is more in the general side on Australia, as I said on my call, and a company like Armcor is, as we have over the years built now a good, strong national footprint with a good network of selling both the OEM business and the HVAC business and the refrigerant side. These type of acquisitions like Armcor is where we're completing the product portfolio as we can see good possibilities and also margin side on having a full offering for the installers, on everything around in HVAC, you have from installation and all the equipment to install it, but also looking at when you work on HVAC on some of these also on the chiller side. So the strategy there on Armcor and the acquisitions that we will continue in Australia to continue to build a full offering to leverage our network in a stronger way. I'm not sure that answers your question or if you want any other specific details?

[Henrik Milton, Portfolio Manager]

It does. And then regarding future acquisitions, then the United States is very interesting for us, of course. But if you can tell us a little bit about the U.S. pipeline and what the acquisition space within your balance sheet is. How large company you can take on without making a rights issue, for instance?

[Christopher Norbye, CEO & President]

I'll start with answering on the strategic side, and I'll leave the financials of that to finish up with Maria. But I think on the acquisitions side, we always want to mention 2 things. One is that we still see a good consolidation of [indiscernible], especially on the HVAC side in Europe. And of course, Inventor is part of it, but there's more in the pipeline in the European side and new markets in Europe that's very active. Then moving on to the U.S., I would say it's a clear target for us and part of our strategy here going forward, which, of course, starts with a good mapping of all the targets, discussion with potential owners and targets. It's a longer journey that has started to find the right targets. And of course, we want to find enough of the platform investment in the U.S. within the refrigeration or HVAC business to start to build it. I can't disclose what that time or the site is, but I would say that the platform investment in step 1 should not be that we need to do a rights issue. I think we have plenty of space in the balance sheet for those acquisitions. But Maria if you want to comment on that.

[Maria Ryden-Persson]

Yes. So we have said that we can increase the balance sheet immediately with SEK 2 billion in liabilities due to additional acquisitions. And then, of course, to do a platform acquisition in new markets, we also need to look into future funding possibilities like bond, et cetera. So we think we can manage pretty much growth within our current balance sheet.

[Operator]

[Operator Instructions] Our next question is from Karl Bokvist of ABG Sundal Collier.

[Karl Bokvist, Analyst]

Most of my questions have been answered already. But if I may ask one on -- I believe you mentioned in the second quarter that there could be a possibility of prebuying, and as you say, taking both Q3 and Q2 and putting them together to sort of understand the growth rates. But into Q3, do you think that the component shortages and those sorts of aspects have now sort of had the impact that the customers were anticipating, i.e., I mean, there hasn't been any further prebuying. It's more like the prebuying occurred in Q2 and now there's more of the issue of getting access to or getting availability.

[Christopher Norbye, CEO & President]

I would be the same as you asked the question, without knowing, of course, on a factual basis, that's a hypothesis that we're working with as well because we also saw the trend at closing our Q2 extremely strong. And of course, with a fantastic June in that balance. And then in July and August that was more muted. And then a good strong September, which is now continuing a good level in October. So that's the assumption we are doing as well. Another main issue is, I keep saying 2 things, the component shortage and lead times, because, of course, if you push out lead times, that's going to affect also on your sales levels in the short term.

[Karl Bokvist, Analyst]

Understood. And within refrigeration, is it possible for you to provide a split between -- either in general or for the quarter or for the year between industrial and commercial and how these 2 segments developed?

[Christopher Norbye, CEO & President]

No. I think at this stage maybe that's something we can come back with, but I would say that the majority is on the commercial side and then the industrial side is just starting to increase, especially on the technology like the Fenagy technology. So I would say the majority there is on the commercial side.

[Karl Bokvist, Analyst]

Understood. And just one final thing to understand the dynamics here. But the freight prices that you have to pay, what are the kind of terms here in terms of, do you set a preset trade level for a specific number of months in a particular region? Or is it done on a transactional basis?

[Christopher Norbye, CEO & President]

I would say both. I would say historically, it's been more long term. But to me, to get that kind of long-term contracts now with freight companies is very challenging. So we are working more on a transactional basis, but the prices we see now, I would say, is on the top level, and that's what we are repricing our products to the market with. So of course, if they further go up, which I think they are at extremely high level, then we need to realign that. But right now, we feel fairly comfortable on the price increase we're doing will compensate for freight, but we have a lead time that's why we're saying also Q4 will be affected.

[Karl Bokvist, Analyst]

Understood. My final one is just, you mentioned plus 14% in September this quarter. Just to understand here, I think, now 6% organic growth Q3 '21, minus 2% last year. Were there any particular dynamics last year within the quarter that July and August were very, very strong, but September was weak, something like that?

[Christopher Norbye, CEO & President]

I don't have that at the top of mind. So maybe I'll come back to you, because we have that data, of course. I don't believe that September was a weak month last year. But we'll get you the numbers.

[Operator]

Our next question is from Robert Redin of Carnegie.

[Robert Redin, Research Analyst]

Just again on the 14%. I mean, if the OEM business still had its component shortages and so on in September, and you think that will persist in Q4, so the 14%, was it driven then by the other product areas? Or how it looks?

[Christopher Norbye, CEO & President]

Yes, I would say it was a good pickup on the HVAC side in September across all regions, both on the sales side, but also on the orders side. So I'd say it was the HVAC side that was on a good activity level in September and also started here in October.

[Robert Redin, Research Analyst]

All right. Perfect. And then just on refrigerant prices. I mean, I see you have a sort of Q4 price here in the chart. So is that a kind of communicated price level as per now? Or is there a lag effect there? How certain are those? And is there some other -- can you see even further into Q1 on the price trend there?

[Maria Ryden-Persson]

So you can see that from a trend perspective that the prices are going up a little bit after Q3 here.

[Christopher Norbye, CEO & President]

And I think we can also add, I mean, that the prices from the main suppliers are coming up, which, of course, is positive for us. But as I said before, I would like more visibility and that will continue here throughout Q4 before we confirm that this is a trend versus a blip in the market. But right now, and right now in time, it looks like a positive development, but we'll keep you posted.

[Operator]

We have a follow-up question from Karl Bokvist of ABG Sundal Collier.

[Karl Bokvist, Analyst]

Just on the acquisition side, the deals that you have made that seemingly have quite good profitability. I was just wondering the synergy potential on those businesses given that the starting point is a bit higher perhaps than the acquisitions that you made in the past, just to understand the dynamics here.

[Christopher Norbye, CEO & President]

Yes. No, I think you're correct. It's a higher starting point. But I think, based some of that on the experience with a company like Sinclair, what we see is 2 things. We see how we leverage their product in our network that's more covering all of Europe, of course, and that's what we can see on the growth of a company like Sinclair, which we also expect to have possibilities with Inventor. And then also the supply chain where these products are being bought, we also now can pull a leverage and potentially double the purchasing, which also gives you synergy. So we would say it's early days, but the ambition is to leverage both synergies on the sales and cost side, even if they already have a good margin. So I would say that's a positive possibility with a higher base than maybe the historical ones.

[Karl Bokvist, Analyst]

All right. And my final one is just the longer positive trends that you commented on where you say that it's estimated that roughly 30% of shops in the food sector in Europe have converted. Just curious on when that data point was updated? Is it quite a recent one? Or was it for full year 2020?

[Christopher Norbye, CEO & President]

It was full year 2020?

[Karl Bokvist, Analyst]

All right. And that's in a number of shops, just to understand?

[Christopher Norbye, CEO & President]

Yes.

[Maria Ryden-Persson]

Yes.

[Operator]

[Operator Instructions] There are no further questions at this time. So I'll hand back over to our speakers.

[Christopher Norbye, CEO & President]

Thank you very much for calling in. Of course, if you have any follow-up questions, comments, or other things, we are available also to help you and support you in those questions. But thank you very much for your time.

[Maria Ryden-Persson]

Thank you.