Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the Inwido audiocast teleconference Q2 2021. Today, I am pleased to present CEO, Henrik Hjalmarsson; and CFO, Peter Welin. [Operator Instructions] Speakers, please begin.

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Thank you very much. Good morning, everybody, and welcome to this presentation of Inwido's Second Quarter and First Half Year Results 2021. My name is Henrik Hjalmarsson, I'm the President and CEO. And with me, I have Peter Welin, CFO and Deputy CEO.Next page, please, Page 2. So we will spend the coming 25 minutes or so going through a brief introduction to Inwido for those of you who are new to us. A few words on the Q2 performance, the highlights as well as the first half year numbers. I'll go through a brief update on M&A and some words on the market outlook as well as our short-term priorities.Peter will then take over and go through the financials in a bit more detail, after which I will summarize, and then there will be plenty of time for questions at the end.Next page, page 3. So if you hope for those area are new to us, we are a leading window group in Europe, a clear market leader in the Nordic region with a strong presence in the U.K. and Ireland. Over the past 12 months, ending in quarter 2 2021, we've achieved sales of SEK 7.2 billion and an operating EBITDA margin of 12.1%. We've got roughly 4,600 employees in the locations that you see marked with white dots on the map on the right-hand side. And we market and sell all the fantastic brands that you can see on the bottom part of this slide.Next page, please, Page 4. Our value creation is based on a clear and proven model, which we refer to as our virtuous cycle to drive shareholder value. These are 5 elements that are the basis for value creation, and they ensure that we deliver long-term, cost-efficient customer value as well as employee value and, hence, drive shareholder value over time. They're based on our proven ability to improve businesses to drive profit after more than 50 acquisitions over the past 25 years, and it's built to plug in acquired businesses, obviously being sensitive to their start point to make sure that we protect the base, but also maximize the incremental value that we can derive from new acquisitions.These 5 elements, then starting from the top right-hand side, is that we drive efficiency synergies from areas such as sourcing and technology can achieve better pricing and innovation by buying together as a group, but also sharing product and production technology to improve the businesses under the Inwido umbrella.Secondly, we've got a decentralized model with strong local accountability with focus on business and focus on customers with strong leadership and drive because we believe that this drives better decision-making closer to the customer and also drives performance and results focus.Thirdly, we believe that what you measure is what you get. So a clear and strong performance management structure and KPI structure with a strong focus on the results that you achieve drives the right behaviors and drives results over time.Number 4 is a strong focus on capital efficiency and allocation, which leads then into the fifth one, which is an integral part of the long-term value creation, which is good value-accretive M&A as well as investments for growth in the different business units.Next page, please, Page 5. So in terms of Q2 then, well, overall, it was a strong quarter for Inwido. We achieved sales above SEK 2 billion for the first time in a single quarter, which means an organic sales growth of 19%. We had an all-time high operating EBITDA in the quarter as well as a strong order intake and closed the quarter with the highest ever order backlog. We saw a 15% organic growth in e-commerce despite some considerably tougher comparables from last year. And all of this means that we posted the ninth consecutive quarter with strengthened margins as well as the fifth quarter in a row with organic growth. Next page, please, Page 6. Looking then at the numbers. Sales grew to SEK 2.009 billion, up from SEK 1.719 billion last year. The operating EBITDA grew by SEK 65 million to SEK 267 million. The operating EBITA margin strengthened by 1.5 percentage points to 13.3%. Order intake, up 32% or up 27% adjusted for acquisition, which means that the order backlog at the end of the quarter increased by 61% or 55% adjusted for acquisition to just north of SEK 2 billion. and the net debt versus operating EBITDA excluding IFRS 16, closed at 0.9, which is considerably down from the 1.7x at the same time last year. Next page, please, Page 7. Looking at the development, the first 6 months of the year. Sales has grown nicely organically at 18%, up to SEK 3,653 million. The operating EBITDA margin -- sorry, the operating EBITDA strengthened considerably to SEK 388 million, with an operating EBITDA margin then strengthening 2.7 percentage points to 10.6%. We've closed the acquisition of Metallityö Välimäki in Finland being an important part of creating conditions for long-term profitable growth in Finland, not the least in metal, windows and doors as well as the [ salt ] systems. And we have achieved almost a doubling of our EPS to SEK 5 per share.Next page, please, Page 8. Looking then at the business area performances, starting with Business Area South, we saw high growth rate and further strengthened margins in the quarter. As you can see in the ring chart on the right-hand side of this chart, and as many of you will remember from before, we have a considerable exposure to the consumer market in Business Area South.E-commerce grew nicely in the quarter, 15% organically. And again, despite some tougher comparables from last year, order intake grew 7%, and the quarter closed with an order backlog up 43% versus same time last year. The larger Danish units continued to grow sales and margins in what's been a favorable consumer markets, and we've seen some quite considerable recovery in demand in the U.K. and Ireland, post some quite severe COVID-19 related shutdowns and restrictions in the past year. As you can see in the chart on the top right-hand side, sales grew nicely organically plus 26% or reported plus 20% to SEK 855 million. And as you can see in the chart on the bottom right-hand side, the operating EBITDA increase and the operating EBITDA margin increased from 19.3% last year to 20.8% this year. And the order backlog at the end of the quarter was up 58% year-over-year. Next page, please, Page 9. Looking then at Business Area North. Very pleasingly, we've seen continued margin improvement and a good sales growth in the quarter. As you can see here in the ring chart on the right-hand side, we have some more exposure to the industry market in North. But in the quarter, sales growth was largely fueled by strengthened positions on the positive consumer market. We saw a good profit development, particularly in the Swedish business units. But I also have to acknowledge that the industry markets in both Sweden and Finland has been recovering better than expected, both by ourselves, but also by industry analysts.As you can see in the chart on the top right-hand side, net sales grew. Reported sales grew 14% or organically 13% to SEK 1.102 billion. And as you can see in the chart on the bottom right-hand side, operating EBITDA improved and the operating EBITA margin strengthened by 1.2 percentage points to 8.8% in the quarter. And the order backlog at the end of the quarter were up 62% versus same time last year.Next page, please, Page 10. Look at them briefly at M&A, which is obviously a very important value driver for the group. We have seen some overall increased activity level in this area. In the COVID pandemic, it's been relatively easier to make progress in smaller transactions in existing geographies and a bit more challenging to go after larger transactions, particularly in new geographies. However, as the markets open up, travel restrictions are slowly lifted as well as meeting restrictions, we do see some increased opportunities in this area. And obviously, we are in the process of integrating Metallityö Välimäki, which, as I mentioned before, we closed in April.Looking then at our eighth criteria on the right-hand side, starting from the top. We focused on businesses within windows and doors because this is our expertise and our focus. We go primarily for profitable businesses. We prefer to take businesses from good to great rather than going after turnaround cases. We look at businesses with a strong position, either in their market and/or in their segment. We look primarily at the renovation segment because we run the consumer-focused businesses, which we know delivers better and stronger margins over time.We look at management opportunities because we know in our industry, good leadership drives value over time. As mentioned previously, we look at synergy opportunities. sharing is caring, and we know that the synergies in areas such as procurement, with better prices, but also product and production technology drives value from the group over time. We have a clear geographical focus on the Nordics, the DACH region, the U.K. and Poland, and we also look for incremental capabilities, be it in products or in technology, for example.Next page, please, Page 11. Looking briefly at the market outlook. We obviously entered the third quarter with a strong order backlog, which will support sales in the near term. We see for the near-term continued healthy activity levels in the consumer and in the industrial markets. However, we also see continued inflationary pressure on input materials continuing through quarter 2 and into quarter 3, and we are continuously taking price increases to offset this.We see some midterm uncertainty in the market as society returns to what we refer to as a new normal, but we continue to be optimistic about the long-term outlook, as the demand for energy-efficient windows and doors increases when investments into homes and buildings across Europe increases to decrease their energy intensity.Next page, please, Page 12. Looking then at our short-term priorities, which remain largely the same from before. We keep a close eye on input material inflation to make sure that we take swift and resolute price adjustments where needed. We maintain a customer focus and strong execution in what continues to be a quite dynamic environment. We continue our value-generating investments in growth initiatives, for example, in e-commerce. We obviously continue to increase our M&A efforts, as that's an important value driver for the group. And we run a proactive cost management as the COVID-19 wears off on the group.Next page, please, Page 13. And with that, I hand over to Peter, who will take you through some of the numbers. Peter, please.

[Peter Welin, Deputy CEO & CFO]

Thank you, Henrik. And then I'll ask you to go to the next page, Page #14, please. On this page, we can see the income statement to left, we can see the income statement for Q2 in the middle, January to June, further right later 12 months and then to the right 2020. If we start with the rolling 12 months or later 12 months, the operating EBITDA margin has improved now 9 quarters in a row and operating EBITDA margin latest 12 months is now on 12.1%.For this -- for the quarter, sales was plus 17% and we were for the first time ever above the SEK 2 billion mark with a sales of SEK 2.9 billion, a growth of 17%. If we adjusted for currency as well as the latest acquisition, sales is plus 19%. We have a negative impact in sales for the currency when translating external currencies to SEK due to stronger SEK in the quarter.Look at the margin. The margin was improved in the quarter from 26.9% to 27.1%. Even though we have sales -- even though we have inflation in material prices, especially later in the quarter. We have reduced that or compensated that with higher sales prices but also with higher volume. The higher volume, especially in April, May has improved the margin. We have better efficiency and better capacity utilization.Operating EBITDA, plus 32% compared to last year from SEK 202 million to SEK 267 million. EBITDA margin, 11.8% to 13.3%. EBITA was improved by 37%. The difference between operating EBITDA and the EBITA per quarter is related to the acquisition cost of Metallityö Välimäki.Further down in the income statement, we can see that profit after tax as well as the earnings per share was increased by 34% compared to last year. For the period, January to June sales is plus 15% adjusted for currency as well as acquisition, it is plus 18% compared to last year. Margin close to 1% improvement from 24.6% to 25.5%. We had a good margin development in Q1. We had a strong sales in Q1 due to the high backlog end of last year. So we opened up the year with a better sales with a higher capacity utilization and improved efficiency, which has also continued in Q2.Operating EBITDA, plus 55% compared to last year from SEK 251 million to SEK 388 million. And further on the income statement, we can see that profit after tax is plus 96% and our earnings per share is plus 95%.We have today an earnings per share of even of SEK 5 compared to SEK 2.56 last year. Rolling 12 months or later 12 months, sales of SEK 7.167 billion, an operating EBITA margin of 12.1% and earnings per share of 11.08% compared to.Next page, Page #15, please. On this page, we can see the development in sales as well as an order intake for 2019, 2020, 2021 for the quarter, the Q2. To the left, you can see the development in sales and through right, we can see the development in the order intake.Sales, as I said before, for the first time ever, we are above SEK 2 billion mark in sales of SEK 2.9 billion, growth of 17% compared to last year, organically plus 19%, high organically due to the currency impact. We have a currency impact, negative currency impact of about 3% in the quarter. North was plus 14%, organically plus 13% in sales in the quarter, and South had sales growth of 20% organically plus 26% compared to last year. And then in 2019, we had a sales of SEK 1.710 billion. Looking at the order intake, the order intake has improved even more than the sales in the quarter.The order intake is plus 32% in total, which we call report or an take. However, when we make acquisitions and the order backlog of the acquisition is booked as order intake in our reporting. So taking away the acquisition of Metallityö Välimäki the backlog and order intake, it is plus 27% compared to last year. North had an order intake growth of 39%. Adjusted for acquisition it's plus 30% and South had an order intake growth of 22% in the quarter compared to last year. If you then turn page, we go to Page #16. This page is showing the order backlog end of each quarter from Q2 2017 to Q2 2021. We have a seasonality in our order backlog. Normally, the order backlog is the highest level in Q2 or Q3 and the lowest level in Q4. And as you can see on this graph, we have quite a large improvement in order backlog end of this Q2 -- end of this quarter compared to Q2 last year. And also here, we have this SEK 2 billion mark for the first time ever, we have an order backlog above SEK 2 billion.We have an increase of 61% compared to Q2 last year. If we then adjusted for the acquisitions, we take away the backlog from the latest acquisition, it is plus 55% compared to last year. Though a higher order backlog will support sales in the second half of this year. North has a total backlog increase of 62% and South has a backlog increase of 58% compared to last year. If we then turn page, we go to Page #17, please. This page is showing operating EBITA and operating EBITA margin. To the left, you can see the development for 2019, 2020 to 2021 in the quarter. At the right, we can see the development for the same year generate in June. As said before, the margin has been improved now 9 quarters in a row, and the margins for latest quarters, Q2 was 13.3% and compared to 11.8% last year and 10.9% in 2019. Even though we have material inflation, it has been mitigated by higher sales prices, and we have also improved efficiency and the capacity utilization.We started the quarter with a high backlog. And with a high backlog, we could run the productions in the high speed or high capacity utilization in April, May, higher than normally during this month and thereby, the margin has been improved in the quarter.Looking at the end of June, we have a margin improvement of 2.7% units from 7.9% to 10.6% this year. It was 7.3% in 2019. We also had a good margin improvement in Q1. Both in Q1, we had high capacity utilization and improved efficiency, which is then continued in Q2 and the margin has been improved in further.If you then take the next page, please, Page #18. This page is showing the net debt and the net debt versus EBITDA, including as well excluding IFRS 16. The net debt has increased in the quarter compared to quarter 1 quite normal due to the dividend payment and also due to seasonality. We paid out dividend this year of SEK 261 million in May. Last year, we did a pay a dividend, and we also had a quite good cash flow improvement last year due to working capital. We have improved working capital also this year in Q2, but not as strong as Q2 last year. However, even though net debt has increased, the net debt to EBITDA is still on the same level of 0.9% because we have improved EBITDA and compensated the higher net debt.So net debt versus EBITDA, excluding IFRS 16 is 0.9% compared to 1.7% one year ago. If we include IFRS 16, we add on net debt of SEK 354 million, and the net EBITDA is 1.2% compared to 1.9% one year ago.Next page, please. We go to Page #19. This page is showing our development since 2014 until today, rolling 12 months. We made an IPO in September 2014. In 2014, we had a sales of SEK 4,916 billion and an operating EBITDA margin of 10.2%. Sales have been improved by 46% since 2014, equal to a CAGR of 6%, and we are now on SEK 7,137 billion. Operating EBITDA has in the same time improved by 73%, equal to 9% in CAGR, and we are today on a margin level of 12.1%.We had a [ margin ] good development in '14, '15 and '16 as well. We were close end of 2016. Then in 2017, at the beginning of the year, we had sourcing challenges, which cost us and -- cost of our margin. And of '17 and '18 and '19 had also a high degree of industry sales or lower degree of consumer sales. Those of you who know about us, we -- know that we divide our sales between consumer and industry, and we have higher margins in consumer sales compared to industry sales.So in 2018, '19, when the consumer sales, the share was reduced, the margin was also been reduced. Now we have improved the margin 9 quarters in a row. We have improved consumer share. We are today closer to 75%. It has been improved during 2020 as well as beginning of this year. We have a higher volume in our factories. We have improved efficiency, and we have better capacity utilization, and thereby, the margin has been improved, and we are today on 12.1% rolling 12 months.I'll now hand over back to Henrik. Henrik will make a short summary, and then we will open up for questions.

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Next page, please, Page 20. So to summarize the second quarter and the first 6 months, obviously, we've seen a strong start to the year in what's been an overall good consumer market. We've seen healthy sales and order intake growth as well as strengthen margins in both our business areas, made some progress, although potentially modest so far, but in terms of the acquisition of Metallityö Välimäki, but we are also increasing the M&A activities going forward. And we entered the third quarter with a strong order backlog as well as a short-term favorable outlook for both the Consumer segment and the industrial segment.Next page, please, Page 21. So with that, thank you very much, and we open up for questions. Operator, please.

[Operator]

[Operator Instructions] Our first question comes from Adela Dashian from Handelsbanken.

[Adela Dashian, Analyst]

This is Adela Dashian with Handelsbanken. I have 2 questions actually. The first 1 is related to the inflationary pressures. It seems like you've been able to pass those costs over to the end customer already. Is that correct? Or should we expect some additional margin pressure in the quarters to come?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

I think , I think what we've seen is we've seen more inflation coming through in the back end of the quarter than early on. We have taken both swift and, I would say, quite considerable price increases, but we will see more inflation coming through in quarter 3, which will -- might put some pressure on the gross margin. On the other hand, we have an opportunity to -- with better production utilization and efficiencies to compensate some of that as well. But as I said, we have also taken a considerable price in the marketplace.

[Adela Dashian, Analyst]

And when we're talking about those price increases, could you just give us some context about what exactly you mean by that? Are we looking at 3%, 5%, 10%? What exactly does the price increases mean?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Yes, that's a very good question. And in reality, as you familiar with, we have 29 business units and the answer to that question are probably 29 different answers. But broadly speaking, it's in the spectrum -- price increases are probably in the spectrum of 3% to north of 10%, a bit depending on the material mix that the business in question is selling and also the customer mix. So it varies a bit, but it's in that range.

[Adela Dashian, Analyst]

And are you seeing that your competitors are doing similar things? And do you expect as a result of your price increases that you might lose some market share if your competitors are not increasing prices as well?

[Peter Welin, Deputy CEO & CFO]

We've seen competitors moving on price as well, perhaps a little bit. We were a bit closer to the development I would think, and we were a bit earlier, but we've seen the competitors moving as well. We're not expecting any -- to lose any sales at this point of market share because of the price increases. I mean, we should also remember that we're going into the second half of the year with a strong order backlog, which will obviously support the development as well. But we've seen a move in the total market on price.

[Adela Dashian, Analyst]

All right. And then my second question relates to your M&A efforts. If you could first just remind us of what the M&A process looks like for you, like how exactly do you go to market when you look at potential targets? And then what characteristics are at the top of mind for you at the moment?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Yes. So there are 2 typical ways that we carry out the process. The first one, which is the most common one is actually that we get in contact with -- proactively with the current owners of businesses that we find interesting. Mainly these are private and/or family owners and many of the businesses are also family led. Those processes tend to take a bit of time, and they are a bit unpredictable in terms of how long time they come. So there is a bit of a -- there's a risk of a catch-up effect in terms of that type of process. The second type is then a bit more uncommon but also happens where we were actually contacted by potential sellers or sometimes advisers.And at the moment, we are actually pursuing targets in both of those categories. The situation is still a little bit dynamic. So in terms of predicting the time line for this, it is a little bit difficult. We have the ambition to close or to get to, I would say, and sign 1 or 2 more targets this year. That is our ambition. But obviously, that depends on the exact response from potential sellers as well as how travel and meeting restrictions developed following the summer now.

[Adela Dashian, Analyst]

Did you say that you work on closing 2 targets this year? Or...

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

We have the ambition to sign 1 to 2 more targets this year.

[Adela Dashian, Analyst]

Got it. Okay. And then lastly, given your market position here in the Nordics, especially in Sweden and Finland, do you believe that your capacity or consolidation efforts are limited here?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

There are some limitations in the Nordics, yes, due to competition, restrictions as we have some quite considerable market share, particularly in Sweden, Finland and Denmark. There are obviously -- you can obviously make niche acquisitions and acquisitions in what I would call neighboring categories, but it would have to be mainly smaller units.

[Operator]

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

[Kenneth Toll Johansson, Financial Analyst]

I have some questions around the very strong demand situation you have. Firstly, what are you doing to increase capacity so that you can deliver on the strong orders? And do you feel that longer, well, first, what are the delivery times if I were to buy some windows for my house right now? And do you see that you start losing orders because delivery times are longer than normal?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Okay. Ken, so the lead times are a bit longer than yes. They are probably in the range of, on average, maybe 3 to 4 weeks longer than normal, something like that. depending a bit on the category and where you are. We haven't seen that we're starting to lose orders because of that yet. One of the parameters to take into consideration is actually the material scarcity in the market. So thanks to our well-developed sourcing work and also the fact that we are the leading player in Europe, I think we've been better at securing raw materials in a scarce situation.But then potentially some of competition, which has actually allowed us to keep factories running potentially a bit more than some competitors have. So the lead times are a little bit longer than normal. And sorry, I lost the second -- you had a second part to that question, which I lost.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So a little bit, what are you doing in order to increase capacity? Is sourcing the main obstacles or can you do more in your plant in order to increase capacity?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

I think the answer to that is a very relevant question, and the answer to that question varies a little bit. It is actually plant capacity is a constraint for us at the moment. As we've said before, 1 area where we have accelerated our investment work is actually in our e-commerce business. But at the moment, we are somewhat constrained by production capacity actually in our growth in e-commerce. We had -- as you will -- many will remember, we had a very strong growth last year.So -- and those investments will kick in at the beginning of next year, which will then relieve that situation somehow. But in other areas, we do have some more capacity to spare. So there, actually, sourcing is the main bottleneck. So it's a little bit of a mix. We're doing -- we're obviously taking action basically everywhere to maximize capacity, and we think we have -- we do have room to further improve a little bit the production utilization.

[Kenneth Toll Johansson, Financial Analyst]

Are you adding more shifts as well or working a lot of overtime that is costly?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

No. We're mainly adding more shifts and also actually, in some cases, shifting around production of products to maximize capacity utilization. But mainly, we're adding shifts where we can. Normally -- our normal way of operating is normally not to plan for overtime. Then obviously, sometimes you run overtime because things don't always go with your plan, but we normally don't plan for that, but rather add more shift.

[Kenneth Toll Johansson, Financial Analyst]

And then one thing that I'm thinking about is that if we could get a sense of roughly how much your price increases are. So what I'm after a little bit that you bought -- you have strong order -- sorry, strong organic sales growth, both in sort of sales but also in orders. And of that growth, how could that be split into sort of price effect and more volume effect?

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Yes, that's a very, very difficult question to answer, actually, because as I mentioned previously, the price SEK increase effect is quite diverse across the units. And as I said, there is a spread between probably on the lowest end, 3% up to definitely north of 10% in some areas. And we also have a quite considerable mix effect, as you know, depending on how big of the order backlog is consumer versus industry facing.So I couldn't actually give you a, off the bat, a reliable answer to that question. But there is obviously some price impact as well in the order backlog. And there is definitely some mix impact in the order backlog with consumer sales. But to quantify that, off the top of my head, I wouldn't dare to do that.

[Kenneth Toll Johansson, Financial Analyst]

Yes. But it seems that if I look at the reported numbers, it seems like the majority of the effect is probably volume-driven, so to say.

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Absolutely. That's correct. Yes, yes. Yes.

[Operator]

Thank you. There are appear to be no further questions. I will turn the conference back to you, speakers.

[Henrik Hjalmarsson, President, CEO & Executive VP of North]

Okay. Then thank you very much for your attention. We will close the call there, and we wish you all a pleasant summer. Thank you very much.

[Operator]

Thank you. This does conclude today's call. Thank you very much for attending. You may now disconnect your lines.