Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the Inwido Third Quarter Report 2019. Today, I'm pleased to present CEO, Henrik Hjalmarsson; and CFO, Peter Welin. [Operator Instructions] Speaker, please begin.

[Henrik Hjalmarsson, President & CEO]

Thank you. Good morning, everyone, and welcome to this presentation of third quarter results 2019. My name is Henrik Hjalmarsson, I am the President and CEO, and with me, I have Peter Welin, CFO and Deputy CEO. I will begin by walking through some of the highlights in the quarter and also go through business area performance, and Peter will then deep dive into the financials of the quarter. And as the operator mentioned, there'll be plenty time for questions at the end.Next page, please, Page 2. So in terms of overall business performance in the quarter, we saw improved profitability and a very strong cash flow in the quarter, and we're obviously particularly happy with this given the somewhat softer industrial market in particularly Sweden and Finland, in business area North. As most of you know from before, the industrial market is more cyclical in its nature due to the fluctuating new-build activity, whereas the consumer market is more stable and resilient through an economic cycle. And we feel we've done a good job in the quarter mitigating the somewhat softening industrial market and capitalizing well on the more stable consumer market. I'm also particularly happy with the strong cash flows, which I see as a testament to the strength of the new operating model, Simplify, that we launched at the back end of last year where we have full local business unit accountability not just for the P&L but also for the balance sheet, which we've seen has given good results on the cash flow side in the quarter.If we look at the numbers, sales was down 1% or organically, excluding currency effects, minus 2%, but operating EBITDA strengthened slightly to SEK 203 million, up by SEK 1 million from last year. The large Danish units continue to perform well with strong organic growth. E-commerce continues to grow nicely, the e-commerce business unit, and is now 10% of the group's revenues with above-average profitability. The profitability and the development in the Norwegian unit continues to progress well and we're achieving increasingly better results in that market. And we're obviously taking continued efficiency measures to mitigate the somewhat softening top line, particularly in the big units in Sweden and Finland, both in terms of maintaining commercial efficiency but also managing overheads.Order intake in the quarter was minus 2%. However, if we exclude an acquired order backlog in 2018, the order intake was actually slightly [ in ] growth in the quarter, and the order backlog at the end of the quarter was 5% down year-over-year, which is similar to the situation at the end of quarter 2.As I mentioned, the cash flow was really strong in the quarter at SEK 319 million, which is substantially up from the SEK 149 million last year. And this has then improved the net debt-to-EBITDA ratio to 2.5, which is on the group target and substantially better than last year when we landed at 3.0. And we estimate that we'll continue to take market share altogether in the Nordic market in the quarter.Next page, please, Page 3. If we look at the overall market development in 2019, in general, we'll say that the market development in our core markets, which is the Nordics and the U.K., has been somewhat on the soft side this year. The key drivers of that is, as I mentioned before, the somewhat softening of the industrial markets due to reduced new-build activity in particularly, Sweden and Finland. But also, obviously, Brexit concerns impacting the consumer sentiment and overall investment level in the U.K. market. The Danish market is in slight growth whereas the Norwegian market has been a slight decrease. And if we look in general at the market in Ireland, Germany and Poland, they are in slight to moderate growth at the moment.Next page, please, Page 4. If we look at some of the important events for the group in the quarter, obviously, making sure that we have capable and efficient managing directors and all have been used as a really critical point to the Inwido operating model. And I'm really happy to see that we've appointed new managing directors in both Hajom and SnickarPer in Sweden as well as in Profin and Klas1 in Finland. I'm really glad to see the level of the managing directors that we're able to attract with strong industry competence, broad value chain experience and really relevant commercial background, and I think that vouches for strong continued development for these companies.If we look at Elitfönster, we've commenced installation of the first parts of the preparatory installations of a new planing machine. This is a big investment but also really important investment to further improve the competitiveness and the efficiency of Elitfönster and actually in our biggest production unit in Vetlanda.In Bøjsø Døre & Vinduer, our premium -- one of our premium manufacturers in Denmark, we've started industrialization of a quite significant and new investment to further increase our premium manufacturing capability and cement Bøjsø's position as the #1 premium window manufacturer in the Danish market.In Pihla Group in Finland, which is the biggest business unit in Finland and one of the biggest businesses in the group, we've launched a new generation of antenna glass windows, which resolved the issues with mobile signal strength indoors and improves mobile data speeds in new apartment buildings.Next slide, please, Slide 5. I wanted to take the opportunity to remind you of our relatively newly launched operating model, Simplify, that we launched at the back end of last year and just remind you of the 5 strategic pillars of Simplify.Inwido is a highly decentralized business with accountable people and an important aspect of this is full local business units accountability for the profit and loss as well as for the balance sheet. Inwido is the result of the 50 acquisitions over the past 20-or-so years. And when the balance sheet permits and the targets are right, we will continue to grow through acquisitions of strong companies in Europe. We prioritize the residential consumer-driven businesses, where we see a strong long-term potential but also better resilience over an economic cycle. We've run tight local cost-efficient supply chains with focus on maximum customer value in the most efficient way, and we derived synergies from sourcing, finance, technology, leadership and not the least, best practice, which we in group management is a key part in spreading across the group.Next page, please, Page 6. If we look at the business unit performance in the quarter, business -- sorry, business area performance in the quarter. Business area South continued strong profitable growth in quarter 3. The large Danish units continue to deliver very well in the quarter. E-commerce continued its organic growth and grew 8% organically in the quarter. And as I mentioned before, they're now at 10% of the group revenue with above-average profitability. The majority of the business units in the U.K. are performing well despite the Brexit uncertainties, so a good testament to good work in taking market share in the local market there. And we're capitalizing well on a healthy Irish market with good growth in the market there.In terms of the numbers, sales grew by 7% to SEK 724 million, and the operating EBITDA improved by 1.2 percentage points to 18.7%. The order backlog at the end of the quarter is 13% up year-over-year.Next page, please, Page 7. In business area North, if we start by looking at the right-hand side, we see a ring chart where we can see that we actually have some relatively significant industrial market exposure, particularly in Sweden and in Finland. And obviously, the challenging new-build market in Sweden and Finland is then impacting the top line in a slightly negative way in the markets. However, as I've mentioned a couple of times already, positively, consumer demand is more stable and we saw overall retail sales in the business area in the quarter. We have continued to take efficiency measures to mitigate volume development, the negative volume development. We are -- both in terms of temporary layoffs, adapting work time to adjust direct labor, but also in some cases permanent layoffs. And we've done a good job managing the overall cost level in the quarter. The Norwegian business unit continues to improve with further increased profitability in the quarter.In terms of the numbers, sales were down 7% to SEK 902 million. The operating EBITDA margin decreased by 1.4 percentage points to 8%, and the order backlog at the end of the quarter was 14% down year-over-year.Next page, please, Page 8. If we look at the outlook for the markets, we do see a mixed development in the different segments and somewhat in the mix -- in the different geographies. The consumer demand, in general, is still on a healthy level albeit softening somewhat and may be particularly in the U.K. market due to the more acute Brexit uncertainties at the moment. We expect the e-commerce momentum to continue, and we're going to continue to capitalize on the ongoing macro trend of increasing consumer e-trade behavior. The Brexit uncertainty will potentially impact the U.K. and Ireland, obviously, but potentially also Denmark, where we see some quite substantial [ experts ] from the Danish geography into the U.K.We see an industry market that is on a softer level, particularly in Sweden and in Finland, and we see that as we go into the winter season in those geographies where consumer demand is normally a little bit softer.And all in all, the organization, we strongly feel that the organization is better equipped for a mixed development following the Simplify implementation with better ability to adapt to local conditions and local opportunities.Next page, please, Page 9. If we then just summarize the short-term focus, we will continue a very active margin control in the softer markets, particularly in Sweden and Finland, keeping cost levels overall, both on the commercial side and the overhead side, under strong control. We will continue to invest in e-commerce growth in both of the geographies. We will continue to strengthen the balance sheet to allow for further acquisitions when the timing and the targets are right. And we will obviously continue to secure positive impact from Simplify and the decentralized accountabilities for both profit and loss and for the balance sheet.Next page, please, Page 10. And with that, I'm going to hand over to Peter Welin, CFO and Deputy CEO.

[Peter Welin, Deputy CEO & CFO]

Thank you so much, Henrik. And then we turn page -- and we go to Page #11, please. On this page, Page #11, you can see the income statement, you can see to the left the results for Q3; then to the right, the results for Q1 to Q3 year-to-date. And then further to the right, we can see the results for the next 12 months. For the quarter as well as year-to-date, you can see the impact when it comes to IFRS 16. We start with Q3 and we can see that sales declined by 1% organically. It was minus 2%, and we'll come back later to the sales. We can see that the gross margin was a little bit lower compared to last year mainly due to the mix and we can see that the data was more or less on par with last year due to the fact that Inwido has reduced the overhead costs, and by overhead costs, it means sales and administration costs. And we reduced overhead costs by SEK 90 million in Q3. Inwido consists of 28 business units and some business units have been growing in 2019 and they have then increased their overhead costs where our business units have lower volume in Q3 and they have reduced the overhead costs. And in total and the net impact is the SEK 90 million. And this SEK 90 million savings in overhead costs has thereby compensated for the lower volume as well as the lower margins and the results, operating base guide is on par with last year. And if we include IFRS 16, the EBITDA was somewhat above last year. The [indiscernible] cuts were lower than last year, mainly due to a currency impact and this has been resulting in an improved profit after tax and also improved earnings per share. Earnings per share has increased by 11% from SEK 2.31 to SEK 2.56. If we look then at year-to-date, we could see that sales is of the same level as last year. Organic-based sales was -- were minus 3%. We were minus 4% at the Q2, and then organic sales was minus 2% in Q3, meaning that year-to-date, January to September, we have organic sales decline of 3%.Operating EBITDA result is somewhat behind last year, mainly due to a slow start of the year. We had a weak winter season in Q1 that impacted results in Q1. Whereas, earnings per share is above last year, that has increased from SEK 5.16 to SEK 5.20. And then to the right, we can see that sales rolling 12 months is SEK 6.682 billion and the operating EBITA margin is now 9.7% and earnings per share is SEK 7.51.If we then turn a page, we go to Page #12. This page shows sales and order intake in Q3. To the left, you can see the sales for 2017, '18 and '19, and to the right, we can see the order intake for '17, '18 and '19. If we start with sales, we can see that sales declined by 1% compared to last year, and organically, it was minus 2%. The order intake was reported minus 2%. However, we made an acquisition in Q3 last year, and if we take away that acquisition, the cost when we acquired companies, we also get an order backlog in that acquisition and that order backlog is then recorded as order intake for us. If we then take away that order backlog that we acquired, the order intake for Q3 this year was on par with last year, small growth.If we then turn page and we go to Page #13. This page is showing the order backlog from Q3 [ 2014 ] until Q3 this year, end of each quarter. We can see at the end of the quarter, this year, it's 5% lower than end of the quarter last year. We don't have any acquisitions and we have the same structure this year as Q3 last year. We can now see that the backlog was lower in Q3. When we start a quarter, it was minus 4%, but the sales ended minus 1% because Inwido succeeded to gain order intake in consumer orders in Q3, which were delivered in Q3. And now we started order backlog for beginning of Q4 with minus 5%.If we then turn page, we go to Page #14. This page is showing operating EBITA as well as operating EBITA margin. To the left, you can see the quarter, the Q3; and to the right, you can see the year-to-date figures, January to September. We can see that Inwido has succeeded to improve the margins in Q3 this year from 12% in 2018 to 12.2% in Q3 for 2019. And it's also above the level of 2017, so we have a cost of development when it comes to the margin. Inwido has succeeded to improve margin despite lower volume in the quarter.If we look year-to-date, January to September, you can see that we are still behind last year, 9% compared to 9.2%, and this is due to the fact of the slow start we had in Q1, in the winter season. Inwido has succeeded to improve the margin in Q2 and also then in Q3, but year-to-date, we are still behind last year. And we're also behind the level of 2017.If we then go to next page, Page #15. This page is then showing the development of operating cash flow. As we stated in these quarter presentations, we have been focusing our cash flow and we have been focusing balance sheet with a target to reduce the net debt, and thereby, also reducing the net debt of EBITDA. And as you can see, the operating cash flow has been improved year-to-date. January to September operating cash grow has improved by SEK 332 million, mainly due to lower working capital and also due to lower tax payments. In 2018, Inwido paid too high taxes in some countries, especially Finland and Sweden. These tax payments were based on previous year's results, but the results declined in 2018 in these countries and the tax payments were too high in 2018.In 2019, the tax payments have been more on a right level when compared to -- in relation to the profits. And thereby, we have lower tax payments this year compared to last year.Working capital has been improved due to the working capital program we have launched within the group and with several activities and also as a result of the Simplify model we have within the group.Working capital has not only been reduced due to lower volume but has also been reduced in relation to sales, which can be seen in the next page. In this page, this Page #15 is all excluding IFRS 16 impact. If we then turn page to Page #16, and this is the final page before we open up for questions. This page is showing net debt versus EBITDA to the left and then working capital and development to the right. And as you can see to the right, we can see that working capital has been reduced in value, but also in relation to sales. You can see the line -- the other line, you can see a decline in working capital and there's the sales, latest 12 months, has been reduced. And working capital on this page is inventory plus trade receivables minus trade payables.And to the left, you can then see the development of the net debt and the net debt versus EBITDA. Due to the stronger cash flow in this year but also the strong cash flow we had end of Q4 last year, the net debt has been reduced by SEK 367 million compared to September last year, and the net debt-to-EBITDA has been reduced from 3.0 1 year ago to 2.5 now, a reduction by 50 basis points. And once again, these figures are excluding IFRS 16.That was the presentation. And operator, we open up for questions.

[Operator]

[Operator Instructions] Your first question is from Carl Ragnerstam at Nordea.

[Carl Ragnerstam, Analyst]

It's Carl Ragnerstam here from Nordea. So I have a few questions. First of all, we can see that you managed to take out SG&A quite nicely during the quarter. Is it much more to do in terms of taking out hedge costs for Q4 and going into 2020?

[Henrik Hjalmarsson, President & CEO]

Carl, Henrik here. It's -- let's say, we have continuous activities in particular the bigger units in Sweden and Finland, where we see the softer industrial markets to adjust overheads reflecting the development of the market. And that goes both on the commercial and cost side, I'd say, but also on the overhead side. And there is activities still to be delivered there. The exact market share of that, I don't want to -- I mean, this is driven very much in a business unit and I won't speculate on that, but there is some work ongoing that will yield some further results.

[Carl Ragnerstam, Analyst]

Okay, perfect. You also mentioned that you're gaining market shares in the Nordics. Could you specify in what geographies and market segments as well?

[Henrik Hjalmarsson, President & CEO]

I would say overall, if we look at, let's say, the past quarter and the past quarters, the key areas where we've taken share has been in the Norwegian geography. We've taken some quite nice steps forward. We've also taken some share in Denmark. In Sweden and Finland, we've maintained or slightly dropped share, I would say. So on an overall level in the Nordics, we're growing, but the geographies are -- we've made better progress in Denmark and Norway and have been more stable or a slight decline in Sweden and Finland.

[Carl Ragnerstam, Analyst]

Okay. And speaking of Norway and Finland, they're seemingly weakening. Have you seen any change just to the overall pricing landscape?

[Henrik Hjalmarsson, President & CEO]

I assume you mean Sweden and Finland, which are the most -- which we've highlighted as the more softer industrial market. And overall, the price levels are, from our perspective, relatively stable, but -- so no major movements, I would say.

[Operator]

Our next question is from Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

Marcela Klang at Handelsbanken here. Congratulations on the low working capital. I wondered, how comfortable are you with your inventory levels? Now obviously, we are entering a lower season. But are you comfortable with your industry levels or could there be a risk of any bottleneck?

[Henrik Hjalmarsson, President & CEO]

Marcela, what I would say in general is our business model is such that 99% of all the volumes we sell are actually made to order. So in that sense -- and we work with very lean and efficient value chains, I would say, going back towards our suppliers as well. So overall, to optimize the business, we normally don't need a lot of inventory except on some key components and in those areas where -- which we see as the key components. We -- I personally feel quite comfortable with the levels we're at now in terms of meeting demand going forward.

[Marcela Klang, Analyst]

Sounds good. Another question related to e-commerce. It is 10% of the group right now and you mentioned previously Denmark is the most mature market in -- for e-commerce. But how big a part of that, that is booked on the e-commerce under Inwido South actually relates to Sweden and Finland?

[Henrik Hjalmarsson, President & CEO]

I mean, there is -- the majority of sales in the e-commerce business unit is in the South geographies, so to speak. So I mean, order of magnitude is something like between 50% and 2/3 of that are in the South geographies. The rest is actually -- to around 2/3. The rest is in the North geographies, roughly.

[Marcela Klang, Analyst]

Maybe 1/3 in the North?

[Henrik Hjalmarsson, President & CEO]

Yes.

[Marcela Klang, Analyst]

Could you also speak a little bit about your latest initiative towards the retail segment, Elitfönster På Plats, how has that developed? Do you have more initiatives coming to target consumers in the North?

[Henrik Hjalmarsson, President & CEO]

Yes. I think, overall, our perspective is that consumer behavior is changing, and I think our success in e-commerce is part -- I mean, one, we're obviously doing a good job, but secondly, we're also capitalizing on a macro trend. So that's part of that. And we see that change of behavior not just in terms of transferring straight off to an e-trade solution but also in terms of seeking convenient solutions, et cetera. And we will continue to develop our overall propositions to meet that changed behavior. Elitfönster På Plats is one of those initiatives that is -- and if you look at the specific performance of that, that's continuing to grow in honesty from a relatively modest base, but it's growing nicely. And we see there is more potential for similar types. I wouldn't even call it similar, but for initiatives that meet the same overall macro trend of change in consumer behavior in other geographies going forward.

[Marcela Klang, Analyst]

And the final question from me, you mentioned some part of Danish production going to the U.K. and being [ present ] by Brexit. How big part of Denmark actually goes to the U.K. approximately?

[Henrik Hjalmarsson, President & CEO]

So from our perspective, exports to U.K. is very small. We have some exports from our factories to Ireland, to our own Irish entity, but that's relatively small in relation to the total volume. For the market, this is somewhere -- it's 5% to 10% of the total volumes. And this is just a guesstimate at the moment. We are covering the exact data. But in that range, 5% to 10%, that goes into the U.K. market of Danish fraction volume. So it's not a considerable number.

[Operator]

[Operator Instructions]

[Henrik Hjalmarsson, President & CEO]

So I guess there are no further questions. I just want to take the opportunity to remind you that Inwido will host a Capital Markets Day on the 7th of November this year in Stockholm, and you'll find further details on our website, inwido.com. With that, thank you for listening in on behalf of us, and have a good rest of the day. Thank you very much. Bye-bye.