Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2022-Q2

[Operator]

And welcome to Inwido's Q2 Presentation for 2022. This conference call is being recorded, and will be posted on Inwido's and Financial Hearings web pages afterwards. [Operator Instructions] And there will be an opportunity to ask questions afterwards. Today, I am pleased to present CEO, Henrik Hjalmarsson; and CFO, Peter Welin.

With that, I will hand over to speakers. Go ahead.

[Henrik Hjalmarsson, executive]

Thank you very much. Good morning, everybody, and welcome to the presentation of Inwido's second quarter and first half year results 2022. My name is Henrik Hjalmarsson, I'm the President and CEO, and with me, I have Peter Welin, CFO and Deputy CEO. We will spend the coming 25 minutes or so going through a short intro to Inwido, an update on the Q2 trading and first half year, an update on M&A and an outlook. Peter will then go through a bit more the details of the numbers in the quarter. And I will wrap up with a summary, after which there will be plenty of time for questions.

Next page, please, Page 2. So for those of you who might be new to Inwido, we are a leading window group in Europe, a clear market leader in the Nordic region with a strong and growing presence in the U.K. and Ireland. We have a net sales of SEK 8.6 billion rolling 12 months, and a return on operating capital of 17.9%. And we employ roughly 4,900 people in the geographies, you can see market in dark blue on the right-hand side of this chart. And we market and sell all the fantastic brands you can see on the bottom part of the slide.

Next page, please, Page 3. We operate with a clear and over time, very proven value creation model, which is our approach to drive sustainable shareholder value over time and in a sustainable way. These are 5 elements that are the basis for the value creation model that ensure that we drive long-term and cost-efficient, both customer and employee value in a sustainable way and hence then shareholder value. We do this based on our proven ability to improve the businesses in the Group over time. And obviously, plug in acquired businesses being sensitive to their starting point to generate as much synergistic value as possible from them being part of the Group.

Next page, please, Page 4. Looking then at some of the highlights of the quarter. In the second quarter, we continued to see fairly healthy markets in general, and we closed the quarter with a record high order backlog. We posted a good growth rate and with the ninth consecutive quarter of organic growth. Very pleasingly, we added 2 strong businesses to the Group with the acquisition of Westcoast Windows in Sweden and Hyvinkaan Puuseppien in Finland. We saw continued growth and good profit development in 3 of the 4 Business Areas.

However, as also commented at the -- in the -- in conjunction with the presentation of the first quarter, we've struggled with the implementation of growth-enhancing investments in Business Area e-Commerce, which has impacted the factory efficiencies, negatively and in combination with the investments in future growth and unfavorable product mix has also then impacted margins negatively in the Business Area. And in the quarter, we've continued to see increases on costs for input materials. However, towards the back end of the quarter, we're starting to see a stabilization on high levels.

Next page, please, Page 5. Looking then at the numbers, it's really pleasing to see posting of a another record quarter for Inwido. Sales grew 23% or 15% organically to SEK 2.475 billion, with operating EBITA growing nicely by SEK 30 million to SEK 297 million. Operating EBITA margin slightly down, mainly then driven by a margin decrease in Business Area e-Commerce to 12%. Order intake continued to grow 11% up or 7% growth adjusted for acquisitions, which means that the order backlog increases year-over-year by 32% to SEK 2.687 billion. With continued good cash flows, we stand still with a very strong balance sheet despite that an increased dividend paid out in the quarter and closing of 2 acquisitions, with a net debt versus operating EBITDA of 1.0x, down from 1.2x last year or looking at it excluding IFRS 16, than 0.7x.

Next page, please, Page 6. Looking then at the development, the first 6 months, sales growth of 24%, organically plus 17% to 2 -- sorry, SEK 4.548 billion. Operating EBITA growing healthy to SEK 447 million with a margin then at roughly the same level as last year, 10.3%. LTM operating EBITA of SEK 997 million and LTM EBITA, first time ever over SEK 1 billion at SEK 1,008 million. We closed 3 good acquisitions in the first half of the year with Dekko Window Systems in the U.K., and as I mentioned, Westcoast Windows in Sweden and Hyvinkaan Puuseppien in Finland. And continue to make good progress on earnings per share, growing to [ SEK 5.74 ] per share.

Next page, please, Page 7. Looking then briefly at the Business Areas, starting with Scandinavia. We saw continued good growth in all 3 markets: Denmark, Sweden and Norway, with good profit improvement in Norway and Denmark. We've seen the acquisition of Westcoast Windows contributing positively already from the start to sales and profits. Overall, we've done a good job adjusting prices to match the higher input costs and compensating for inflation. All in all, this means that sales grew by 21% to SEK 1.360 billion. Operating EBITA margin, basically same as last year at 15.1%. And the order backlog at the end of the quarter, up 18% year-over-year.

Next page, please, Page 8. If we look at Eastern Europe, we've seen overall healthy consumer and industrial markets, which has helped us generate a strong growth in the quarter. The largest business unit in Finland grew very strongly and increased profits. And we've seen an overall positive continued development in the business units in the Finnish geography, which then combined with the acquisition of Hyvinkaan Puuseppien delivers a strong position as we add yet another successful Finnish business to the Group. We also saw continued good sales and profit development in Poland. And all in all, it means that the sales in Eastern Europe grew by 30% to SEK 589 million. Operating EBITA margin decreased slightly to 8.8%, and the order backlog at the end of the quarter, very strong, up 76% year-over-year.

Next page, please, Page 9. Looking then at Business Area e-Commerce, we have seen some continued supply chain challenges. As we commented in conjunction with the quarter 1 report, we've had implementation challenges with the implementation of capacity enhancing investments in the largest factory in -- for e-Commerce in Estonia. This has affected capacity and thus sales negatively, particularly at the -- the first half of the quarter. This has, as we also communicated earlier, improved successively over the quarter though. Together with the investments for growth and an unfavorable product mix, this has then affected the margin negatively in the quarter. Sales down 2% to SEK 268 million. Operating EBITA margin at 7.6%, and the order backlog at the end of the quarter, 3% down year-over-year.

Next page, please, Page 10. Looking then at Business Area Western Europe. We've continued to see strong profitable growth, both organically, but also through a good delivery from the starting Inwido family of Dekko Window Systems. We've also seen very strong development in Ireland with both stronger sales and higher profits. Combined, this means that sales grew 71% to SEK 247 million. Operating EBITA margin strengthened considerably to 9.9%, and the order backlog at the end of the quarter is up 5% year-over-year.

Next page, please, Page 11. I thought it would be prudent to do a bit of an update on external factors given the turbulent global circumstances at the moment. Starting then with the war in the Ukraine, which is obviously a humanitarian catastrophe for -- and a big tragedy for all those impacted. However, for Inwido, we have no operation in Russia, in Belarus or in Ukraine, and have very limited inbound material flows from those countries. But as all European industrial players, we are obviously indirectly impacted, particularly by the increased energy prices in Europe.

We have in the quarter continued to see disturbances and turbulence in the input material supply chains. However, I'd say during the quarter, we've done a good job managing this with very limited impact on our ability to deliver and service our customers. And as I mentioned earlier, the prices for input materials has continued to increase in the quarter, but at the back end of the quarter then started to stabilize, however, at historically high levels.

Next page, please, Page 12. As most of you know, value-creating M&A is a very important part of the shareholder value creation model for Inwido and a key growth driver. We see continued considerable opportunities and continuing to consolidate the fragmented window and door market in Europe, and therefore, accelerating our M&A activities to deliver material acquired growth on an annual basis. We've made good progress with 3 acquisitions in the first half of the year. And we see positively on the opportunities for M&A, both in the short-term and in the longer-term, not the least given the strong balance sheet we have. We strive for positive multiple arbitrage, and we try to leverage 2 step acquisitions in the case of stand-alone businesses. We evaluate and assess potential acquisitions with the 8 dimensions you see illustrated in the picture on the right-hand side of this chart.

Next page, please, Page 13. Then a few words on the acquisitions we closed in the quarter, starting with the Westcoast Windows, which manufactures windows, balcony doors and sliding doors in wood and wood aluminum, with employee -- apologies, 80 employees in a production facility in Trollhattan in Sweden. Sales of roughly SEK 164 million in 2021. Westcoast mainly sells its products to retailers, but also have an export operation on the ground in the U.K. Westcoast will operate as a separate business unit in Business Area Scandinavia, but we see considerable both operational and commercial synergies with our existing business, both in Sweden and actually in the U.K. And we've acquired 100% of the shares of Westcoast Windows.

Next page, please, Page 14. We then also added another strong business to the Finnish group of businesses with the acquisition of Hyvinkaan Puuseppien, which was founded in 1958 by today's CEO's father and today's CEO is Ilkka Turpiainen. It's a business that specialized in solid wood doors and made to measure windows for the Finnish market. We got 16 employees in a production facility in Hyvinkaa in Finland with sales of roughly SEK 40 million. Hyvinkaan Puuseppien will operate as a separate business unit in Business Area Eastern Europe. However, also in this case, we see considerable both commercial and operational synergies with our existing businesses in Finland. Here, the existing owner will retain 35% of the shares for a period of at least 2 years, and we will strive together to develop the business for future success.

Next page, please, Page 15. Then given the importance of sustainability for the long-term value creation for the Inwido Group, a few words on the outcome. In the case of the sustainability KPIs that 5 of these are measured on a quarterly basis, and they have a 1 quarter lag in reporting. So the numbers you see here are actually the numbers for the first quarter 2022. Of the 5 quarterly KPIs, I'm happy that we made progress in 4 of these. We had a slight setback on sick leave. But as you may remember, the first quarter this year still had some considerable impact from the COVID pandemic, which has obviously impacted sick leave negative. I'm particularly happy about continued progress in terms of reducing our hazardous waste, which decreased by 16.8%. And very, very importantly, and a topic that's very close to my heart personally is the lost time accident development, where we saw a decrease with 17.1%. Obviously, still very far from the long-term ambitions we have and the vision of taking this to [ 0 ], but a good step in the right direction.

Next page, please, Page 16. Looking then at the outlook. We closed the second quarter with a record high order backlog, which will obviously support sales in the near-term. We see continued price increases in the quarter. However, the input material prices starting to stabilize at a high level at the back end of the quarter. We're in a market that's characterized by high inflation, increasing energy costs and rising interest rates, which will obviously reduce consumers' disposable income. However, we see a continued focus on the home and the renewed interest for energy savings, which creates new opportunities on the households. And we continue to have a very optimistic long-term outlook with regards to the need for energy-efficient windows and doors to support a sustainable and good life at home and at work.

Next page, please, Page 17. So with that, I'm going to hand over to Peter, who's going to take you through the numbers. Peter, please.

[Peter Welin, executive]

Thank you so much, Henrik. Then we go to Page #18, please. On this page, we can see the income statement for the Group. To the left, we can see the Q2 report for this year as well as last year in the middle, the year-to-date results, the first 6 months and at the right the rolling 12 months. I must start with operating EBITA for the rolling 12 months. For the first time ever, the EBITA is above SEK 1 billion, and the operating EBITA is just shortly below SEK 1 billion, SEK 997 million. So for the first time ever, Inwido has a rolling 12-month EBITA result just above SEK 1 billion. If we now start with the quarter, sales was plus 23% in the quarter, organically, it's plus 15%.

The margin declined in the quarter from 27.1%, down to 24.9%, a decline of 2.2% [ units ], mainly due to the inflation -- material inflation. Operating EBITA margin was down 1.3% units compared to last year from 13.3% down to 12%. We have some higher overhead costs, mainly driven by sales administration. We have some sales and marketing activities this year that we didn't have last year, so it was a higher cost level. However, the increase was not as high as a sales increase and thereby, a little bit better EBITA margin decline compared to the gross margin decline. Operating EBITA was plus SEK 30 million, an increase from SEK 267 million to SEK 297 million. The EBITA was plus SEK 29 million or equal to an increase by 11%. The difference between operating EBITA and EBITA is the acquisition cost in the quarter.

Further in our income statement, we can see that profit after tax is plus 12%, and the earnings per share is plus 11% compared to last year, SEK 3.29 per share to SEK 3.66 per share this year. If we then look for the first 6 months, January to June, sales is plus 24%, organically, it's plus 17%. Operating EBITA has improved by SEK 89 million from SEK 388 million to SEK 477 million, an increase by 23%. The margin is slightly down compared to last year, 10.6% to 10.5%. And further on the income statement, we can see that profit after tax is plus 16% compared to last year, and the earnings per share is plus 15% compared to last year from [ SEK 5.00 ] per share to SEK 5.74 per share. On a rolling 12-month basis, we have now sales of SEK 8.620 billion. We have an operating EBITA of SEK 997 million, equal to 11.6% operating EBITA margin, and we have an EBITA just above the SEK 1 billion mark, SEK 1,008 million. And earnings per share rolling 12-month is now [ SEK 13.03 ].

If we then turn page, we go to Page #19. On this page, we can see that sales development, as well as the order intake development for Q2 2020 to 2022. So left, you can see the sales development, and to the right, you can see the order intake development. Sales was plus 23% in the quarter, organically, it's plus 15%. The increase -- the 23% increase equals SEK 466 million. Of this, SEK 466 million, SEK 84 million is acquired growth and SEK 52 million comes from the currency impact. We have a weaker Swedish krona. So when translation to -- translating to Swedish, we have a positive current impact of SEK 52 million. And then organic growth is then SEK 330 million equal to [ 15% ].

In Scandinavia, we were plus 21% in total, adjusted for currency was plus [ 17% ] and acquisitions is plus [ 17% ]. East was plus 30% organically, it's plus 25%. We can see high growth in Finland in the quarter. E-Commerce was in total minus 2%, organic minus 8%, and then Western Europe was in total, plus [ 17% ], organically, plus 13%. The order intake in the quarter was also up. The total order intake was plus 11%. However, when we make acquisition, the acquired backlog is booked as order intake.

So when adjusting for acquisitions, the order intake was plus 7% in the quarter. Scandinavia had a total order intake growth of 8%, and there we acquired Westcoast. Eastern Europe had a total order intake growth of 16%, and there we acquired Hyvinkaan Puuseppien. And then e-Commerce was minus 12%, and Western Europe was plus 68%, and there we acquired Dekko. However, we also have a good growth when it comes to -- when it comes to Ireland, we had a good growth in the quarter comparing to last year.

If we then turn page, we go to Page #20. This page is showing operating EBITA and operating EBITA margin for 2020 to 2022. To the left, we can see the development in the quarter and to the right we can see the development for first 6 months. We start with the quarter, and operating EBITA reached SEK 297 million, which is the highest Q2 and the highest quarter ever when it comes to result in SEK. The margin was slightly down from 13.3% to 12%. The margin was down due to inflation, as well as the development of e-Commerce. Scandinavia had more or less the same margin as last year, 15.1%, 15.2% last year. East had also a slow -- minor decline from 8% -- from 9.1% to 8.8%. In West, we had a higher margin this year compared to last year, an increase from 5.3% to 9.9%. And then in e-Commerce, we declined from 20% down to 7.6%.

The inflation, as Henrik said, continued in the quarter, but stabilized end of the quarter, but we had a high inflation in the beginning of the quarter. And Inwido, most of the business units within Inwido have increased the sales prices in the quarter, and that will give a full impact second half of this year. Looking at year-to-date, the year-to-date improvement is SEK 89 million when it comes to EBITA compared to last year. When compared to 2020, we have improved the results by SEK 226 million. The margin is slightly down compared to last year from 10.6% to 10.5%, above the margin of 2020 of 7.9%. Compared to last year, Inwido had a good margin development in the first quarter, and then in the second quarter, as I said before, the margin declined by 1.3% units, and it's also, we are slightly behind last year in the -- in operating EBITA margin.

If we then turn page, we go to Page #21. This page is showing the order backlog from end of each quarter from Q2 2018 to Q2 this year. The backlog is up by 32% compared to last year, equal to SEK 658 million higher backlog compared to last year. It is up 100% more or less -- more than 100% compared to the backlog of 2 years ago, June 2020. If we then adjust the backlog with acquisitions, that backlog is plus 26% compared to last year. Scandinavia is plus 80%, East is plus 76%, e-Commerce minus 3%, and West is plus 5% compared to last year.

If we then turn page to Page #22. This page is showing the return on operating capital development since Q2 2018 up until Q2 this year. We had a good improvement in return on operating capital, and we have improved the KPI, the latest 10 quarters in a row from 10.2% in December 2019, now up to 17.9%. In the year 2020 and the year 2021, we improved the cash flow and we reduced the average operating capital by about SEK 600 million. Comparing December 2019 compared to December 2021, the average operating capital is down SEK 595 million.

Now the average working capital has increased. This quarter, it has increased by SEK 170 million, and that is due to acquisitions. We have acquired companies, and thereby, we have a higher average operating capital. But at the same time, the rolling 12-month EBITA has improved by SEK 29 million during the first -- the second quarter. So thereby, the margin or the KPI has improved from 17.8% end of Q1 to 17.9% end of Q2. And we are still then above the target of 15%.

If we then turn page, we go to Page #23. This page is showing the net debt development, including as well as excluding IFRS 16 and is also showing the net debt versus an operating EBITDA, including as well as excluding IFRS 16. The net debt, including IFRS 16 is today SEK 25 million lower compared to end of June last year, despite the dividend payment now in May this year of SEK 356 million and also despite acquisitions we made during this year. The net debt versus EBITDA is now down to [ SEK 1.0 million ], including IFRS 16, was [ SEK 1.2 million ] last year. Excluding IFRS 16, it was [ SEK 0.7 million ] compared to [ SEK 0.9 million ] last year. The IFRS 16 debt is about SEK 400 million right now, SEK 396 million in detail.

Looking at the net debt, it has increased during this year, that is due to the dividend payment, the acquisitions and also seasonality. We have a quite high seasonality within this business, and the working capital is always at its lowest in December and thereby, the net debt is the lowest in December. The net debt also includes the earn-outs, as well as expected payments for call and put options. We have earn-outs in the Dekko acquisition, and that earn-out is including our net debt. We also have -- we also have valuation of future call and put. We don't own 100% of some of the acquisitions. We have a minority between 25% and 35% in the latest 3 acquisitions -- or sorry, not the latest, but in 3 of the 4 latest acquisitions. And those expected payouts for that call and put option, they are included in the net debt as well.

If we then turn page, we go to Page #24. On this page, we can see the development of sales and operating EBITA margin since the IPO in 2014. Sales has been growing by 75% since the IPO and a CAGR of 8%, and the operating EBITA has more or less doubled since the IPO. The margin has improved from 10.2% to [ 10.6% ], slightly lower margin now rolling 12 months compared to full year last year, and that is due to inflation and the e-Commerce as I said before.

I'll now hand over back to Henrik, he will make a summary, and then we will open up for questions.

[Henrik Hjalmarsson, executive]

Next page, please, Page 25. So in summary, in the second quarter, we saw continued good growth and the ninth consecutive quarter with organic growth and into the third quarter with a record high order backlog. We added 2 more strong businesses to the Inwido family with the acquisition of Westcoast Windows in Sweden and Hyvinkaan Puuseppien in Finland. We see high inflation, increasing energy costs and rising interest rates impacting the consumers' disposable income, but we also see a continued focus on home and renewed interest for energy savings, creating opportunities among the households.

With that, next page, please, Page 26, we open up for questions. Operator, please.

[Operator]

Thank you. If you wish to ask a question, please press 01 on your number plan. If you wish to withdraw a question, you may do so by pressing 0. Thank you. [Operator Instructions] Thank you. Our first question comes from Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, analyst]

Thank you for a very, very thorough presentation. I had 2 questions, if I may. The first one is, when you say that order intake slowed towards the end of the quarter, do you mean that it declined year-on-year or do you mean that it slowed that was still in positive territory? That's the first question. And the second question is, you had margin pressure from inflation in the second quarter. Do you expect to have this pressure also in the third quarter or have you caught up? Those are the 2 questions.

[Henrik Hjalmarsson, executive]

Thanks, Rasmus. So asking -- so responding to your first question, it depends a little bit on whether you include acquisitions or not. But towards the back end of the quarter, the growth rate in order intake definitely slowed down. And excluding acquisitions, there was a slight decline year-over-year in order intake, excluding acquisitions that is. If you look at the second question, which I lost you for a little bit there, but I think it was around the margin and the input material cost increases.

So given that we normally have, let's say, about the quarter lag in terms of price increases, I think we've actually done a better job than normally now during this period, protecting our margins, and you'll see that if you look specifically at the margins, so for example, Scandinavia. And given that we see stabilizing input material prices towards the back end of the quarter, we expect to be able to be in a more, let's say, quote upstate towards the back end of the third quarter.

[Rasmus Engberg, analyst]

Right. So some negative impact, but that's leveling out towards the end of the quarter, that's what we should be expecting at this point.

[Henrik Hjalmarsson, executive]

Super. Correct.

[Operator]

[Operator Instructions] Thank you. Our next question comes from Sofia Sorling, Carnegie.

[Sofia Sörling, analyst]

Yes. Thank you. And hello, everyone, thank you for your presentation. So I have a couple of questions, and they are also related to this comment on slowdown in orders by the end of the quarter. Would you say that it's in general for the Group or is there in any specific geographical markets that you have noticed this slowdown? And also perhaps if you can give us some color on if it's within the consumer or the industry segments?

[Henrik Hjalmarsson, executive]

Yes. So if we look at specifically the development related to that comment, what we have seen is we had a very strong order intake progression in the first half of the quarter in Eastern Europe. Given the delivery times -- and you'll see that the order backlog is up 76% year-over-year. Given the delivery times in the market there, we did see some decreases in the order intake activity, particularly then in Eastern Europe towards the back end of the quarter.

We actually continue to see more healthy activity levels in Sweden. And then throughout the quarter, e-Commerce order intake has been at a lower level year-over-year, mainly then linked to the supply chain challenges, which has impacted our ability to take new orders. But there, we actually saw a slight stabilization or rebound at the back end of the quarter. So the biggest single driver of that slight decline excluding acquisitions is actually Finland and Eastern Europe.

[Sofia Sörling, analyst]

All right.

[Henrik Hjalmarsson, executive]

And to your second question, it's fairly evenly spread between industry and consumer.

[Sofia Sörling, analyst]

All right. And perhaps I will continue then with -- so in previous quarters, you have expressed the longer lead times. Is still -- is this still the case, or what is your current expectation on lead times in your existing order backlog?

[Henrik Hjalmarsson, executive]

Yes, that is correct. So the lead times are still clearly above average, if we look at, let's say, a 3-year to 5-year horizon. We should remember that, as Peter said, the order backlog is more than twice as high as it was the same time 2 years ago. And particularly in Finland, but also, I would say in Sweden, we are -- and to some extent also in the geographies in Western Europe, we are substantially above normal lead times. And as we said, looking only at the year-over-year perspective, Eastern Europe order backlog is up 76%. So that also means that the capacity is not up 76%, so it means that the order delivery times are longer than normal.

[Sofia Sörling, analyst]

All right. And last question here about the M&A. So are you expecting the same pace of acquisition during the second half of 2022 as the first half of 2022?

[Henrik Hjalmarsson, executive]

It's -- I mean, as we've communicated before, it is always a little bit difficult to forecast M&A. And I actually 5 quarters ago made the mistake of trying to predict the development during the second half of 2021, where I ended up being wrong, and then instead, we did 3 acquisitions quite quickly here at the start of '22. We are continuing with the same pace in efforts. But we also have respect for the fact that in many cases, we are talking to family-owned and led businesses and that the exact duration of the transaction process is very -- is hard to predict. So at the moment, I'd say it's -- we're working with the same pace, but the exact progress we'll make is difficult to predict.

[Sofia Sörling, analyst]

All right. And sorry, just one last question, I forgot. About e-Commerce, are you expecting now that the challenges with the production capacity is finalized and that you have more of a normal quarter in the following quarters for e-Commerce?

[Henrik Hjalmarsson, executive]

We are -- as we communicated at the -- in conjunction with the report for the first quarter, we said that the situation was going to continue to improve during the second quarter. It has continuously improved. So from a production capacity point of view, we are almost fully back at the level where we should be. So from that perspective, yes, then obviously, in terms of forecasting the order intake for the quarters to come is more difficult, but from a supply chain perspective, we are more or less back to where we wanted to be.

[Operator]

[Operator Instructions] Thank you. There are no further questions at this time from the telephone line. I will hand over to the speakers for any closing remarks. Go ahead.

[Henrik Hjalmarsson, executive]

Okay. Thank you very much for listening in and for following the Inwido journey. We wish you all a fantastic summer. Thank you very much. Bye-bye.