Inwido AB (publ)

STO:INWI

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to the Inwido's Q3 Earnings Call 2022. [Operator Instructions]

We have with us on the call today, CEO, Henrik Hjalmarsson; and CFO, Peter Welin. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Henrik Hjalmarsson. Please go ahead.

[Henrik Hjalmarsson, executive]

Thank you very much. Good morning, everybody, and welcome to this presentation of Inwido's Third Quarter Results 2022. I'm Henrik Hjalmarsson, President and CEO. And with me, I have Peter Welin, CFO and Deputy CEO. We will spend the coming 25, 30 minutes going through a few highlights on the third quarter, including a deep dive into the different business areas, some details of the financials, as well as a short outlook going forward. After this, there will be plenty of time for questions.

So with that, next page, please, Page 2. But before we get started, just a brief introduction to Inwido. 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. We have net sales of SEK 9.1 billion rolling 12 months now up until the third quarter, and a return on operating capital of 17.9%. And we have roughly 4,900 employees in the geographies you see marked in dark blue on the map on the right-hand side. The white dots that you see on the map are our production locations. And we market and sell all the fantastic brands that you can see on the bottom part of the slide.

Next page, please, Page 3. Before we dive into the details of the third quarter, a few remarks on what we see as an emerging new era in terms of the energy landscape around us, driven not only by the geopolitical developments that we see, but also the combined efforts to decrease our carbon footprint in line with the agreed treaties, we believe that we are likely leading a period of abundance of cheap energy.

As you know, the fastest way to lower the prices is to reduce demand. And the best way to do that is to improve energy efficiency. The EU, as a part to reach the ambitious 1.5-degree target of the Paris Treaty, have launched the Green Deal, and one very important part of the Green Deal is the renovation wave that aims to double the annual energy renovation rates in the coming 10 years.

We also see, as you can see on the right-hand side of this slide, some large campaigns across basically all our markets driving for energy efficiency. And this is also a key topic on medias' agenda. One example is the Swedish Energy Authority, Energimyndigheten, which states recently in a report that up to 1/3 of the heating in a Swedish villa actually evaporates through windows and doors.

So in conclusion, I think it's fair to say that it's never been a better time to replace old windows and doors with newer energy-efficient ones from Inwido.

Next page, please, Page 4. So then, highlights for the third quarter. I'm pleased that we're posting the 10th consecutive quarter with organic growth and, for that matter, organic growth on a high level. We see a quarter where we continue to stay above the trajectory towards our long-term targets, both in terms of growth and in terms of profitability.

We also see good development in 3 of our 4 business areas, where the Business Area e-Commerce has a weaker development in the quarter, mainly as a consequence of some lingering effects and some lost momentum from the supply chain disturbances we've seen in the first half of the year which, in turn, then was a consequence of some troubles we had in implementing growth-promoting investments in the supply chain.

We've seen continued increases and quite rapid increases in glass prices, which are very dependent then on the Europe price for natural gas in the quarter. However, we've started to see wood prices soften, albeit from high levels.

Next page, please, Page 5. If we look at the numbers then, sales growth was 26% to SEK 2.386 billion. Organically, that's a growth of 15%. Operating EBITA increased by SEK 22 million to SEK 297 million, which is the highest ever in Q3 and on par with the highest quarterly result ever. Operating EBITA margin, down by 2 percentage points, mainly as a consequence of mix and the challenges that we've seen in Business Area e-Commerce; the very high natural gas prices during the quarter, which has then substantially impacted the price of glass, one of our key material components; as well as obviously impact from the high price of electricity in the quarter.

Order intake, down 1%, minus 1%, with an order backlog increase of 6% to SEK 2.420 billion at the end of the quarter. Thanks to continued strong cash flows, we continue to decrease the leverage with a net debt versus operating EBITDA of 0.8x, down from 1x last year, or 0.5x excluding IFRS 16.

Next page, please, Page 6. If we summarize the development of the first 9 months, the development is strong also in that perspective, with a sales growth of 25% to just shy of SEK 7 billion, an organic increase of 16%. We see operating EBITA growing by SEK 112 million to SEK 775 million, with an operating EBITA margin slightly down to 11.2%, down by 0.7 percentage points from last year. EPS continues to grow up to SEK 9.62 for the first 9 months.

Next page, please, Page 7. Looking then a bit at the business areas, starting with Business Area Scandinavia. As you can see on the chart on the right-hand side, we continued with good growth in the quarter, and we've seen improved profits in all the countries, with further strengthened positions in our core markets.

Most of the business units have done a successful job in adjusting prices to the higher input materials to compensate margin. We've seen a good contribution already from the start of the recent acquisition of Westcoast Windows, that has contributed positively both to sales and to profit.

Sales was up 27% to SEK 1.265 billion, with operating EBITA margin strengthening slightly by 0.1 percentage points to 16.2%. And the order backlog at the end of the quarter is slightly down, 9% down year-over-year.

Next page, please, Page 8. If we look instead at the Business Area Eastern Europe, we continue, as you can also see on the chart on the right-hand side, a strong growth, particularly, pleasingly, in the consumer segment. The largest business unit in Finland grew very strongly with increased profits. And pleasingly, we're also seeing continued good development in our Polish business with strong sales and good profit development. Sales grew 36% to SEK 656 million with an operating EBITA margin slightly down by 0.2 percentage points to 9.0%. The order backlog at the end of the quarter, very strong, up 28% year-over-year.

Next page, please, Page 9. Looking then at Business Area e-Commerce. As I mentioned previously, we have lost our positive momentum a little bit after the capacity constraints that we saw in the first quarter. These capacity constraints, as I said, were linked to strategic capacity-enhancing investments for future growth. But we're also seeing consumers that are slightly more hesitant in the e-comm DIY market than we did during the COVID.

Looking at where we are at the moment, capacity is no longer a constraint for us and the efficiency is improving week by week, albeit from poorer levels. Sales is 9% down in the quarter to SEK 232 million. The operating EBITA margin coming in at 6.3%, down from 22.8% last year. The key drivers of this being a negative operational leverage with lower volumes, somewhat higher costs as a result of continued investments for strategic long-term growth, but also poor efficiencies due to the supply chain disturbances that we had earlier in the year. The order backlog at the end of the quarter is 6% up versus same time last year.

Next page, please, Page 10. And then lastly, looking at Business Area Western Europe. As you can see, again, on the top right-hand side in the chart, for net sales, we've seen strong growth and improved profits, but we also see some weakened margins, mainly due to mix in the quarter. We see a very positive development in Ireland, where we are continuing to strengthen our position and achieved both stronger sales and higher profits. It's also very pleasing to see that the Dekko Windows Systems that we closed the acquisition of earlier in the year is continuing to contribute very well with good sales as well as profits. Sales is up 46% to SEK 241 million with an operating EBITA margin, however, slightly down at 9.9%. The order backlog for Western Europe at the end of the quarter is 19% up versus same time last year.

Next page, please, Page 11. A few words then on the environment around us and the external factors impacting the business. Starting then with the obvious tragedy in Ukraine, which is obviously a humanitarian catastrophe and a tragedy for those affected. However, for Inwido, the impact is limited. We have no operation in Russia, in Belarus or in Ukraine, and we have no direct sourcing from any of these countries. We are, however, impacted in the sense that the price of glass correlates very strongly with the natural gas prices in Europe. And as you may be aware, these prices have been at unprecedented levels during the third quarter, which has then impacted the prices that we pay for glass, one of the most important input materials for us. That, however, is slightly offset by the fact that we're starting to see timber prices come down. However, most other materials remain on stable levels, albeit high historic levels.

As I mentioned earlier, energy savings are on top of the agenda, both politically, in the media, but also among consumers and households.

Next page, please, Page 12. As I mentioned many times before, M&A is one very critical value creator for Inwido and a key long-term growth driver. We evaluate, implement, and execute M&A based on the 8 criteria that you see on the right-hand side of this slide. and I'm happy that we've made good progress so far in 2022. We've closed 3 acquisitions, with Dekko Windows Systems outside of Manchester in the U.K., Hyvinkään Puuseppien in Finland and Westcoast Windows in Trollhattan outside of [indiscernible] in Sweden. And all of the 3 have come off to a good start with good contributions, both in terms of sales and profit, as well as on clearly identified synergies with the rest of the business.

What's also very pleasing is that, thanks to our good continued work with strong cash flows, we have a very healthy balance sheet that leaves plenty of room for further strategic growth and value-driving acquisitions.

Next page, please, Page 13. Another very important part of the Inwido strategy and a key priority for us is sustainable development of our operation, partly and very importantly because we see that we can contribute critically to the energy transformation in society with our energy-efficient windows and doors, but also because we are acutely aware of the need for us to consistently decrease the impact that we make on the environment around us.

One part of the sustainability work is to report and follow up on 9 sustainability KPIs that you can see here on the left-hand side of the chart. The last one is a new one for this year, but of the previous 8, you can see that some are reported on a quarterly basis and some on an annual basis.

Looking at the latest reporting period, we've made progress on 6 of the 8 KPIs, and our ambition is very clearly that we want to make progress on all 8 for the long strategic future.

Looking at the KPIs that are reported quarterly, you can see those on the right-hand side, where it's pleasing to see that we are continuing to make progress on creating a safer place to work, although we set very high ambitions in this area and are continuing to invest considerably to make this a safer place to be day by day. It's also pleasing to see that we're making progress in terms of decreasing our hazardous waste.

However, it also shows that we still have work to do. Our energy consumption per produced unit is actually going up on a rolling 12-month basis versus the period before. The key driver actually being a cold winter this year, but nevertheless shows that we need to continue to develop the very good initiatives that we have in this area. And mainly due to the quarantine rules around the COVID pandemic, we see that short-term sick leave is going up, albeit it's pleasing to see that we're making some continued progress on decreasing the long-term sick leave.

Next page, please, Page 14. And with that, I'm going to hand over to Peter, who's going to go through the details of the financials. Peter, please.

[Peter Welin, executive]

Thank you so much, Henrik. Let me turn to Page #15, please. This page is showing a summary of the income statement. To the left, we can see the Q3. In the middle, you can see the year-to-date. And at the right, you can see a rolling 12 months as well as last year.

The results in the quarter, sales was plus 26% compared to last year, organically it's plus 15%. So volume plus price increases gave a growth of 15%.

The gross margin declined from 27.8 to 24.5, mainly due to mix. We have had a lower degree of e-commerce sales in the quarter compared to last year and as well as the e-commerce had also lower gross margin this year compared to last year. Then we have the glass prices, which are impacted by the gas prices, as Henrik mentioned before, in the quarter. And we have also higher energy costs compared to last year in the quarter.

Operating EBITA was improved by SEK 23 million, an increase of 8%. EBITA was a little higher in the quarter compared to operating EBITA of SEK 298 million compared to SEK 297 million. And the reason for that is onetime repayment of AGS insurance in the quarter. And we also had some acquisition costs in the quarter.

Further on the income statement, we can see that profit after tax was plus 10% compared to last year and earnings per share was plus 9% compared to last year.

Year-to-date, we have an increase of sales of 25%. Organically, it's plus 16%. The gross margin is also down compared to last year. Year-to-date, the operating EBITA has been improved from SEK 663 million to SEK 775 million, an improvement of SEK 112 million or 17%.

We can see further down the income statement that profit after tax was plus 14% and earnings per share is plus 12%, an increase of SEK 1.05.

Rolling 12 months, sales is now up to SEK 9.1 billion. And also glad to say that operating EBITA for the first time ever is above SEK 1 billion, is equal to SEK 1.9 billion, a margin of 11.2%. And earnings per share is today rolling at SEK 13.34.

If you then turn page, we go to Page #16. This page is showing the order intake development as well as sales development on the left for 2020, 2021 and 2022 in Q3.

If we start with the sales, the left, sales is plus 26%. Acquisition has increased our sales by 6%. And the currency has also increased the sales by 3%. And organic sales volume plus prices is plus 15%.

Scandinavia had organic sales growth of 20%. Eastern Europe was plus 30% in the quarter. e-Commerce was minus 14%. And West was minus 1%.

The order intake to the right declined by 1% compared to last year. Excluding acquisition, it's minus 7%, still above the level of 2020 and also above the level of prior to the pandemic.

Looking at the business areas in the order intake, the total order intake, the Scandinavia was minus 2%. East was minus 40%. E-Commerce was minus 8%. And then West was plus 68%, thanks to the acquisition of Dekko as well as good improvement in Ireland.

If we then turn page, we go to Page #17. On this page, we can see the operating EBITA in the quarter as well as year-to-date. Also for the margin in the quarter as well year-to-date for 2020, 2021, as well as 2022. The operating EBITA of SEK 297 million is the highest operating EBITA in Q3 ever for Inwido. The margin declined from 14.5% to 12.5%. If we exclude e-Commerce, the margin is more or less on the same level as last year. Then we have a negative impact from the gas and glass prices as well as energy costs. And the margin in 2020 was 14.4%.

Year-to-date, we have also higher result ever of SEK 775 million. The margin has declined compared to last year from 11.9% to 11.2% due to e-Commerce as well as inflation and energy costs. The margin is still above the level of 2020, an improvement of 1% unit, thanks to the strong quarter 1 this year compared to quarter 1 2020. In Q1 this year, we had a margin of 8.5%. In quarter 1 2020, it was 3.3% due to a strong backlog we had end of 2021.

If you then turn page, we go to Page #18. This page is showing the order backlog end of each quarter since Q3 2018 until Q3 2022. The order backlog declined compared to Q2. However, we are still plus 6% compared to last year and plus 85% compared to 2020 and considerably higher compared to previous years. So still strong order backlog compared to previous year on the history of Inwido.

Excluding acquisitions, the order backlog is plus 1%. Scandinavia is minus 9%. Eastern Europe is plus 28%. E-Commerce is plus 6%. And Western Europe is plus 19% compared to last year.

If we then turn page, we go to Page #19. This page is showing the return on operating capital. Return on operating capital is defined as EBITA rolling 12 months in relation to the average operating capital latest 4 quarters. Since Q3 2018, we have improved from 9.5% to 17.9%.

Operating capital decreased from beginning of 2020 to end of 2021 by SEK 690 million, thanks to improvement in working capital. This year, for the latest 2, 3 quarters, the operating capital has increased due to acquisitions. Working capital in relation to sales has stayed and is stable on a lower level.

We have, during the period, improved EBITA. At the same time, we have reduced operating capital. And thereby, the return on operating capital has improved to 17.9% and is still above the target of 15%.

If we then turn page, we go to Page #20. This page is showing the net debt end of each quarter, including as well as excluding IFRS 16, also showing the net debt related to EBITDA, including as well as excluding IFRS 16.

Net debt decreased in the quarter by SEK 241 million. We have the strongest cash flows in the second half of the year. Compared to Q3 2019, the net debt has decreased by SEK 1.4 billion. And the net debt related EBITDA has decreased from about 2.5 to 0.5, excluding IFRS 16. Including IFRS 16, we are 0.8. The IFRS 16 debt has increased the total debt by SEK 383 million.

So indeed, it has today low leverage, we have thereby balance sheet as well as liquidity to make acquisitions.

If you then turn page, we go to Page #21. This page is showing the development since the IPO. Inwido made an IPO in 2014. Since the IPO, sales have been growing up until today, rolling 12 months, by 85%, a CAGR of 8%.

Operating EBITA has been doubling during the period and the earnings per share has increased by 4x or 300% from SEK 3.1 to SEK 13.3.

I now hand it over back to Henrik, who'll make a short summary and outlook, and thereby we open up to questions.

[Henrik Hjalmarsson, executive]

So next page, please, Page 22. So very briefly, in summary, we've closed the quarter where we remain above the trajectory both in terms of growth as well as profitability towards our long-term targets. We see a strong order backlog that supports sales in the near term, but some more uncertainty in terms of the order intake. On the one hand, we see high inflation, increasing energy costs, and rising interest rates that reduces the consumer's disposable income.

But on the other hand, we continue to see a strong focus on the home and the home environment and a rapidly renewed interest for energy-efficient solution, which creates clear opportunities for Inwido.

Either way, we have a proven track record of rapidly adjusting our operations up or down to fluctuations in volumes and remain prepared for any demand development while continuing to protect our margins.

Next page, please, Page 23. Before I open up for questions, very rapidly, I just want to remind you that on the 8th of December, we will host a Capital Markets Day in Stockholm. You are cordially invited and please sign up on our website.

With that, we will open up for questions. So I hand back to you, operator, please.

[Operator]

[Operator Instructions] The first question comes from Victor Hansen from Nordea.

[Victor Hansen, analyst]

Yes. This is Victor Hansen, Nordea Equity Research. Henrik and Peter, my first question here, what's the price effect in your order intake and your order backlog?

[Henrik Hjalmarsson, executive]

Yes. The price impact is a bit hard to separate price from mix, as you know, given the complex setup and environment, but it's in the range of 10% to 15% year-over-year.

[Victor Hansen, analyst]

Yes. That makes sense. And then when do you expect your e-Commerce efficiency to be back to normal?

[Henrik Hjalmarsson, executive]

We expect a gradual supply chain efficiency recovery here during the fourth quarter. And we should be back at -- as I said before, from a capacity perspective, there is no longer a challenge for us. And from an efficiency perspective, we expect to be sort of fully back on track either at the very end of the fourth quarter or early in the first quarter next year.

[Victor Hansen, analyst]

Got it. And then finally, what's the margin hit from higher input prices such as glass?

[Henrik Hjalmarsson, executive]

Yes, it's a bit hard to answer directly, obviously, again, because of quite a substantial mix. But given the spike in energy prices, given that high 40% of revenue is actually input material costs, and given glass is the biggest input material, we obviously have a considerable hit there. On top of that, we then have general energy prices that are impacting.

But in the quarter, input material prices alone, probably net impacting the margin by around 1 percentage point.

[Victor Hansen, analyst]

Okay. That's great. And one final question. Would you say that you paused or slowed down your M&A pace here due to turbulent markets? Or what's your outlook here in terms of M&A?

[Henrik Hjalmarsson, executive]

We continue to remain very active in the M&A space, spending a considerable amount of time and energy on finding the right targets and developing those jointly. I think it's important for us to take a long-term perspective on this, which means that the targets that we're looking at and working together with, are targets where we are, in a sense, less worried about any short-term fluctuations and see clear long-term joint value creation.

So our activities continue. We do see some pockets of sellers being a bit more cautious given a fear that the uncertainty in the market outlook will impact their valuation multiples negatively. But overall, we see continued progress on the M&A front.

[Operator]

Our next question comes from [ Frederic ], a private investor.

[Unknown Attendee]

Good morning. My name is Frederic [indiscernible]. Do you hear me?

[Henrik Hjalmarsson, executive]

Yes.

[Peter Welin, executive]

We hear you.

[Unknown Attendee]

Yes, I have 3 questions. I want to go back to regarding the demand. I mean you are growing quite heavily in all the regions. And I just want to know, do you see an increased demand now that private -- I mean private buying more windows to mitigate the energy prices?

[Henrik Hjalmarsson, executive]

I mean, if we look at the order intake, as you see, which is our demand predicated in a sense, you see that, that was slightly down in the quarter. In reality, however, the mix impact there is quite substantial where we see slightly more hesitant activity levels on the industry side, and also on the e-Commerce side, a bit more hesitant activity levels. However, in other pockets, we see opportunities from the energy renovation focus that obviously comes as a consequence of the very high energy prices that we've seen.

So it's a little bit of a mixed bag. And that's also why I mentioned, from an outlook perspective, that on the one hand we obviously recognize that consumers are squeezed by rising interest rates, higher inflation, but on the other hand, they also have strong opportunities for good ROI investments in their homes with, for example, then changing windows and doors to more energy-efficient products.

[Unknown Attendee]

Okay. And regarding the natural gas prices affecting the glass prices, if and when the gas prices come down, how long is the price lag do you see it?

[Henrik Hjalmarsson, executive]

It's shorter than it used to be. So given the very turbulent environment, we normally work with somewhat longer periods of locking in prices. In this current natural gas and glass price environment, we have not done that. So we will see any reduction in natural gas prices will have impact already in the quarter clearly. And in some cases, it might even have so within just a few weeks. So in effect, it's energy surcharges that will be coming down quite rapidly. That's how we've structure that, given the turbulent environment.

[Unknown Attendee]

Okay. And this is more of an IR question, but how actively are you working against institutions and larger funds regarding your ESG profile?

[Henrik Hjalmarsson, executive]

I would say that we are continuously increasing the activity levels. We have, over the past couple of years, internally very clearly highlighted and invested behind the ESG area in the broadest sense. And as I said, we're very aware of both the way that we can impact this positively from a Pan-European perspective, but obviously also the responsibility that sits with us. So I would say more and more.

And given the relatively high taxonomy alignment that we expect to be able to achieve, we also see an increasing interest level in the sustainability aspect of the ESG aspect of our business.

[Operator]

[Operator Instructions]

[Peter Welin, executive]

In the meanwhile, we have received 2 questions over the e-mails and that we can take these 2 questions here. So it's from Daniel [indiscernible].

So Henrik, question number one is regarding the impact of timber prices. Do you have any idea on how much your input costs are made up of timber? And how much of reducing timber prices will impact cost of window frames?

[Henrik Hjalmarsson, executive]

Yes. So we obviously have a view on how much of our input cost is timber prices. And we can say that, to give some sort of size here, timber is our second biggest material category in terms of value following glass. And as I said before, roughly 45% of our revenue is actually input material cost. And we expect, as I also said before, timber prices to be coming down during the fourth quarter and also into the first quarter of next year.

And I guess a way to size that, to give a bit more specificity around it, is that 45% of our revenue is materials and roughly 50% of those materials are made up of wood and glass, so.

[Peter Welin, executive]

Glass is a little bit more than wood.

[Henrik Hjalmarsson, executive]

Correct.

[Peter Welin, executive]

Second question from Daniel is, are there any specific markets where you are looking at acquisitions, and do you see a reduction in the prices of private companies?

[Henrik Hjalmarsson, executive]

So obviously, we see an opportunity to continue the consolidation with what will be likely smaller bolt-ons in the Nordics given the strong positions that we have in several markets. But we see a clear opportunity to continue the consolidation in the U.K. and Ireland.

But we've also been quite clear about our desire to make inroads into at least one larger continental European market in the near term. And we do see some clear opportunities there. And as a bit of a teaser to the Capital Markets Day coming up, then we will talk a bit more in detail in terms of both the opportunities there and the activities we have to drive that.

In terms of valuation, it's a bit of a mixed bag, to be quite honest. We do see a market where, given the uncertainty in outlook, multiples are starting to come down a little bit. On the other hand, given the recent high activity, both in our space and on the economy in general, obviously, the trailing financials are at fairly high levels. So it's a bit of a mixed bag.

Any further questions, operator?

[Operator]

There are no further questions, sir.

[Henrik Hjalmarsson, executive]

Okay. Then we hereby close the call. Thank you very much for your participation, and see you next time. Thank you. Bye-bye.

[Operator]

Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Thank you.