Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Inwido Q1 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Henrik Hjalmarsson; and CFO, Peter Welin. Please go ahead.

[Henrik Hjalmarsson, executive]

Good morning, everybody, and welcome to this presentation of Inwido's first quarter 2023 Results. My name is Henrik Hjalmarsson. I am the President and CEO. And with me, I have Peter Welin, CFO and Deputy CEO. We will spend the coming 20 minutes or so going through a few highlights of the results, a short glance into the different business areas as well as a deep dive into the financials, after which there will be plenty of time for questions.But first, for those of you who are new to Inwido, we are a leading window group in Europe and a clear market leader in the Nordics with a strong and growing position in the U.K. and Ireland. Net sales of SEK 9.6 billion rolling 12 months with a return on operating capital of 17.6%. And we have roughly 4,400 employees at the end of the quarter.In the geographies marked in dark blue on the map on the right-hand side, and more specifically in the white dots on the map, which are production locations across Northern Europe. And we market and sell all the fantastic brands that you can see on the bottom part of this slide.We offer 5 clear shareholder value proposition as a group, the first one being a strong position on an attractive market, driven by the clear ambitions to reduce the high share of total greenhouse gas emissions that the building stand for in Europe, hence then driving stronger energy efficiency around the buildings in Europe, of which windows and doors is an important part.We have a strong position in our core geographies, which we leverage through setting price points, driving offerings, but also capitalizing on the resources and competencies we have. A healthy and strong proven track record through economic cycles, tackling tougher times with a good cost efficiency as well as capitalizing on stronger markets with leveraging growth for better margins.We run a scalable e-commerce platform in a clear leading position in the Nordics, but with some strong opportunities to roll out further across Europe, most notably ongoing in our case in Germany, but with further potential going forward, and very importantly, from a strategic perspective with a clear potential to drive a European consolidation, consolidating a pan-European fragmented window landscape.Looking then briefly at the highlights of the first quarter. First of all, it's pleasing to note a strong result in a tougher market with SEK 168 million EBITA, which is the second best Q1 to date, just shy of the result last year. We've seen the 12th consecutive quarter with sales growth, higher margins in 3 out of the 4 business areas.A positive trend, very pleasingly in business area e-commerce, after a more challenging year in 2022 with some challenges following the investments in the supply chain for future growth, where we've seen growth in both sales, in profit and in order intake in the quarter. We're looking at the markets where the new build side is weaker and the industrial side is weaker and also with slightly more hesitant consumers, albeit as I'll come back to, still a healthy focus on energy conservation and energy efficiency.Looking more specifically then at the numbers. Sales grew by 1% in the quarter to SEK 2.95 billion. Organically, that was a 7% decline. Operating EBITA, as I said, in a multiyear comparison a healthy number of SEK 168 million, slightly down from last year's SEK 180 million, and operating EBITA margin down by 0.7 percentage points to 8% flat, mainly driven by sales mix, but also some clearly chosen investments to drive future growth.Order intake, 17% down with an order backlog, that's 32% down year-over-year at just shy of SEK 1.6 billion, and Peter will, in a while, come back to some more details around the order backlog. And still a strong balance sheet, creating room for investments as well as M&A with the net debt versus operating EBITA of 0.7, including IFRS 16, or 0.4 excluding IFRS 16.If we look then briefly into the different business areas, starting with business area Scandinavia. As you can see in the ring chart here on the right-hand side, we do have some considerable industry exposure in -- most notably in Sweden than in business area Scandinavia. And with an industrial market that has remained weak throughout the quarter, we have seen an impact on the performance in the quarter. We see consumers across Scandinavia that are more cautious, but as I said, still focused on energy renovation and the energy conservation opportunity.In the quarter, we saw weaker sales and margins, margins then being driven mainly by lower volumes to the factory, which is then holding back fixed cost absorption side. Sales, 9% down to SEK 1,073 million with an operating EBITA margin slightly down to 10.8%. The order backlog in the end of the quarter is 37% down year-over-year.If we look at business area Eastern Europe, we saw a quarter of good growth and improved margins with a clear -- after a second half of 2022 with a slight continued lag in getting through price increases to fully compensate for the inflation during last year. We clearly saw the full effect on this in the first quarter with higher margins mainly in our largest Finnish business unit, but also in our Polish operation.Sales grew 11% to SEK 565 million, with an operating EBITA margin up 1.4 percentage points year-over-year to 6.8%. Order intake down 25%, mainly driven then by the weaker industry market, which means that the order backlog at the end of the quarter is down 31% year-over-year.Looking at the business area e-commerce. Very pleasingly, as I mentioned, continued progress after a challenge in 2022, with both sales, profit and order intake going. We've continued to make significant marketing investments to drive future growth and strengthen our position in the core markets as well as in our emerging markets, which has then held back the margin development in the quarter.Sales grew 29% to SEK 236 million with an operating EBITA of SEK 4 million corresponding to an operating EBITA margin of 1.5%, up from last year's minus 4.2%. Order intake in the quarter, plus 12% versus last year and the order backlog at the end of the quarter, 27% down year-over-year.Lastly then, business area e-commerce -- sorry, business area Western Europe, where we saw continued good growth and stronger margins, despite being in -- what continues following Brexit inflation and interest rates, a slightly more cautious consumer market. Dekko Window Systems outside of Manchester, which we acquired in last year around this time, has contributed well both with sales and profit.All in all, that means that sales grew in the quarter by 70% to SEK 223 million. The operating EBITA margin came in 0.6 percentage points up year-over-year at 8.7%. And the order intake is slightly down, minus 8%, but that is partly impacted by the fact that Dekko was acquired in the period last year and the order backlog then taken in as order intake. Peter will come back to that later. Order backlog at the end of the quarter, minus 14% year-over-year.Looking then at one of the important value creation drivers for us being M&A. We obviously feel that we made good progress in 2022 with the 3 healthy acquisitions that have contributed well from the start, with Hyvinkaan Puuseppien in Finland; Westcoast Windows in Sweden; and, as I mentioned, Dekko Window Systems in the U.K.We are now in a situation where, as I mentioned, talking about the drivers of shareholder value, continued M&A and consolidation in the market is a clear value creation opportunity, and we sit with a very healthy balance sheet, which creates considerable room for continued M&A activity in the months and quarters to come.I also wanted to take the opportunity to say a few words about our progress in terms of sustainability. First of all, not the least for me, personally, I'm very happy about the continued progress in terms of reducing the number of accidents with absence in our factories. We have continued to drive a structured and preventative work where incidents as well as risk moments are clearly identified and systematically analyzed and taken action.As an example, our largest business unit, Elitfonster in Sweden, their lost time accidents have decreased by 85% over the past 6.5 years, so making some considerable progress in the year. I'm also happy given our ambitions in terms of decreasing our footprint on the environment, with the continued reduction in energy consumption, both measured per unit, but also in absolute terms.However, clearly, some more workflows we continue to do in terms of waste and hazardous waste generation. Particularly following some remnant effects in reality from COVID continues to be a challenge, albeit at stable levels and more efforts are going in to address that over time.And with that, I'm going to hand over to Peter, who's going to take you through the numbers.

[Peter Welin, executive]

Thank you so much, Henrik. This page show you the income statement for the first quarter. And to the right, we can see the rolling 12 months. The growth continued in the quarter. Sales grew by 1%. Organically, it was minus 7% and number of sold units declined compared to last year.Despite lower volume in the factories, the gross margin improved in the quarter due to full impact from implemented price increases in last year and also adjustments of cost in the factories. The labor cost within the factories have been reduced to meet the lower volume. However, the lower volume has a negative impact on the gross margin as well as the operating EBITA margin when fixed costs in the production and overhead costs have not been adjusted accordingly in the quarter.Gross margin was improved by 0.6% units from 22.8% to 23.4%, and all business areas improved gross margin in the quarter. The improvement was mostly within e-commerce with an improvement of 4% units. The operating EBITA margin declined in the quarter from 8.7% to 8.0% due to higher overhead costs in relation to sales. Still, the margin of 8% is an historical high margins for the first quarter.Operating EBITA declined from SEK 180 million to SEK 168 million and profit after tax declined by 8% from SEK 122 million to SEK 112 million, and earnings per share declined by 9% from SEK 2.08 million to SEK 1.90 million. For the latest 12 months, meaning from April 2022 to March 2023, sales reached SEK 9.6 billion with an operating EBITA margin of 11.3% and an earnings per share of SEK 13.56.This page shows the operating EBITA as well as operating EBITA margin for the first quarter latest 6 years. Indeed, it has some high seasonality business. The seasonality has, however, been less during the pandemic and the margin for the first quarter has improved during the pandemic due to low seasonality.Prior the pandemic, the margin of Q1 was in the low single-digits as this graph shows. And prior to 2018, the margin in the first quarter was below -- even lower than the 4%, or 3% to 4%, as shown in this graph. This year, 2023, the Q1, Inwido had a [ relatively ] strong order backlog in the beginning of the quarter, thanks to a relatively strong order intake end of last year as described in the Q4 report.A relatively strong order backlog in combination with full impact from price increases, more stable material prices and control of variable and semi-variable costs in productions, including labor costs, gave a relatively high margin in the quarter of 8%, still below last year. Scandinavia had a lower margin and the results in the quarter compared to last year, whereas the other business areas showed a positive development, both in the result as well as the margin in the quarter.This page shows our sales development. To the left, you can see the sales development for the first quarter latest 6 years, and to the right, we can see the order intake for the first quarter latest 6 years.If we start with the sales, compared to last year, sales grew by 1%. Organically, it was minus 7%. Scandinavia and Western Europe had a negative organic growth of 9% and 8% respectively, whereas e-commerce and Eastern Europe had a positive growth in the quarter. E-commerce grew by 24% and Eastern Europe had a growth of 2% in the quarter.If you look at the order intake, the order intake declined by 17% compared to last year. Adjusted for acquisitions, the order intake declined by 20%. If we look at the graph for 2022, we can see that we have a slightly yellow mark on the graph, and that indicates acquired order backlog, because when we make acquisitions, the acquired order backlog is calculated as an order intake. So adjusted for acquisitions, the order intake declined by 20%. E-commerce had a positive order intake in the quarter of 12%, whereas the other business areas had a lower order intake compared to last year. Scandinavia minus 19%, Eastern Europe minus 25% and Western Europe minus 8%.For the group, the order intake was more negative within the industry segment in the quarter compared to the consumer segment. The order intake for Q1 was below last year. But as you can see in this graph, it was higher than previous years. And even adjusted order backlog -- [ of ] order intake -- and adjustment, I mean we were adjusted for acquisitions as well as price increases, the order intake for this year, the first quarter was above the level pre-pandemic.This page shows the order backlog end of March, latest 6 years. During the pandemic, the order intake improved quite rapidly. Inwido was then, in 2020 to 2022, not able to improve the capacity and/or sourcing so quickly to meet the higher order intake. Thereby, the backlog grew and delivery times increased in more or less all markets, in all channels and all brands.This year the order intake declined in Q1, more in volumes and values, and thereby, the order backlog has decreased and delivery times of the day on a normal level. Still, the backlog end of March this year is above the level prior to the pandemic. Compared to last year, the backlog is 32% behind and adjusted for acquisitions, the backlog is 34% behind. All business areas have a lower backlog compared to last year. Compared to March 2020, prior the pandemic, the backlog is plus 53%.This page shows the return on operating capital development since Q3 2018. The targets set in 2021 is to have a return on operating capital above 15%. The return on operating capital has been improved every quarter since Q3 2019 up until Q4 2022 from 10.2% to 18.3% in December 2022. In the beginning of this year, the return on operating capital has declined from 18.3% to 17.6%. We have a lower profit. EBITA declined in the quarter by SEK 10 million, which has impacted return on operating capital by 0.2% units.At the same time, we have a higher debt and thereby higher operating capital due to IFRS 16 working capital and acquisitions. In December 2022, the IFRS 16 debt increased by about SEK 90 million due to higher interest rates and thereby higher rents and also due to prolongment of agreements. The IFRS 16 debts end of March was about -- was SEK 107 million higher compared to last year, which have a negative impact when calculating return on operating capital.At the same time, working capital has increased in the quarter due to seasonality and also to a short-term impact from the lower volumes, and acquisition have also impacted operating capital. The latest acquisitions have now fully impacted operating capital for the latest 4 quarters.This page shows the net debt as well as the net debt in relation to operating EBITA, both including as well as excluding IFRS 16. You can see on this page that the level of IFRS 16 debt has increased during the last quarters. And in Q1, it has -- is an increase from SEK 363 million last year to SEK 470 million this year due to higher rents from higher interest rates and prolonged agreements in Q4 2022.The net debt, excluding IFRS 16, has increased in the quarter from SEK 294 million in December to SEK 485 million in March, an increase of SEK 191 million. It is normal for the business to have a higher and increased net debt in Q1 due to seasonality and also due to customer bonuses. The customer bonuses from last year is paid in the beginning of this year. This year, the increase of net debt was higher compared to last year due to higher working capital in the quarter.Net debt in relation to EBITA is still far below the target of maximum 2.5. Net debt in relation to EBITA was end of March, 0.7 including IFRS 16 and 0.4 excluding IFRS 16. Still a strong balance sheet and liquidity that can be used for further expansions. The net debt versus EBITA is below the level of last year.Yes. So in summary then, we've achieved a good start to the year with a strong result in what is a more challenging market with an operating EBITA of SEK 168 million, best Q1 to date. Higher margins in 3 of 4 business areas. However, as mentioned, a lower margin overall, driven by sales mix, somewhat lower volumes, increasing energy costs, and very importantly, increasing marketing investments for future growth.We've seen a continued positive development in business area e-commerce with growth in both sales, profit and order intake. We do see an industrial and new build market that continues to be weak and consumers that are slightly more cautious and obviously not immune to the ongoing development. But at the same time, the desire to continue to invest in a good life at home, and very importantly, to continue to invest for energy conservation and efficiency is still high and has great opportunities for us.With that, we thank you very much, and we open up for questions.

[Operator]

[Operator Instructions] The next question comes from Victor Hans from Nordea.

[Victor Hansen, analyst]

First question. In the [ industry ] you highlighted seasonally normalizing margins, but they were very strong here in Q1, as you mentioned, Peter. And this is despite the low margin in e-commerce also. So I'm wondering here, what's driving this still very strong margin? Is this some mix effect or…?

[Peter Welin, executive]

I mean -- I think overall, looking at a multiyear comparison, the biggest driver of the margin is still the overall top line, which in a multiyear comparison is strong in the first quarter. Obviously, only "up 1% year-over-year". But if you look in a several year perspective, it's strong, and that is one key driver. And yes, I think that's the key driver of it. The second one is, as we mentioned also in Eastern Europe, that -- Finally, if I phrase it a bit bluntly, getting full impact from the price increases that we've done continuously during 2022 to meet the considerable input [ within ] inflation. With that coming through, that then supports margin development in Eastern Europe more specifically.

[Victor Hansen, analyst]

And then second question here. You took a hit to working capital in the quarter. Payables declined and receivables increased. So should we expect this to normalize?

[Henrik Hjalmarsson, executive]

Yes. We -- I mean, obviously -- with lower volumes coming through the system, which we also saw in the first quarter, obviously, with taking into consideration price increases, organically, volumes were down in the first quarter, with volumes then coming down slightly, so does the purchase of goods, which then impacts negatively payables. It then does take a little bit of time to fully adjust the inventories for those reducing volumes, but we do expect over the course of the coming months or no more than quarters for that to normalize again.

[Victor Hansen, analyst]

And yes, you mentioned the volume part here. But on your order backlog, it was down 42%. But if I use your sales bridge for M&A and FX and then also remove pricing, as you mentioned here, which I believe is close to 10%, then I get nearly 50% on organic volumes. Would you say that is fair?

[Henrik Hjalmarsson, executive]

It's -- I mean, without having a fully consolidated picture across the group, it's there or thereabouts, yes. And as I mentioned before, we -- I think it's important also to looking back to what Peter mentioned around historic order intake, is we come from a period 1 year ago where the delivery times were unnaturally long basically across the board, and that has normalized, which is 1 big driver of that impact. But yes, there or thereabouts.

[Victor Hansen, analyst]

And can you say anything about how orders have started in April?

[Henrik Hjalmarsson, executive]

Well, I mean, the only thing we can say about that is basically that, the industry activity remains across the core markets where we are active in the industry, remains weak. Consumers are, in general, I think fair to say more cautious, but we continue to see opportunities on energy efficiency. That's it basically.

[Victor Hansen, analyst]

And my final question here. I'm wondering if you could give some color on your M&A pipeline, perhaps wondering if sellers have adjusted their expectations due to the weaker macro or is there still some way to go?

[Henrik Hjalmarsson, executive]

I think that the picture varies a lot between geography actually. As we have made quite clear, we have ambitions in several European geographies. The outlook for the market is also very different in different geographies, not the least because the pace of energy renovation is quite different in different geographies. But in the markets where we have seen more impact, particularly on the industry side, we also see that reflection reflecting on expectations on enterprise value and in the markets where the outlook is more benign, less of that impact, obviously. But where the outlook and the activity has been impacted negatively, some of that has also come through in expectations, is our view.

[Operator]

The next question comes from Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, analyst]

Just trying to get down to sort of margins here. Obviously, you have a clearly lower order backlog going into Q2. But we had anticipated that Q1 would have a lower capacity utilization or clearly lower [ factory ] utilization that didn't really happen. Does that mean that it will happen in Q2 or have a material impact or do you think it's the thing that happens in next year's Q1 instead? Or how do you think about this development going forward?

[Henrik Hjalmarsson, executive]

I think it's probably a combination of the fact that given in the development of the order backlog during Q4, that impact was a little bit less than maybe we had anticipated in general. And then secondly, I think that the way that sort of -- the shape of the order backlog and the way -- the win to develop, maybe that impact a little bit later than usual. I would say, yes, those are probably the 2 things we see. I think the biggest driver was still the fact that the order backlog developed in a way during the fourth quarter, which we carried momentum into, particularly in the start of the first...

[Rasmus Engberg, analyst]

But do you anticipate the significant effects from underutilization of capacity in Q2 now that the backlog is lower or not?

[Henrik Hjalmarsson, executive]

Yes. Typically, I mean, looking at the shape of the order backlog and comparing to previous years, I think it's -- one thing to note very importantly is the fact that our lead times are back to more normal levels, which means also that our foresight into the full development during a quarter, whereas we came from an unnatural situation in 2022, where basically the full quarter was sold at the start of the quarter. That is not the situation anymore.We are back to more normal between 4 to 8-week lead times, which makes it a little bit hard to answer your question in any given detail. But I still think looking at the multiyear comparison, if you look at the volumes that are in the order backlog, that yes, year-over-year, there is an impact, if nothing else definitely in terms of the lead time. But too early to say in our books, whether it will have any material impact on capacity utilization yet.

[Rasmus Engberg, analyst]

And in the quality of the order backlog, I assume that is quite strongly tilted now to consumer orders or -- is that correct or…?

[Henrik Hjalmarsson, executive]

It is fairly so, yes. It's become more and more clear. So whereas we've carried a big historic momentum on the industry side, which typically also has longer lead times, now we see a stronger and stronger [ build ] towards the consumer side.

[Rasmus Engberg, analyst]

And does that impact the gross margin as well as the overall margin positively or if it's -- is it just on the EBITA side that did impact -- must be on the gross margin?

[Henrik Hjalmarsson, executive]

No. I mean in -- how should I say, in isolation, it actually probably impacts gross margin even more than EBITA margin. There is one more thing to take into consideration, obviously, which is the fact that we then have a mix between -- I mean, the different business areas have slightly different margin structure. So obviously, there is a sort of business area mix to take into consideration. But in isolation, the consumer -- the overweight of consumer will impact both gross margin and EBITA margin positively, everything else equal.

[Rasmus Engberg, analyst]

And -- sorry, I lost the question. Did written down somewhere, but I forgot all about it.

[Operator]

[Operator Instructions] The next question comes from Kenneth Toll Johansson from Carnegie.

[Kenneth Johansson, analyst]

A question on the overhead costs. You had very strong gross margins, but the EBITA margins were a bit softer than last year. You also say that you are sort of adjusting labor in production in order to adapt to the current demand levels. But are you doing anything on the overhead cost side? You talked about extra marketing costs in the first quarter. But looking forward, there might be some wage inflation and so on affecting those costs. So what are your thoughts on those costs?

[Henrik Hjalmarsson, executive]

Relevant question. There are a few things to take into consideration. There is a slight mix impact that is impacting that a little bit across the group. So that's one thing in the first quarter. Second one is acquisitions, obviously, driving that up. Third one is indeed inflation. And then the most important one is some really conscious choices in the first quarter to continue invest behind the initiatives, driving up most notably sales cost and marketing cost in the quarter.Going forward, however, I mean, we, I think, have demonstrated historically that we are quite proactive in terms of monitoring development and taking action. We will continue if we see them to leverage opportunities to invest for future growth. But should the development continue to be more negative on the industry side than driving down overall revenues and impacting that negatively, then we will take -- we have planned to take action to take down the overhead costs as well. In reality, some of those actions have already been put into place. So some of that impact will come through. And we stand prepared to do more if we need to, depending on the development.

[Operator]

The next question comes from Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, analyst]

I now find what I wanted to ask you about. I was wondering about if your backlog is down 40%, how much is it roughly down on the consumer side? I assume the industry backlog is down quite a lot. Can you give some sort of breakdown on that?

[Henrik Hjalmarsson, executive]

Off the top of the head, I think the only granularity we can give you is that it's -- that consumer is down less and industry is down more, without being able to ask -- answer that more specifically than that. But there is a lesser impact on consumer and more in industry.

[Rasmus Engberg, analyst]

The final question I wanted to ask you is that, can you talk a little bit about the prices -- the price effect year-on-year? Is that around 10% maybe in this quarter? Does that make sense to you? I don't know if it's hard to give an exact figure for this, but...?

[Henrik Hjalmarsson, executive]

No. We see it is -- because there's a lot of mix and everything. But it's -- let's say, it's some way into the double-digits, then whether it's exactly 10.5% or it's 12.5%. But it's into the double digits.

[Rasmus Engberg, analyst]

And how are prices now sequentially? Are they stable or going further up or going down or how are they developing now?

[Henrik Hjalmarsson, executive]

At this specific moment, sequentially, prices are fairly stable on -- so our sales prices are fairly stable at the moment.

[Rasmus Engberg, analyst]

But your input costs are coming off a little bit now or...?

[Henrik Hjalmarsson, executive]

Well, we started to see some impact, yes, of input costs coming up, most notably on timber and lately also some on glass and aluminum. But that's correct, yes. Which is, it should also be one of the drivers, and I think that came across one of the drivers of the margin improvement in Eastern Europe year-over-year has seen that impact -- full impact from the price increases and then easing off on input material price.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for written questions or closing comments.

[Henrik Hjalmarsson, executive]

Okay. We have received some written questions. And the first one is, if you could please elaborate on the magnitude and possibilities on demand and sales related to increased focus from consumer on energy efficiency?Yes. It's really hard to give any specific number, unfortunately. And the opportunity varies a lot by geography also across Northern Europe. So there is an increasing interest, there is a clear opportunity. We see it in 2 dimensions. So number one, driven by price spikes short-term that we saw on energy, particularly during the fall -- last fall, but also increasingly, the Green Deal ambitions and counter the activities that are taken into account of the fact that 40% of the EU carbon dioxide emissions are linked to the buildings. We are seeing that come through more and more and not the least political initiatives. But it's really hard to quantify, unfortunately.

[Peter Welin, executive]

A second question from a private investor. He had 2 questions. One was related to the order backlog, that has already been asked from Rasmus and answered. The second question is related to the weather. How did the cold and snow weather across the Nordic impact sales and orders in the first quarter?

[Henrik Hjalmarsson, executive]

Yes, also a relevant question. And as we mentioned, typically, we do see an impact from that. This year, still on a multiyear comparison coming into quarter 1, we did come in with a fairly strong order backlog, which supported sales. But in some parts, we have seen an impact on order intake in the quarter from the snowy weather, which is, however, not atypical because, as I mentioned before, we do typically see a seasonality variation. And that was all then.Okay. Then, we thank you all very much for your interest, and we hereby close the call. Thank you very much, everybody.