Brødrene A & O Johansen A/S (AOJB) Earnings Call Transcript & Summary

Welcome to Brodrene A & O Johansen Interim Report for Q2 and H1 2024. [Operator Instructions] This call is being recorded. And I will now hand it over to your speakers. Please begin.

Good afternoon, and welcome to our second quarter and first half of '24 webcast. Let us look at some of the highlights of the second quarter. AO saw a positive growth of 2.8%. The growth was 1.9% when adjusting for the impact from Svenska VA-Grossisten. Our expectation was a flat quarter and thus a slightly higher-than-expected growth. Second quarter benefited from the early Easter. Adjusted for the number of workdays, the organic like-for-like was minus 1.6%. Renovation, modernization and maintenance shows a satisfactory growth. AO holds a strong position in renovation, modernization and maintenance. Our focus is upgrading and expanding our outlets is a key element to make AO the preferred place to do your daily business. The number of customers in our stores remain higher than in previous years, which is very satisfactory. Our B2C growth continues. For the third consecutive quarter, our B2C activities are showing growth. It is rewarding to see that households are regaining appetite to invest in improvement of their household. AO is investing in the business. When 1 faces headwind, the initial reaction is to cut costs. We are looking carefully at cost spending, and we have reduced head count by 1% to 2%. However, AO is not a quarterly driven company. We do have the best team, and we want to ensure that we are ready to embrace and serve the growth we are expecting going forward. Even we are investing in hiring new competencies in '24 to be well positioned to expand our business over the coming years. AO Sotckholm has had a strong start. The team in Stockholm joined AO in May, with 2 months of growth and solid results, the new member of the AO family has confirmed its potentials. We are looking to expand with an additional site and hope for an opening during first quarter of '25. The acquisition of the Workwear Group has been approved by the competition authorities. As of the beginning of August, the Workwear Group is part of the AO and their accounts. I had the [ patient ] to visit the Workwear Group last week, and I'm truly looking forward to welcoming them into the AO family and to be able to bring the increased opportunities within Workwear to AO's customers. Let us look at the management's observations. Demand is increasing, but still falling short of wholesaler capacity. This creates fierce competition, which pushed a challenge to the margin level primarily in project sales. In AO, we stay selective to not take orders with an unsatisfactory margin. But it is still our aim to grow our share also within projects. This fact is likely to have a short-term negative impact on margins. Lower basket sizes core for internal manpower. The lower basket sizes caused more inventory pitch per million of sales and more logistic drops per million of sales. Short term, this is a challenge and puts a pressure on our plan to improve the cost of doing business ratio. Cost inflation makes it tough to reduce cost of doing business. In parallel with the most cost increasing rapidly, we also faced a significant number of new legislations and administrative burdens. This forces us and other companies to recruit more administrative personnel with no direct influence on increasing the sales. Consumers have [ forced ] green transition when it comes to installation of heat pumps. We are closely observing the subsidy scheme launched at the beginning of June, but it is too early to conclude but the conversion rate is not encouraging so far. AO sales of heat pumps and other energy solutions amount approximately 5% of AO revenues. In our rest of year estimate, we have included cost risk of approximately DKK 20 million, although we closely manage credit we have improved slightly more losses in our second half '24 estimate. We also faced integration costs related to the 3 completed acquisitions. And last but not least, we will see increased headcount by the new competencies we have hired and will hire to proactively position ourselves to the growth plan. We are observing the geopolitical and macroeconomic tensions. It takes an eye on each finger to monitor the supply chain risks and potential disturbances cause cost by global changes. In the short run, we do not see significant changes to the geopolitical and macroeconomic tensions, but we do foresee continued uncertainty and fierce competition throughout '24. Uncertainty is not beneficial for the customers' appetite to order projects, not to increase investments. We had quite an intense M&A quarter in AO. Don't get me wrong, in AO, we find organic growth very important and rewarding. But from time to time, we do meet companies with a match that completes our business perfectly. With the acquisition of Svenska VA-Grossisten, AO gets a foothold in the Stockholm area. For years, we have had a wish to address this market. And with Svenska VA-Grossisten, we feel that we have found a perfect company front our position in strengthening AO in the Stockholm area. We expect an additional location to be opening during first quarter of '25. For years, AO has been following VVSkupp. VVSkupp is the largest Norwegian workshop within Plumbing and bathroom products. The company has its own location, South of Oslo, which allows us to handle all our activities from the same location. Last but not least, the acquisition of the Workwear Group is an attractive addition to the AO group of companies. The Workwear Group has experienced an impressive journey since the establishment in 2009, with revenue of approximately DKK 265 million, the company is a leading player within workwear on the Scandinavian market. The activities of the Workwear Group are operated from the state-of-the-art warehouse with significant unleveraged capacity. AO has approximately 28,000 professional customers to whom we will be able to offer an improved assortment and the strong capabilities from the Workwear Group. I'm excited to welcome our new colleagues from Svenska VA-Grossisten, from VVSkupp Group and from the Workwear Group to the AO family. Now Per, please take us to final performance.

Thank you, Niels. Q2 sales came in at index 103 against our expected flat growth and thus slightly higher than expected. Revenue development improved during the quarter and the maintenance sales reached more than index 105, which is very satisfying. Projects came in at approximately index 85. Easter brought 3 additional working days to April, but June had 2 less working days. Gross margins reduced 0.8 percentage points due to fierce price competition. External costs came in higher than Q2 due to a DKK 5 million higher loss in trade receivables. Number of employees were 11% higher than Q2 last year. Salary costs increased DKK 12 million relevant to -- equivalent to 9%. A part of the increase was due to the fact that incentives were 0 last year. EBITDA came in at DKK 75.1 million and an EBITDA margin of 5.8%, reflecting lower gross margins and higher costs. EBT ended at DKK 37.7 million against DKK 57.5 million last year. Earnings were as expected. Let's turn to the margins. In spite of a 0.1 percentage point positive segment mix, margins came in 0.8% shy of Q2 last year. Margins are pressured by fierce competition and overcapacity in the market driving low margins, especially in projects. Let's leave the margins and turn to the segment info. The B2B segment accounted for 88.8% of revenues, and the B2C segment accounted for 11.2% of revenues. B2B showed positive growth and delivered a sales index 101.5. The sales index for projects were approx 85, while the repair and maintenance sales exceeded Index 105. B2C showed positive growth for the third quarter in a row. Adjusted for 1 additional working day and the impact from Svenska VA acquisition, organic like-for-like growth was index 98.4. From a margin point of view, B2B came in at 22.2% and B2C came in at 26.8%. If you look at the indirect, the nonallocated cost, it was DKK 14 million higher than last year, whereof loss of trade receivables amounted for 1/3 and salary increases, the rest. Let's turn to the investments. And please be aware that the chart does not include M&A investments. The highlighted band in the mid of the chart shows the normal level of maintenance investments in AO. The investments in Q2 2024 came in lower than Q2 the previous years. On top of the normal maintenance investments, we saw approximately DKK 10 million investments related to upgrading of 3 outlets, which are to include the EA assortment in the second half of 2024. The outlets throughout the country is a cornerstone in AO's business model. This is where we meet thousands of customers each day. Let's turn to cash flow and net interest-bearing debt. From a Q2 perspective, AO saw a relatively good cash flow from operating activities being some DKK 70 million improved to Q2 last year. Cash flow from investments were impacted by the acquisition of Svenska VA-Grossisten and VVSkupp in Norway with DKK 91 million. The tax part of the dividend to shareholders amounted DKK 18 million, which also impacted the cash flow in Q2 in April. Summing up, the net interest-bearing debt ended at DKK 801 million against DKK 717 million end of Q1, and the financing gearing was 2.4x EBITDA. Let's turn to the guidance for 2024. We update our organic revenue guidance from DKK 5 billion to DKK 5.2 billion and now to DKK 5.15 billion to DKK 5.3 billion due to the more positive growth outlook. On top of that, we estimate revenue impact from acquisitions in 2024 to be in the range of DKK 150 million to DKK 200 million in 2024. Consequently, we changed our revenue guidance to the range of DKK 5.3 billion to DKK 5.5 billion. The changed revenue guidance is expected to bring additional DKK 30 million to DKK 40 million to earnings. However, we see a risk that gross margins may be slightly more impacted by margin pressure in the second half of 2024. And furthermore, we do include approximately DKK 20 million cost in rest of year estimate related to integration costs, related to cost, related to investments in new competencies and related to risk of additional losses on trade receivables. The losses are not alarming, but we do see a slightly higher own risk exposure due to credit insurers being more selective in their coverage. Thus, we estimate the positive impact from increased revenues to be mitigated by lower gross margins and additional one-off costs. And consequently, we keep EBITDA guidance unchanged in the range of DKK 340 million to DKK 370 million, and we keep earnings before tax, unchanged in the range of DKK 200 million to DKK 230 million. As always, we do stress the fact that the geopolitical and macroeconomic tension result in market activities being more volatile than normally which pushed the additional uncertainty to estimates. This concludes the presentation, and we are ready to take your questions.

[Operator Instructions] The first question is from Kristian.

I have a couple of questions. I'll do them 1 by 1. So first of all, for our Swedish business, you say that you will be investing in a second site in Stockholm. Can you elaborate on this? Is this sort of pure organic? Have you acquired a site and are going to set up the warehouse or exactly how is it done?

Kristian, yes, we are going to open a site, not an own site, not a greenfield site, but a rented side and hire good team, partly supported by our team in Svenska VA.

Okay. Thanks for that clarification. Then also just a bit curious because obviously, I know that part of the potential for your business in Sweden is to gain a bigger share of [ wallet ] with some of the very large customers here. So now that you have sort of officially established yourself in Stockholm, how has your dialogue been with the national customers?

Good dialogue, Kristian. And we will see the results later. It will not be from day to day, but we have entered a good dialogue, and it's our impression that the national light customers in Sweden, they appreciate having another player to play with.

And when could we expect that to sort of -- be visible in the revenue?

Well, I think that in 2025, 1 should begin to be the impact from that side also.

Okay. Then a question to your acquisition of the Workwear Group. So just affecting on the EA acquisition, which I know was different, but I always hear the rollout of the assortment in your AO sources is taking some time. How should we think about the implementation of the workwear assortment in the whole AO both store and webshop and so on? How fast can you execute that?

It would be a faster 1, Kristian, and it's a totally different game. This is a pure digital company. So the trick is to allow our B2B customers to do their digital trade and get this produced and delivered by the Workwear Group. And then obviously, we will also include more workwear in our shops, but it will be a much, much easier and faster implementation than EA.

Okay. That's interesting. And then to this DKK 20 million in additional costs you flagged. How should we think about that going forward? So I guess my question is really simply could we expect that DKK 20 million or something the like again next year? Or is it more of a one-off nature we shouldn't expect repeat next year?

Yes, you could say the transaction cost is surely a one-off, right? The increased risk that we put on losses from trade receivables time will show. But what we often see in times with -- where people have headwind is that the financial insurers, they get more selective and that as we said in the presentation, that increases our own exposure. So it's actually not a higher degree of bankruptcies, but it's a higher degree of own exposure that I'm nervous for in 2024. I -- we believe that the market will be -- will return to positive growth and the economy will gradually be improving in Denmark and in our markets. And then we should see the losses, I hope, to juice again. When it comes to the new competencies, it's not a one-off. So they will sit on our cost base also next year, but they will, of course, create revenue. So when we refer to the cost addition in 2024, it is to get them established. And we are hosting the cost before they impact revenue-wise. And the main part of the DKK 20 million is due in the second part of '24, but some of the DKK 20 million has already been spent in -- during the first half.

Okay. Understood. And then maybe just the last 1 for me because I think you said it yourself, it has been fairly eventful on the M&A side. So are you done for now at least? Or do you have advertised some more acquisitions?

We have had quite a busy M&A period, as Niels said, I think we ought to harvest the synergies now. But when we see a potential, then we are interested. As Niels said, it goes for both Svenska VA and VVSkupp that actually, we have been looking for them or companies like them for quite a few years. So it's a coincidence that they came in, in the same quarter. We are not done with M&As, but don't expect more in this quarter. We have had a number of...

[Operator Instructions]. Okay. While we wait if there should be more questions from the telephone, go ahead with the written questions from the webcast.

Thank you, and we have had quite a few. Thank you for that. First 1 being, if we are going to rebrand the logo and the name of Svenska VA-Grossisten in the Stockholm area. The answer is no. We are going to continue with the Svenska VA-Grossisten, but add to the name that it's a part of the AO group. We also have a question related to Svenska VA-Grossisten. If -- what about the assortment, how are we going to select the assortment? As you know from previous webcast, we are -- the business in Sweden is mainly water and drainage, and we have a very good business and a very good management within that area. We will choose the same assortment in Stockholm. So it's not at least near term, it's not the our expectations to broaden the assortment. So it will be the same assortment that in Western Sweden. Then we have a question also related to the M&A in Scandinavia. The VVSkupp in Oslo, it's located in Grålum. It's quite near the Swedish border. Do we see a possibility to supply the VVSkupp efficiently with our trucks from AO Denmark when we go to [indiscernible] anyway. It's an interesting thought. And yes, the main road will be for us this way through Sweden and then crossing the border. It is a -- in 1 hand, it's a synergy for us in VVSkupp that we are now able to buy more from the Norwegian suppliers. But on the other hand, it's also a synergy to VVSkupp that we are able to supply from Denmark whenever that's an advantage and to put B2C and B2B articles on the same truck will be an option for us. So it's a good thought. Then we have a couple of questions with regards to the pricing out there. If we are seeing competitors being more aggressive on pricing and if we have the visibility when the situation will normalize well, it's -- you know the market attractiveness has improved in Q2 as we also said during the presentation. But it's still a tough game out there, no free launches and we do, for sure, see margin pressure, especially within the projects. And that's also why we say that we remain -- project -- the project business accounting for like 30% of our total business is an important area for us. But we remain selective. We see some of the pricing being extremely low, and we will rather we will rather not take such an order than, yes, then spoil our margins too much. So for sure, it's a fierce competition out there. When will it normalize? Well, I don't know. But if we see a positive growth in the market, then I think everything will tend to normalize. We have a question what sectors are weak or strong, respectively, especially when it comes to the project sales, well, private building has been a weak one. What we are seeing now is that private building is picking up, more projects are coming in. And as late as the other day, we had a meeting with 1 of our big -- you could say customers within that line of business, and they are also seeing a pickup of activities I think we will also see a pickup of commercial buildings. Now the -- we all expect the interest rates to lower in the future. But at least for now, we see a stable interest rate. So now people they know what to deal with basically a year ago when the -- when we saw 6 to 8 increases in interest people were reluctant to bid because they didn't know if they were calculating on the right basis. So we have a much better visibility when it comes to interests. Then we have a question also regarding the acquired companies, why did the seller sell? Did we reach out to them? Or did they contact us, et cetera. Well, I think every M&A, it's own story, I guess. But 1 of the companies, which we have been looking for, for years, they kind of fold out of their original owner strategy and it fits our strategy quite well. So it was a good time for us to approach them in order to initiate a dialogue. That's just 1 example. I think, yes, different stories to different M&As, but 3 very good companies. And now we have had the Svenska VA since May and the VVSkupp since July, and we will integrate or host own -- the Workwear Group from August. And they are all the 3 of them are fit and ready to grow. Yes. Another question. What would it take for margin pressure to ease significantly? Bond yields have been declining significantly recently. Will this help? Probably, yes. As we said before, I think the bond yields and the interest levels have all -- I think they are all fueling that we should see a little bit more activity. And I guess it takes more activity to see an ease of the margin pressure. Then we have a question that relates to the general revenue growth contribution per working day, and yes, it's a good question. It's a relevant question because this is also how we measure our progress and our performance. That's like-for-like per day. And if you look at your calendar out there, you would see that in Q1, we had 62 working days. And in Q2, we had 59 working days. In Q2, we had a higher revenue. So the math is that our revenue per working day in Q2 was 9% higher than our revenue per working day in Q1. So this is actually as 1 of the measures that brings us -- bring our mood into a positive. We have a significant increased revenue per working day in Q2 compared to Q1. Then we have a question related to the activity outside Denmark. It has been relatively small so far, are the recent acquisitions outside Denmark opportunistic or a sign of strategy to expand across Scandinavia? We have had that same question a couple of times, asking how should we see a Danish company, a Scandinavian company, a European company. You should not see us as a European company, but you should see us as a Danish company being interested in growing more in Sweden and Norway. Then we have a question with regards to the long-term goal for the profit margin. And that may be the 10% EBITDA ambition you're referring to. It's a tough ambition. And it's definitely an ambition that you will not reach in a period of time where economy is a [ scan ], competition is extremely fierce but we stick to the ambition. We want to build a company that can have an EBITDA margin of 10%. It's not easy because the profit margin is under pressure. And we don't expect otherwise in the long run. You'll have to be more and more efficient as a wholesaler. And at the same time, it's extremely difficult as Niels also set to slim your cost of doing business. We are getting extremely loads of new regulations all the time. And yet, we stick to the 10% ambition. It won't be this year. It will probably not be next year, but we stick to the ambition. Then we have a question regarding the EBITDA guidance, which implies a higher EBITDA margin in second half. It's a very relevant question. And I imagine that then -- yes, that many of you have the questions in your head how on earth are we going to earn the double in the second half of '24 compared to the first half of '24. First of all, I confirm that this is our expectation. It is our expectation to end the double. So why is that? Primarily 4 sources, 1 being the organic additional revenues, this will actually hit the bottom line quite effectively. And that amounts to approximately half the additional earnings that we are going to deliver in second half. The other 1 being the earnings from acquired companies. We don't disclosure the earnings from acquired companies, but 1 should probably -- you know that from our announcements, we have indicated what we see from an earning levels from the 3 companies. And based on that, you would probably, in your Excel spreadsheets, arrived to that those 3 companies should amount to approximately DKK 20 million in EBITDA impact in second half compared to first half. Then you should remember the holiday allowance. It's an expense in the first half of the year, and then it's an income in our profit and loss in the second half of the year. So that was the third source. And then the fourth source is supply bonuses. When having higher revenues in the second half of the year, we will in value, of course, have higher bonuses, but also relatively because the vast majority of supply bonuses, they have flown into the P&L mechanically. But the last supplier bonuses, there you want to see the evidence that you hit the target that you reach the upper stairs in the contract and win the extra bonus. So the Q4 will always be a more attractive quarter when it comes to supply bonuses when you are growing. And we also put in a reserve. So you will often see a higher profitability in fourth quarter than the beginning of the year in AO. So those 4 sources and a couple of other sources will, in fact, result in our -- in us expect -- our expectation that we are going to double earnings in second half of 2024. In spite of the pressure on margins. And in spite of the DKK 20 million where some of it has been used in first half, as I said. I hope that makes sense because I fully appreciate that the math is it's a bit complex, but it is our expectation. I think that concluded the questions that we have received. All questions has been relevant -- okay, we've probably got another one. Obviously, the reason for me posing is that I'm reading at the same time. We have a question if the top line guidance is still very conservative. I don't know. I will leave that to you. And if you find it too conservative, I hope you're right. But what I can say from a fact point of view is that we had 121 working days in first half and we have 128 working days in second half of '24. So we have 6% additional working days in the second half of '24. If you combine that with the increased revenue per working day in Q2 compared to Q1 then you can do your math in your spreadsheets. And again, if you arrive at a higher number than we do, we hope you're right. I think that concludes the questions. They were all good and extremely relevant. Thanks for participating. Before I close down, I just want to recap that our next publishing will be in the third quarter. We will publish -- there has been quite some confusion we observe to when we publish and when we host the webcast. We publish our next third quarter announcement or interim report the 23rd of October after stock exchange closure. And the next, the following day, the 24th of October at 1:00, we will host the next webcast. Great. Thanks for now. Bye-bye.