Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Inwido Q1 report 2019. Today I am pleased to present CEO, Henrik Hjalmarsson; and CFO, Peter Welin. [Operator Instructions] Speaker, please begin.

[Henrik Hjalmarsson, President & CEO]

Good morning, everybody. Welcome to this presentation of Inwido's quarter 1 results 2019. I am Henrik Hjalmarsson, President and CEO of Inwido, and with me I have Peter Welin, CFO and Deputy CEO. We will spend roughly 30 minutes presenting some of the highlights for the Q1 performance for the Inwido group and there will be time for questions after our presentation. Before we start with the actual Q1 presentation, I just thought I'd share a short update on our vision and overall strategy following the new Simplify structure that we went fully live with on January 1 and which we've talked about in the recent reports. As you can see from the vision, we clarified even further that Inwido, we're all about generating increasing shareholder value by leading and developing the strongest companies in comfort climate and safety that creates better indoor life. In our minds, the most critical component of this is making sure we have talented and inspired employees throughout the entire group and we see this as a key element of our proposition.Next page, please, Page 2. Also just very shortly before we go into the Q1 performance, as most of you know, we are the leading window manufacturer in Europe and one of the leading door suppliers. We see ourselves as a natural home to the strongest players in our broader industry to allow both further development and profitable growth for those businesses. With Simplify, we have clarified that we work in a decentralized structure that allows entrepreneurial spirit and local decision making with clear customer focus. We believe that strong local accountability and authority will let us attract the right leaders with the right ownership of the business and the results and therefore achieve better results over time. With that said, I'm going to walk you through some of the market highlights for our past quarter, our quarterly performance for the business as a whole and for the different business areas, a little bit about the market outlook and some of the key priorities for the eminent future. And after that, Peter will shed some more light on the details of the numbers for the quarter. So next page, please, Page 3. As most of you are aware, the first quarter is the seasonally smallest quarter for Inwido with less consumer activity in the winter months. If you look at the overall market development, in both quarter 1 but also I'd say in the recent quarters, the development is quite fragmented across our different geographies and segments. Looking at the industry market, in particular Sweden and Finland where we actually have some industry exposure of scale, that development is challenging. New build activity is going down across those geographies. Home building starts are down and we can also clearly see this if we look for example at the market data for quarter 4 in the Swedish market, where total window sales in units was down 8% year-over-year. As the industrial market softens a bit, we also naturally see some tougher competition in the remaining market, which is also impacting to some extent the larger units in those geographies. On the other hand, and very positively, the overall consumer demand across basically all our geographies is at healthy levels and we can see that clearly in all the units with stronger and more prominent consumer market exposure, which obviously over time with our consumer focused strategy is positive. From a structural perspective, we've also seen some more tendencies of continued consolidation in the builders merchant markets with a couple of large acquisitions announced so far in the year and particularly so in the Swedish market. Next page please, Page 4. So what about the results in the quarter? Well, I'd say all in all, sales in the quarter held up pretty well in line with our expectations despite a softer order backlog at the start of the year, which was 7% below last year. Sales in the quarter increased by 4%, minus 2% organically. We are obviously particularly happy with the developments in e-Commerce which had a very strong quarter with organic growth of 33%. And we were also pleased to note that our long-term investment in the e-Commerce segment is paying off nicely. Operating EBITA at SEK 45 million or SEK 42 million before IFRS 16 impact is also in line with what we expected. The units in South, in the southern business area all performed better than last year and the Danish units as well as e-Commerce contributed positively, but particularly a positive profit development in our U.K. business unit, since it's supporting a nice margin growth in the geographies. Lagging adjustments of our cost base in geographies in the North where we've lost some sales as well as some IT investments to strengthen our long-term competitiveness has impacted the profitability negatively and I'll come back to that when we look at the northern geographies. Order intake was at plus 8% in the quarter and we closed the quarter with an order backlog at the same level as last year, but we see a better mix in terms of higher order intake from the consumer or higher order backlog from the consumer segment. Operating cash flow, our operating cash flow is normally negative in the first quarter. But that amounted to SEK 51 million positive in the quarter and we can also see that we're starting to see some emerging positive signs from our work with strengthening cash flow. And I'll come back to that a bit more later in the presentation. Next page please, Page 5. So looking at Inwido South, overall performance in Inwido South was very satisfactory in the quarter and actually all business units, the business area improved their results year-over-year. As I mentioned before, e-Commerce had a very positive development with strong organic growth at plus 33% and together with the positive performance in the Danish units and in effect a profit turnaround in the U.K. units, contributed nicely to substantial strengthening of the margins in the units.As you can see from the charts on the right-hand side, long-term sales and margin development continues to be positive in South, and sales in the quarter grew 19% year-over-year and amounted for SEK 552 million. The operating EBITA margin strengthened, as I said, considerably at 10.9% versus 5.8%. If we look at the right-hand side in the charts, you see a dip in the EBITA margin. That's completely normal in quarter 1 due to seasonality. As you can see from the ring chart, we have a very strong consumer share in the southern geographies, which is obviously highly supportive of the margin development and we have clear strategies to continue to grow and support that. Order backlog at the end of the quarter was 31% up versus last year, partly impacted positively by more beneficial weather in these geographies that built that, in particularly March versus what we saw last year. Next page please, Page 6. Looking at the performance in Inwido North, I think we'd have to say all in all that performance was more challenged in the quarter. We see decreasing volumes in the industry segments and partly then also an increase in the overall competitive pressure in particularly the Swedish and Finnish geographies. As you can see in the ring graph on the right-hand side, we have a substantially bigger exposure to the industrial markets, driven by the Swedish and Finnish geographies and that's obviously challenging us with the current market development. And the increased competition has obviously impacted us as a result of that. Profitability was impacted by the lower volumes in the quarter, where the measures to compensate our total cost base didn't fully cover the volume shortfall in the quarter, but also with some planned IT investments to strengthen our long-term competitiveness in these key geographies. It's really positive to see that the Norwegian business unit continues its good development in terms of positive sales and margin development. Total sales in the quarter was minus 4% at SEK 848 million and the order backlog at the end of the quarter was 13% down year-over-year, but with a better mix in terms of higher exposure to the consumer segment. Next page please, Page 7. So how about the outlook on the market then? Well, overall we see a continued mixed outlook for the markets. Consumer demand remains at a decent level. Consumer confidence is slightly down over the past period, but still at healthy levels. And we also note that household economies across all of our key geographies is strong at the moment. At the same time, the industry market outlook continues to be weak, particularly in the northern business area where we do have some industrial exposure of scale and that development in Sweden and Finland would obviously continue to impact us. We see that the underlying e-Commerce trend continues to be strong and we predict e-Commerce growth across all our key geographies, actually. And as a result, we obviously intend to continue our investments in the e-Commerce segments. And actually irrespective of all of this, with our new Simplify structure, we feel that we are better equipped to respond to and also adapt activities and plans to a more mixed, or if you will fragmented, market development. And that positions us better for meeting a more fragmented market development going forward.Next page please, Page 8. If you look at the short-term focus, that remains largely the same, as when we spoke a quarter ago, we will continue to fully implement the decentralized and more customer-focused Simplify structure across the entire group and to make sure that we reap all the benefits of this new way of working. Our long-term acquisition strategy still stands and our work to strengthen the balance sheet to allow for further pursuit of that is ongoing, as I mentioned before. We continue our initiatives to strengthen our consumer proposition and really strengthen our consumer share of sales totally and also strengthen our overall offer to the consumer and renovation market segments through digital channels as well as traditional channels. We will continue to work with cost and efficiency improvements, obviously particularly the units where we have more challenging market development, but in general also our cost to group and we will continue to make investment in both IT and digitalization to strengthen our long-term competitiveness. With that said, I will hand over to Peter who will shed a bit more light on Inwido financial performance for the quarter.

[Peter Welin, Deputy CEO & CFO]

Okay. Thank you so much, Henrik. We turned the page and we go directly to Page #10, please. On this page, Page number 10, you will see the income statement for Q1 in 2019 as well as 2018. And you will also see the rolling 12-month now in Q1 2019. For 2019, you can see 2 columns. One column is excluding IFRS 16, the second column from the left is excluding IFRS 16. And I will come back on the next page, how the impact has been for Inwido when it comes to IFRS 16.The gross margin was just above last year. However, last year we had some restructuring costs in Q1 and that affected the gross margin. So adjusted for restructuring cost last year, the gross margin this year is slightly below last year. Operating EBITA SEK 45 million and excluding IFRS 16, the operating EBITA was SEK 42 million, compared to SEK 56 million last year, a margin of 3.1% in total compared to 4%. The deviation, as Henrik told you before, is related to North. Lower volume in Sweden and Finland due to lower level of new builds and we have not been able to fully adjust the costs for the lower volume in Sweden and Finland.We have also in the quarter a negative mix impact in North and increased to [indiscernible] IT investments and we have not been able to fully push forward material price increases on the sales prices. EBITA is for SEK 42 million excluding IFRS 16 compared to SEK 37 million last year, so some improvement due to restructuring costs last year. Last year we closed down the factory in Varobacka in Sweden. We took that cost in Q1 2018. Profit after tax, it's at the same level as last year and earnings per share is somewhat higher than last year due to minority interest. We have less minority interest this year, due to the fact that we acquired the remaining share of Lampolux in Finland in the beginning of this year. Today we have only a small minority interest in Poland. We turn the page and we go to Page #11. This page is showing the IFRS 16 impact for Inwido. IFRS 16, it means that all operational leases shall be booked and treated as financial lease and that mainly impacts net debt and assets and the EBITDA. The net debt has been increased due to IFRS 16 by SEK 383 million and the EBITDA has been increased by SEK 22 million in the quarter and full year it has been increased by SEK 87 million. So this means that net debt versus EBITDA has been increased from 2.8 excluding IFRS 16 to 2.9 including IFRS 16. And then we have calculated full year impact of that EBITDA. So this is a rather minor impact for Inwido compared to some other companies. EBITDA has been improved by SEK 3 million due to IFRS 16. The increase of the net debt of SEK 383 million is mainly related to leasing contracts of buildings and offices. We turn the page and we go to Page #12. This page is showing sales and the order intakes for Q1 in '17, '18 and '19. To the left, you can see the sales development. And to the right, you can see the order intake development. Sales ended at SEK 1.443 billion, plus 4% compared to last year. And the organic growth, when we adjust for acquisitions as well as the currency, it was minus 2%. The order intake was plus 8% in total and adjusted for acquisitions the order intake has been plus 3% compared to last year. The order intake has been positive when it comes to consumer. It's a little bit better mix, whereas the industry sales or industry segment has declined in the quarter due to the market situation in Sweden and Finland with lower new build markets. We turn the page and we go to Page #13, and this page is showing the order backlog for the end of each quarter from 2014 until 2019. And you can see that the order backlog for March this year is on the same level as March last year and this of course an improvement, because in December we reported an order backlog 7% behind last year. So the higher order intake in Q1 has improved the order backlog and the backlog is now plus-minus 0 compared to last year. And that's all as Henrik mentioned, the backlog had a better mix with a higher degree of consumer sales compared to last year. We turn the page and we go to Page #14, and this page is showing the operating EBITA and the operating EBITDA margin for Q1 for '17, '18 and '19. And also as Henrik said, Inwido has a higher degree of seasonality in our business, driven by lower consumer sales in the winter in Q1 and thereby the margin is always lower in Q1 compared to the rest of the quarters. Industry has a lower degree of seasonality, however this year the sales within the industry segment have been impacted negatively by the market situation and also by the lower backlog that we had at the beginning of the quarter. Except for 2017, the margin has been between 0 and 4% in the latest 5 years. And if we go back even further in history and we go prior to IPO into 2014, Inwido normally made a [indiscernible] in Q1 or a better breakeven in Q1. The result of 2017 with a margin of 6.1% was a historical high result for Q1. So the result this year was SEK 45 million compared to SEK 56 million last year. We're up SEK 3 million from IFRS 16 impact, a margin of 3.1% compared to 4%. As presented earlier in this presentation, the deviation compared to last year is related to North, where South has improved compared to last year. And North, as said before, lower volume, and we are not enabled to fully adjust the cost level for the lower volume and we also have a negative mix in North as well as a higher degree of IT investments. If we now turn the page and we go to Page #15, this page is showing net debt and the net debt versus EBITDA for Q4 2016 until Q1 2019. And please notice that this graph is showing the net debt excluding IFRS 16. If you're going to include IFRS 16, the impact, you have to increase the net debt by SEK 383 million and the EBITDA should be increased by SEK 87 million. The net debt is always higher in Q1 compared to Q4. It's always increased due to our seasonality. However, this year the increase is lower in Q1 2019 compared to Q1 '18 or Q1 2017, due to improved working capital in Q1 2019. So the net debt versus EBITDA ended at 2.8 and if you're then now going to include IFRS 16, it was 2.9 compared to a target of 2.5. Last year we had 2.5 in Q1 2018 and then the net debt versus EBITDA was increased in Q2 and was up to 3.2, driven by the acquisition of Bedst & Billigst and also the dividend payment in May 2018. We then turn the page and we go to Page #16, and this is the final page before we open up for questions. This page is the same page we presented in the Q4 presentation, so this is a reminder. We're here showing that the lower margin we have seen in the last 2 years is not in relation or not affected -- it's not due to the acquisitions. This page is showing that the acquisitions that we have made from 2014 until 2017 has had a positive development for Inwido. In 2017, the margin of these acquisitions was 9.4% and the operating EBITDA was improved by 38% in 2018 and the acquisition had a margin in terms of '18 of 11.3%; this once again, same picture as presented in the Q4 presentation. We now open up for questions.

[Operator]

[Operator Instructions] We have a question from Carl Ragnerstam of Nordea.

[Carl Ragnerstam, Analyst]

It's Carl Ragnerstam from Nordea. So I have a couple of questions. We have earlier discussed the pricing situation in Finland and Sweden. So could you please comment on the current situation and also if you have seen any changes yet?

[Henrik Hjalmarsson, President & CEO]

Sorry, Carl, you said the pricing situation?

[Carl Ragnerstam, Analyst]

Pricing situation, exactly.

[Henrik Hjalmarsson, President & CEO]

Yes, that remains roughly the same as we've seen over the past couple of quarters, so no major change there, compared to what we've seen earlier.

[Carl Ragnerstam, Analyst]

Also in Finland with [indiscernible].

[Henrik Hjalmarsson, President & CEO]

Also in that market, yes.

[Carl Ragnerstam, Analyst]

Okay great, and also the margin development year-over-year in the South looks very strong. Can you comment more specifically about what was the main margin driver behind that between Denmark, U.K. and e-Commerce?

[Henrik Hjalmarsson, President & CEO]

I mean in general, a big contribution is actually the proper turnaround in the U.K. geography for the units in the U.K. That is then helping or substantially contributing to the overall margin development. But we also have obviously a healthy development in the e-Commerce business, both growth-wise and profit-wise. And the Danish units continued to contribute in a stable way. But the biggest single contributor is arguably the profit turnaround in the U.K. units, which has been propping up the overall number.

[Carl Ragnerstam, Analyst]

Okay, perfect, and you mentioned that the result was driven by raw material headwinds and IT investment. What can we expect in terms of raw material impact in 2019 full year and what type of IT investment was it related to?

[Henrik Hjalmarsson, President & CEO]

So with the first point, we don't expect to see any substantial -- I mean the raw material situation is relatively -- it will probably remain at roughly the same level, unless anything unexpected comes up. But that's our current perspective, anyway. If you look at the IT investment, it's mainly investments in -- I guess 2 categories. It's continuing to develop the overall landscape to increase efficiency and competitiveness. But it's also specific and it's related to further digitalization -- digitalizing the channel landscape, so effectively improving the digital tools in the go-to-market aspects of the different businesses.

[Carl Ragnerstam, Analyst]

Okay, perfect, and the last one from me, you commented on acquisitions and so on. I mean looking at your balance sheet, it's pretty stretched and I just have the ratio [indiscernible] I know that. But can we expect acquisitions in 2019 or should we rather expect a deleveraging phase?

[Henrik Hjalmarsson, President & CEO]

Well, we should expect us to continue to strengthen the balance sheet before we do anything more. The exact timing obviously depends on one, how much progress we make on continuing to strengthen the balance sheet and how quickly that goes; and secondly obviously depending on what type of target comes up. But we will continue to work with strengthening the balance sheet before we do anything more.

[Operator]

The next question is from Johan Dahl of Danske Bank.

[Johan Dahl]

It's Johan, Danske. Just a couple of questions, I mean hats off for the development in South. But focusing a bit on the North, could you help us just bridge results in Q versus last year? I mean I think you referred to an improving mix, i.e. higher share of sales in North being consumer. So there must be a fairly substantial headwind from pricing, also cost. Is that correct really?

[Peter Welin, Deputy CEO & CFO]

Johan, in total you can see that we are higher consumer sales in North compared to last year, or a better mix, as I said. However, then we have a mix within the consumer as well. The most profitable consumer sales have higher decline this year compared to last year. So we also have the mix within the consumer that has a negative impact compared to last year. Then we have some IT investments and we also had lower volume compared to last year, affecting then the utilization in the factories and thereby the results. And also we have not fully been able to increase the prices for compensating material price increases.

[Johan Dahl]

Okay got you, but still then it seems -- I mean it's very interesting to know from my perspective as least, what's your strategy sort of to meet this intensified competition and price pressure? And also what sort of tangible productivity initiatives are you deploying to cope with this?

[Henrik Hjalmarsson, President & CEO]

So Henrik here. I mean overall the strategy effectively remains the same. So the key driver to address this is continuing the work we're doing to strengthen the consumer proposition and enhance the consumer share. And we've talked historically about, for example, the initiative we're taking in Sweden with Elitfonster [ plot ]. There's a new type of consumer targeted initiative. But there are obviously a number of other initiatives behind that. And that will continue to drive that long-term strengthening of that part of the business. Secondly, I think the key short-term issue is as Peter said, the ability to compensate for our cost structure for volume shortfalls is going to be critical if indeed that were to be the case going forward. And that's where we didn't fully compensate in the quarter and that's obviously the highest possible attention from our perspective. And then obviously we believe that long term the investments that we're making in IT will continue to strengthen our competitiveness and hence both increase efficiency, but also increase our ability to strengthen the offering to particularly the consumer market, which is then positive for our margin development going forward.

[Johan Dahl]

Okay, I mean just in the past you've talked about Inwido's being the responsible sort of market leader. Have we reached a stage where you're no longer willing sort of to compromise volume to then profitability? Is the correct reading?

[Henrik Hjalmarsson, President & CEO]

I wouldn't quite dare to say that in general. Because that might slightly depend on the different -- I mean in the North we have 15 different business units with all sorts of different positionings and that might be a slightly different reading. But overall, the long-term objective is to increase our margins in the North. With the current softening of the industrial markets, exactly the form and shape that will take and exactly when we will which margin level and the exact action we take depends obviously a little bit on that market development and how the industrial side develops. But overall the objective is to continue strengthening the margin and using our consumer proposition as a key way to do that.

[Johan Dahl]

Okay, just finally, you mentioned in the report some results from the Simplify project. Can you just talk about the result more in detail? And secondly, I'm also wondering how you're sort of planning your staffing ahead of the high season, if you could provide any details there?

[Henrik Hjalmarsson, President & CEO]

I mean we haven't historically gone into any specific details on the exact contributions from the Simplify strategy and structure. What we see from sort of a qualitative perspective is emerging positive signs in terms of a high level of accountability, more agile and swifter decision making, responding to market demands and market changes and overall a higher customer focus, enabling us to better adapt our proposition to the local market and the customers that we're focusing on. And sorry, your second question?

[Johan Dahl]

I was wondering how you're planning for the higher season. Are you staffing up compared to last year or are you staffing down? Just some anecdotal comments will be good.

[Henrik Hjalmarsson, President & CEO]

Yes, thank you. Sorry for that. In general, it's hard to answer. If you say across the geographies in the North where have seen a softer industrial market, staffing levels are generally at a slightly lower level than they were last year. And that's mainly to respond to that change in the -- effectively reflecting the state of the order backlog and also responding to the changes in the industrial market. In the geographies and particularly across most actually of Inwido South, where the order backlog is stronger and the consumer share is higher, we have, as I said before, overall healthy consumer demand; staffing has been at slightly higher levels than we saw at this time last year.

[Operator]

The next question is from Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

So just a question on the last slide, you say that the profitability for the acquisitions have moved up nicely between 2017 and '18. But the overall margins were down. So that indicates that the old business, so to say, had deteriorating margins. And then we come back to Johan's question a little bit. What are you doing in the short term to improve margins? Do you need to do something more, call it dramatic, in the short term rather than the longer term, sort of a product development, IT investments and so on?

[Henrik Hjalmarsson, President & CEO]

I mean I can start this and Peter can complement it. But I think looking at the -- so fundamentally, I mean the underlying fact is as you describe it. And the key driver obviously of that is a combination of the deteriorating consumer market that we saw particularly in Sweden from 2016 to 2018, which impacted obviously our overall consumer share negatively and hence also the profitability slightly. As we know, there stands a correlation between consumer sales and profitability. And secondly, obviously more pronounced on the industrial market development. I think in terms of the -- so hence there were sort of strategies and 2 dimensions to that. But the key strategies to effect the first part of that, which is strengthening the overall consumer proposition and harvesting more than our fair share of the consumer market, as that comes back is still sort of the #1 priority and the key driver for us going forward. Those activities are in progress and taking steps forward. With relation to the changes in the industrial market and depending on how severe that is, that might have more dramatic impacts in terms of cost efficiency going forward. But given that we're now only in the past, let's say 4 to 5 weeks really in terms of high-season order intake, you know obviously we want to make sure that we can reap every single benefit we can from higher consumer sales that comes through, depending on the strength of the consumer market. But again, depending on how that develops and if the industrial market continues to soften, we will have to be very active in terms of managing our cost to protect margins as that industrial market develops. And if you define that as drastic if you wish to. On the other hand, you can say that that's sort of part of the business we're in with make-to-order products and quite high volatility in demand over a longer period of time.

[Peter Welin, Deputy CEO & CFO]

Okay, do we have any further questions? We have received some questions through email. Operator?

[Operator]

The next question is from Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

A couple of follow-up questions on the consumer demand from me. You mentioned that your mix in the order backlog, is it only due to the industry orders falling and consumer demand stable, or have you actually seen consumer demand growing in March and also now the weeks of April that you have in your books?

[Henrik Hjalmarsson, President & CEO]

So total consumer demand for the group is up year-over-year, and the total consumer order backlog is also up year-over-year. That's predominantly driven by South and if you look at the North, consumer demand is relatively stable and consumer order situation is relatively stable year-over-year.

[Marcela Klang, Analyst]

And when it comes to the second quarter, do you think there is any chance that you will be able to better compensate the falling industrial demand by consumer demand compared to the first quarter? Have you seen any signals that this stable consumer demand in the first quarter could improve later on?

[Henrik Hjalmarsson, President & CEO]

So I think we have to recognize the fact that for us quarter 1 is from a consumer activity point of view, is a very small quarter. So what we're trying not to do is to draw any too big conclusions from the overall consumer demand in the first quarter. What we can focus on at the moment and what we're working with obviously largely is the backlog at the start of the quarter, where we see that the consumer demand in the North, as I said, is stable and South it's up. And we will obviously continue with all the activities that we have to continue to drive our overall consumer sales and consumer share. And I'd just say it's a bit too early to say to what extent that can compensate for any volume shortfalls in industrial sales.

[Marcela Klang, Analyst]

And then you mentioned the industry sales falling some 8% in the fourth quarter. What was the decrease in the first quarter and do you expect this to be even more in the second quarter?

[Henrik Hjalmarsson, President & CEO]

What I referred to with minus 8% was actually a total market volume in units in the Swedish geography. And that's collected by the industry association in Sweden, which collects that data. So minus 8% was total window sales in units. And that data is not yet available for quarter 1 and I really don't want to speculate on what that development will be. So I guess we'll see when we have that data where that takes us.

[Marcela Klang, Analyst]

And this industry figure for the whole market compared to how it affects your sales, is it in a similar range?

[Henrik Hjalmarsson, President & CEO]

On a total level, we have roughly a market exposure that I think is equal to the total. We are probably relative to the total market a bit stronger on the consumer side and a bit weaker on the industrials maybe, but roughly we have the same proportion in the Swedish market.

[Operator]

We have a follow-up question from Johan Dahl with Danske Bank.

[Johan Dahl]

Can you just talk about what opportunities and risks you're seeing with the channel changes in Sweden and finally also any sort of cash flow guidance on CapEx and possibly working capital for the full year would be appreciated.

[Henrik Hjalmarsson, President & CEO]

So it's Henrik. I'll start with the first part then I'll let Peter respond to the second one. If you look at the -- I think it's too early to say any specific details in terms of what the channel landscape development will mean. From our perspective, we have a very conscious strategy in that sense to be -- with being the market leader to be very active in effectively most of the segments and having very clear strategies for those. And particularly pronounced with Simplify and a more decentralized local responsibility for the development in those different segments, we feel that we're well-equipped to effectively handle the effect that we'll see from that. Long term obviously we do see a strengthening, a macro trend of strengthening and increased e-Commerce sales, which we think are really well-equipped to do both directly and indirectly and obviously with a broad assortment we have to meet any demands that would come up in those different channels. And the second part, I'll let Peter respond to.

[Peter Welin, Deputy CEO & CFO]

When it comes CapEx, we say the same as we have said before, talking about 3% of sales. That is quite a normal and right level for us right now. When it comes to working capital, working capital has been increased in the second half of 2017 and also in 2018. And we have taken actions and we foresee that this can be somewhat improved in 2019. We see a rather large improvement now in Q1, but that for different reasons. And there will be some coming back now in Q2 [indiscernible]. However, for the full year, we see an improvement in 2019 compared to 2018.

[Operator]

We have another follow-up question of Kenneth Toll, Carnegie

[Kenneth Toll Johansson, Financial Analyst]

Yes. My questions have been answered.

[Operator]

We have no further questions, so I'll hand back to the speakers.

[Peter Welin, Deputy CEO & CFO]

Okay, then we have received 2 questions over the email. And the first question is if the leverage target is still 2.5 after the effect of IFRS 16? And the answer is that the target of 2.5 is excluding IFRS 16. And once again, the IFRS 16 impact is about 10 to 15 basis points when it comes to net debt versus EBITDA.The second question we have received is also related to our IFRS 16. And that is, how is the IFRS 16 effect handled in the covenant terms with the banks? And the answer is that there's no immediate impact for us when it comes to IFRS 16 in the bank covenants.

[Henrik Hjalmarsson, President & CEO]

Yes, any further questions?

[Operator]

We have no further questions via the telephone lines.

[Henrik Hjalmarsson, President & CEO]

Okay, then thank you very much for your time. And we thereby close this presentation, and talk to you soon. Bye-bye.

[Peter Welin, Deputy CEO & CFO]

Thank you. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.