Beijer Ref AB (publ) (BEIJB) Earnings Call Transcript & Summary

This call is being recorded. Welcome to the Beijer Ref Q3 Presentation for 2023. [Operator Instructions] Now I will hand the conference over to the CEO, Christopher Norbye; and CFO, Ulf Berghult. Please go ahead.

Hi, everyone. It's Christopher Norbye here sitting with Ulf and also Joel Davidsson, who will be taking over as CFO going forward. So we're all 3 here in the room in Malmo. So with that, we'll get started. First slide is Beijer Ref at a glance. As you can see, our rolling 12 continues to increase. I think more interesting is that we joined a new market here in South Korea with an acquisition during the quarter. So now in 45 countries around the world and of course we'll come back. But also we've made an another add-on acquisition in the quarter in the U.S. as we have been discussing that earlier. Moving over to the next slide, a little bit highlights of the quarter. Sales of almost SEK 8.5 billion. So we continue our strong growth plus 42%. Of course the majority in this quarter supported by our acquisition in the U.S., but also other acquisitions that we've done during the year. So continue to have a good growth path in total. Organic sales was minus 4% in the quarter. We'll come back a little bit what that relates to. I would say the majority is in HVAC and 1 day less and then the acquisition, I would say, performed very well and we continue to have a good tailwind on the currency. The EBITA continues to be very strong with margins of 11.3%. So continues to be good development in our business driven by a continued strong gross margin. So we grow EBITA 54%. And then also as we have been fairly clear about, the cash flow is now turning in a good way. Record cash flow for Beijer Ref in the quarter in Q3 as we are reducing our inventories slightly on accounts receivable, but also will come back to quite a negative effect because we're not buying anything or very little from our suppliers and we expect cash flows to continue to be strong here in Q4. The result an increase of 32% and EPS continues to grow by 8%. So I would say good quarter, good margins and a strong cash flow in Q3. Moving on to the next slide. If you look at our different product groups as we split up our business. On the organic side, commercial and industrial refrigerants continues to be in a stable level and good activity plus 3% in the quarter, OEM continues to grow, a little bit of a mixed picture, but very positive in Europe where our main companies [indiscernible] continues to have very good development with double-digit growth and some more challenges in APAC driven by China. We expect China to improve as we move into Q4. So I would say very happy with the OEM development in Europe, stable on commercial and industrial refrigeration. Then we have HVAC minus 11% and I think it's important just to have a little bit reference. We still see good activities in the HVAC segment on the underlying business. But having some respect from last year in Q3, Q4 and Q1 we had 25% to 30% organic growth, a lot driven by a chaotic situation on energy prices, gas and oil and a lot of people moving into these type of products. So underlying still good, but compared to those type of comps, it will be a challenge over the next couple of quarters until we normalize our business. But in general, I would say good activities in that area as well. So that drives our minus 4%. Inventory, we will come back little bit more under Ulf. North America, we'll touch upon little bit later. I think on the acquisition side, as announced, we entered South Korea buying 1 of the market leader there in refrigeration and see good growth there by introducing our natural refrigerant product and expanding the business with the new products. So very happy about that entry. Also very important to mention AMSCO Supply, a strategic add-on from us and we expect more acquisition as we continue to grow in the U.S. So a fairly active quarter also on the acquisition and we'll come back to it. We believe that the acquisitions were financed by our cash flow we generated in the quarter. That's why net debt hasn't changed, but very good addition to the company. Next slide. Looking at EMEA, I would say continues to operate at a very good level on the margin side as we're of course also flushing out a lot of inventory. I would say gross margin continues to be strong in the segment and we expect this to continue. We don't expect the inventory to continue to move down here in Q4. So we're getting a good traction on the cash flow. I would say in EMEA, good growth on the OEM side. Refrigeration and HVAC little more challenged because most of this growth in HVAC came in Europe last year Q3, Q4 and Q1 related to the energy situation while APAC was more stable and of course U.S. driven by other areas and we'll come back to that. We also acquired the company Condex here and they have started consolidating into a strong HVAC distributor as well. So I would say in general, good development on ramp in OEM in Europe and then high comps in the HVAC side that's affecting us. But in general, I would say still good activity. Moving on to APAC. APAC is now moving into summer season. Mid-October is usually where we start seeing it in Australia and New Zealand, which is our biggest market. So I wouldn't say a good start to the season there. While of course EMEA and the U.S. are moving more into offseason. So continue to be an active market for us. We mentioned South Korea stable on the margin side, but as volume now starts to increase in Q4 and Q1, of course we'll get a pickup there on the volume side and started promising in this region. So we look forward to follow this here for the high season. Next slide. Then North America, happy to see that we're growing at a higher sales in Q3 versus Q2. So I would say stable market for us in our regions, a little bit warmer in Q3 versus Q2 compared to last year. That's driving some of the demand also. Towards the end of the quarter, we started seeing products supply from our key HVAC supplier that helped us drive sales. So we're now in Q4 getting more and more into a stable supply chain situation. So we believe that of course will help in 2024 as well from gas in '23. So in general, positive development in the U.S., stable in the margins, more equipment sale in Q3 versus Q2 where there's more repair. But in general, a good and stable development in the U.S. and of course during the quarter, we added AMSCO that we've already starting to work together with. It's aligned to our existing territory as the same strategic supplier. Good possibility for us to put on and expand our platform. And then also just towards the end of the quarter, we started to launch private label Sinclair so we're looking for this moving forward. So in general, very happy with the U.S. performance and the outlook going forward and we'll come back a little bit on how regulation is accelerating in the U.S. as well and I think will have a good impact for us on the long term. So move on to the next slide. So sum it up: 42% overall growth; organic 4%, come back a little bit more on that one; good EBITA growth; and then positive EPS growth as well. The next slide. Similar here on the sales side more broken when you see the currency continues to be a tailwind for us and the euro and the dollars continue to be strong versus the SEK. And then M&A plus 39%. So I would say continued good development on the M&A side and there growth as well, which gives us SEK 8.5 billion in sales. Here you can see of course the historical sales that we continue to perform very, very well, plus 42% compared to plus 38% Q3 last year. You can see the difference here is of course organic growth coming into very strong comps driven mainly on the HVAC side as we've said in Q3, Q4 and Q1 last year. But we'll continue to have a good acquisition growth and we'll come back little bit what we see on the HVAC side. But in general, I would say still good activity in most of our regions. Moving on to the next slide. This is I guess a new slide explaining on the HVAC, we'll clarify little bit what we see. Now if you look at our HVAC business the last 5 to 7 years, it's more an organic CAGR of 8% to 10% per year, which I believe is a very good organic CAGR. But then you saw in Q3, Q4 and Q1; you had extremely high growth levels. A lot related to the situation of people buying heat pumps to manage electricity, gas, oil and other solutions in a lot of countries and now we see a more normal pattern. But we still see long term very good possibilities in the heat pump side, electrification over the world, also banning of gas. So long term the trend still looks very strong, but of course the short term are fairly strong comps to manage and that's all to say the underlying activity is still fairly good in our markets. Moving on to next slide. EBITA growth, we went over that. 54% driven by of course higher sales with our acquisition, but also continued very good margin development, 11.3% EBITA margin in the quarter. Moving on to the next slide. Here you see longer trend on the margin development as you can see here in our Q2, Q3, which Q2, Q3 will be our highest quarter on the market because it's our 2 highest sales quarters. And then the U.S. follows a more similar trend like Europe on having Q2 and Q3, as high season when it's of course really hot. And then now as we move into Q4 and Q1, it's more replacement of systems with maintenance and service, but also moving more to heat pumps. The U.S. does have large heat pump sales in Q4 and Q1. And as you know, in Europe we're moving more and more into the heat pump segment as well. And then APAC is moving into summer season so of course that's a strong cooling segment of our business. So moving on to the next slide. The EBITA growth that we can see Q3 2022 plus 70% and 54% above that this year. So we are pretty satisfied our margin and our business are developing in Beijer Ref.

Okay. Then we have the next slide, which is the P&L statement and if you look then at that. Christopher went through the EBITA. So if you go further down, you see the financial net was minus SEK 158 million, which is then impacted negatively by an exchange deviation of SEK 40 million. So the underlying financial net is then down to SEK 120 million. And then the tax in the quarter that is a normal 25% versus last year 24%. The 25% that we have been having for the last quarters. And then I'll move over to the next slide. Then we also talked about earnings per share so there is an 8% increase. And then the next slide then, operating cash flow. So I have 3 slides on operating cash flow just to explain the delta. So this first slide here is then the movement from Q3 2022 to Q3 '23. As you can see that we have increased the EBITA. We also have a very positive movement in working capital with SEK 481 million, slightly higher CapEx of SEK 55 million and leasing SEK 27 million and then others SEK 13 million. And as Christopher said that the nice thing in quarter 3 that was actually the operating cash flow SEK 1.1 billion financed the M&A activity in the quarter of close to SEK 1 billion. So the net debt is the same here during quarter as we entered it. The next slide is then explaining the movement in the quarter. So in the quarter, we added SEK 1.1 billion and then we had a working capital movement of SEK 167 million, the CapEx minus SEK 90 million and leasing SEK 125 million leading then to SEK 1.1 billion. But just to explain SEK 167 million the working capital movement, we have next slide showing the specification of that. So we have then the release of the inventory of SEK 525 million. We also released an accounts receivable of SEK 717 million. And then the negative side then, the inventory reduction is that we are buying less and then we also getting less accounts payable so we have a negative delta or negative movement on accounts payable with SEK 848 million. And then we have other working capital items, which is basically accruals related to salaries like vacations, et cetera. So that had a negative impact in the quarter. So that will leave us with plus SEK 167 million in the quarter. The next slide is then showing the quarterly development of cash flow and, as Christopher said earlier, this is the best quarter we have had in cash flow. So SEK 1.1 billion and hopefully, we will then see or most -- we will see a good development also in Q4 2023. And then my final slide is then the net debt, which is we have then a leverage of net debt to EBITDA of 2.30 reported. But if I then exclude the leasing, which is mainly our rental contracts on our branches and then the pension, we have leverage of 1.94 versus last year of 2.31. So that's also improving. Then I hand over to Christopher on the last slide here.

So little bit the summary points, you heard most of it. The way we summarize the quarter with good profitability, strong cash flow, sales growth. Growth continues to be high driven by the acquisition agenda we have. EBITA continues to follow that growth and of course continue to have improving margins that's driving that further. Cash flow of almost SEK 1.1 billion and I think we've been very bullish on that and we'll continue to be that in Q4. This is of course something that we are working actively with. We're also happy in the U.S. Supply chain is improving, stable marketing in Q3, good activities in most of the segments in the U.S., we continue to have good margins and good activities also on the integration from private label, a lot of activities on refrigeration that will grow in the future and branches investing in. And then of course first add-on acquisition in the U.S. AMSCO Supply, happy to welcome them to our U.S. platform and more to come in that area. And then also entering new market in South Korea, one of the market leaders in refrigeration where we think there's lot of value creation we can do over the years and also continue to grow in new markets. So I think Q3, good performance in general, good activities on that acquisition side, improving balance sheet at a good level and a good cash flow going forward. If you look at a couple of things that I think is fairly relevant that has been done in the quarter. The decision under the updates for the F-gas regulation in EU. We further accelerate the phase out, which means that they will take down the old gas even further until 2030. A couple of things that will happen long term with this acceleration is that of course it will be tighter to get access to the refrigerants and we expect long journey prices will get positive in this journey. But I think even more important of course is that you will have to accelerate the phase out of all your equipment running on old F-gases because we can already now see tightening of the supply, which means that you have a risk of not getting a hold of enough old gas to supply the demand out there. So we're being very positive for the OEM business for us long term to drive the acceleration of phasing out all this and of course very good for the environment. So we believe it's a positive thing, of course also you get more regulation on how you're going to move into natural refrigerants on your HVAC business and your heat pumps and that will also -- when that comes in a couple of years' time have of course a different type of base picture for this type of product. So good long-term trends accelerating on the F-gas in EU. Then also in the U.S. relevant to mention is that by 2025, HVAC is -- the regulation is moving into natural refrigerants. There was a lot of talk before regulation that was manufacturing date, now they're moving it to installation date. So it's also accelerating and that's also going to have of course a long-term positive effect on our platform in the U.S. as we expected. So continued good trends in the changes and the phase out of products that's beneficial for Beijer Ref. We talk about the U.S. getting better on the supply chain, which we expect then in 2024 to get a little bit of pickup and so it can have a better product. Portfolios of course, our main supplier is already prepared for the natural refrigerant in 2025. So it feels good to have a very good partner in the U.S. We launched Sinclair at the end of the quarter. It's going to have more effect on 2024 and this allows us to be a little more aggressive in segments that are not active today with the platform so positive. And for that, refrigeration continues to grow very nicely for us, but from a small base as we disclosed before. We do expect for the next couple of quarters on the comps especially on the HVAC side. As I said, we're growing 25%, 30%; 26% in Q3, 29% in Q4 and 17% in Q1. So it will continue to be a headwind on the comps on the organic side on the HVAC until we get back to more normal comparables especially in Europe. This is mainly in Europe while HVAC in the U.S. of course is in a different situation. We expect cash flow to continue to do well and we expect to be stronger in Q4 than Q3 and of course that gives us opportunity on the acquisition side versus working on our balance sheet and debt. So I think we're in a very good position on the balance sheet and we can choose a little bit as we continue to generate cash flow. Because we do continue to have a good pipeline of acquisitions and working with the company to have them both in the U.S., but also in Europe and APAC. So we expect to continue to drive that strategic growth in the future as well. So that is the last comment so we can open up for questions. Thank you for listening.

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

It's Carl from Nordea. A couple of questions. Firstly, could you say something about the pricing versus volume development for Heritage in the quarter? And also I mean of course you said something about the supplier delivery issues slightly normalized, but would you say that it's back to 100% deliveries as of October and why don't you think we should see a catch-up effect already in Q4? You're more talking about 2024. Is it primarily from a catch-up or also maybe from gain in the market share so to speak or how should we look at it?

First of all, we don't disclose the price volume. There is still a price component in the U.S. from price increases that were coming through. So we still have a positive price increase. But I would say in Europe and APAC, it's more stable much less of a price and it is more volume. But if you look at the second question, I think it's more of a conservative view because as you move into Q4 and Q1, you're moving to more heating season and of course you can have some kind of catch-up there. But for us it's more as we move into the summer season next year where you can have a real impact. But as we sit today and I was in the U.S. last week and we were getting in the final filling up for the packaged heat pump for the season. So you still have some delays. But in general, today it's not an issue. So I mean we might have a pickup, but I don't expect Q4 and Q1 to be too much affected by it. I rather see Q2, Q3 as we ramp up to the season, we'll be in a much better position than last year. And two, of course with the regulation now moving into detail already with the installation date in January of 2025, we're going to start seeing those products getting on the market already in Q3, Q4 next year and that's of course a product that's priced very differently. So that's also positive and I think it's positive for us and our partners I would say on technology wise already there on the technology today to help. So in general, I see more of that coming towards Q3, Q4 next year.

Speaking of the new products in the U.S., how will you handle the shift to the new products inventory and supply chain wise? And also do you have any views on sort of the pricing? We have heard what Carrier is talking about, et cetera. But is it low double digits you expect as well for you? And also could you remind us of the equipment mix of Heritage so far as well as with the new company entering here?

Yes. So there's a lot of questions in there. I'll try and answer all of that and you have to remind me if I miss something. But in general, this regulation just came out 2 weeks ago so we're still going through it together with our partners on the equipment side. But I think what will happen is that you'll start already in Q3, Q4 phasing out the old products and reducing your inventory there and getting the new product online because you need to phase it in the right way because by January as it looks today circa 2025, you cannot sell the old product. That's why you will start seeing new products going through already in Q3, Q4 because that's the only way to do the phase out in a controlled manner. But we are discussing that together with our main partner in there and they're, as I said before, fairly long on the product portfolio as they've been the one that converted first into the technology that's already ready for natural refrigerants. I think when you talk about pricing on this product portfolio, my guess is also based what I'm hearing from Watsco and Carrier that's listed. We are talking to our partner, but you hear anything from 10% to 20%. But let's have a conservative view and work with 10%. But that's what you're hearing in the market for these new products in there. Then if you look at the equipment side of Heritage and I know you had a question there on AMSCO as well. Heritage is about 35%, 40% equipment and AMSCO is a little bit more rounding around 50% equipment.

Very clear. And also entering Q4 in HVAC, I mean you're talking about tough comps we saw it in the quarter as well. But also I guess your business is looking at the organic growth will have a different mix. I mean Asia coming in into high season, seemingly better momentum than Europe. Also in Europe, you're entering heating season versus a cooling season where we're may be talking more air-to-water products. So how should we look at that mix playing out then during Q4 versus what we saw in Q3? Does it sound like at least an acceleration of the negative organic growth, but could it even be an improvement or what do you think?

I don't see an improvement right now in there. I think when you move into Q4, Q1, last year you were just trying and I think it's mainly in Europe. In APAC, yes, but it's a smaller part of our business. You have cooling activities now and the U.S. is of course moving into there, but that's not organic. It's mainly in the EU side of the business, but we don't see any acceleration. And also remember what drove this very good growth in those quarters was a lot of people buying air-to-air heat pumps for heating to balance their grid or the systems in the house. So no, I don't see an acceleration of the HVAC business in Q4 and Q1.

And the final one, just step back here is on OEM, low single digits in the quarter. Also here of course tough comps. But have you seen -- I guess we also heard Carrier saying that customer is becoming more sort of hesitant or cautious in terms of placing orders. Is that what you see and have you also seen an increased demand recently given the tightening quotas in Europe?

No. I would say that if you look at our Q3 and of course I would say that we are doing better on the commercial side and a lot of competitors, the one you can look at. So I mean Europe was still double-digit growth for us in Q3. So on one side we're strong in Portugal, also Fenagy that's gone extremely well supporting the whole OEM side. So you had a negative development. I mean you still have comps of plus 0.8% last year. So we're happy. Of course we feel that on the retail side, they're more hesitant on the quotes. But in general, Europe was still good activities and APAC was more challenging. But retail is lower, but that's not our only customer segment in the business, but retail is a bit slower at the moment. We expect that to pick up more next year. And as we said, this new cooler levels have just hit the market so I expect that to start [ moving in ] and we start seeing that towards maybe after the summer next year when it starts getting tighter and tighter because that's usually when the installers and the customer will start reacting to it. And we do see we are one of the biggest importers in the world here in Europe for coolers and we are fighting hard for our customers to find enough refrigerants that will only get tighter next year. But when we start seeing it on the OEM side, I think it's probably another 12 months before they start seeing on the equipment side.

The next question comes from Adela Dashian from Jefferies.

My first question relates to the HVAC development in this quarter and if you could please give us some more color how much, if any, the near-term uncertainties regarding heat pumps affected development in Q3 especially Europe or primarily Europe?

That's part of it. Of course I think that moves more into for us as being -- especially from the cooling side, moving now to of course more heat pump weather type of market. And I think yes, we see also first of all it's the same situation on Asia both on the cooling and heating, it's very tough comps compared to last year. And you also have some markets where you're weighing a little bit on incentive models. You have Poland, that's a big market. Germany is starting. France I would say is positive and then you have basically in other markets. I would say that we also need to start getting back to strong growth in that segment short term. Long term I think we all see the same trends as we move into electrification and the green deal, but you need some supportive incentive models coming in place in Q4 or Q1 to support it. But I mean the market is still there, but of course not at all at the same level as it was last year. I also think you have on the heat pump side a lot of inventory in the market that needs to flush out for some of the bigger OEMs in the market. If that answers your question.

Yes, it does for sure. And then maybe also just a clarification point on the earlier comment that you made about organic growth in Q4. Did you say that you do not expect an acceleration in growth in Q4 or was it an accelerated decline in Q4?

No, I think what I said there was with a question on the HVAC side. We didn't see any improvement or acceleration versus the pumps as where we're sitting right now because you had HVAC very strong growth here in Q4 and Q1 and a lot of that was supported by the energy situation that we had in Europe last year. And as I said, the CAGR of our HVAC the last 5 years more 8% to 10%. So I don't see an improvement on the HVAC versus comps right now where we sit.

Yes, that's what I also thought. How is that being offset by your developments in OEM as an example? I mean you mentioned that you entered North America with a push by the end of the quarter. Could that contribute at all into Q4 or is that more going to be a 2024 event?

I believe it's more going to be 2024 these trends, but it's going to be at pretty fast rates when you come into Q3 and Q4 next year to manage that transition, a little bit like we saw when you went into the new requirements in there. So that's more moving into towards Q2, Q4 next year for the U.S.

All right. And then also on North American Heritage specifically, in Q3 I mean we at least estimate that you experienced a decline in organic growth last quarter. Would you say that that has now moved into positive territory or is there still declining organic growth in North America?

No, I would say it's moved from 9% to flat stable development in Q3.

Excellent. And then maybe also if I can touch on the margins that were rather robust despite the volume development in the quarter. How would you say -- how sustainable is this level as you're moving into next year? If we were to assume demand to get incrementally worse at this point, could you maybe also then speak more about if you're planning to implement any type of efficiency measures to keep up with the new base as margins stand today or how should we think about that for next year?

I think as you remember, there was a question as we flush out inventory if we saw a margin challenge. And I think as I said then that no, I don't see that. I see stable margins, strong gross margin across the board. And of course those things not only just happened. We're working with that and we are improving it and of course if you continue -- we still feel very positive on the long-term market. So we are still investing in sales resources, we are investing on the OEM side, et cetera. But our ambition is of course to manage the margin and we don't have any target to those indications that our margins should be coming down in the future if the market completely changes. But where we sit today, still is in a stable way.

The next question comes from Karl Bokvist from ABG Sundal Collier.

My first question is on Heritage, if it would be possible for you to give any comments on how Heritage performed compared to a year-ago on both sales and profitability.

We are growing organically. It was an acquisition. I think the comment I would say that we saw improvement in Q3 over Q2. That was driven by couple of factors. One, if you compare to last year and I know some of you following number of cooling degree days. We had a stronger heat wave in Q3 and Q2 compared to last year so that was a positive driver. We also started to get a better product supply so we could work a little bit better with our customers. So it was an improvement over Q2. So obviously stable development over last year in Q3, that was a very, very strong quarter. And on the margin side continues to be stable, well a little bit more equipment in Q3 versus Q2 that affect the gross margin and mix. But in general on our product groups, we're running on similar gross margins as we did last year.

Understood. And then just going back to the comments you made during your initial part of the presentation. Did you say that the HVAC part of your business had a 7% to 8% annual organic growth rate for the last 10 years? Did I understand the year comment there?

No. I said the last 5 years.

5 years. Okay. Understood. And then just a bit on the prior question there regarding margins. Do you see any changes in the pricing environment either from customers pushing back on lower freight rates or revaluations or inventory adjustments or anything like that whether if it affects you positively or negatively?

No, I think it's a mix of things and when that adds up together, it's very stable. Of course you have some tougher situation in the markets on HVAC, but we're holding our situation well. We are also of course getting some advantages on the products that we are buying, strategically we're looking into it. So not too much discussion on freight prices and we did have surcharges or anything related to that anyway in our business. So right now it continues across the board to be stable. And as far what I'm seeing next year from our suppliers, we're seeing stable on the HVAC side and we're seeing price increases on the commercial refrigeration and refrigerants. How much? Let's see. So in general, it continues to be at a stable level where we sit right now.

Understood. Then more of a strategic one. Over the past couple of years, you have focused quite intensely on business improvements and the higher M&A pace and you've seen the benefits of that within your P&L. Now as supply constraints are easing, when do you think you can kind of go back to the more long-term strategic initiatives that you planned to implement on the working capital side?

We're working on that and I think that's something we can come back to next year. Right now we're looking into the U.S., we set that up with our new platform. So we're running through the inventory turns in the U.S. that of course will be positive from there because most of the supply there are 3 to 4 weeks. Now we will flush out our inventory and go back to the levels we've been at before the pandemic next year. But also here in Europe and APAC, we are working with the inventory setup also with our suppliers because of course a lot of our suppliers on the HVAC side do have some constraints on lead times that is manufacturing in Southeast Asia. We will come back a little bit more on the details of that next year as that will be a focus area for us over the next -- strategic on the next 3 to 5 years on the capital efficiency coming from especially inventory.

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

I mean thank you for listening. Thanks for good discussion. Maybe the summary went over. I think there's no real surprises there and strategic in long term, I believe things look very promising and I think also generating the cash flow coming through now the inventory side also gives us a lot of lead way on the balance sheet and how we continue to grow. So thank you very much. And if you have any other specific question, you can reach out to me or Ulf going forward. So thanks for calling in.