Brødrene A & O Johansen A/S (AOJB) Q3 FY2025 Earnings Call Transcript & Summary

At this time, I would like to welcome everyone to this for A&O Johansen Q3 2025 Interim Report. Today's call is being recorded. If you have any objections of this, please disconnect at this time. [Operator Instructions] I'll now turn the call over to CEO, Niels Johansen. You may now begin.

Good afternoon, and welcome to our third quarter '25 webcast. Let us look at some of the highlights of the third quarter. Third quarter delivered a reported growth of 10.5%. Organically, we saw growth of almost 9% and thus slightly higher than in Q2. We saw satisfactory growth in B2B Denmark and Sweden, and the B2C activities continued the strong performance with a 14% growth rate. Sales came in slightly higher than expected. Margins improved compared to last year. We saw the expected increase in margins within [indiscernible]. Sales mix with increases in tooling and fittings have a favorable impact. Margins increased compared to last year, even despite last year's gain from the sale of a commercial property, adding DKK 14 million to the gross profit in Q3 of '24. B2C margins increased by 3.1%, thus continuing the positive development in sales and margins. B2C is adding scale to the business. The B2C activity surpasses DKK 1 billion in annual sales. The scale, combined with the increased margins results in an EBITDA margin of 11.5% in Q3. We continue our preparations to become the everyday green partner of our customers. Green transition is not only about having the right assortment and the right price levels, it is also about preparing and maturing our entire organization to get familiar with our priorities. Our priorities for AO to be the everyday green partner of our customers. In this respect, our entire organization is required to undergo ESG training to get familiar with AO's priorities and goals. Let us look at the management's observation, continued price pressure, while we are satisfied with the margin development within [indiscernible] and our B2C activities, the margin pressure within projects continues. During the past quarters, we have observed an increasing tendency from customers to negotiate even smaller orders. As demand is getting higher during Q3 and Q4, we did expect a more balanced demand-supply situation in Q3 with a less one-sided price focus. Up to now, we have not seen the expected change. The project activities in Denmark and Sweden continue to face a higher-than-expected margin pressure. This is likely to continue during the rest of '25. B2C activities increased their weight in AO. The B2C activities are expected to surpass DKK 1 billion in sales in '25, thus adding up to more than 16% of group revenue. The latest 12 months earnings ended up above DKK 100 million in segment EBITDA. AO's B2C activities enjoy leading market position in Denmark and our presence in Sweden and Norway is growing. In both these countries, we see potential to add market shares both organically and through M&A. We are very satisfied with the growth journey in B2C, and we do see further potential lying ahead of us. Let me conclude by saying that while the geopolitical and macroeconomic uncertainty is high, we do not see the uncertainties having a material impact on AO in '25. Now, Per, please take us through the financial performance.

Thank you, Niels. As Niels said, Q3 sales came in at Index 110.5. Organic growth was 8.8% and acquisitive growth amounted to 1.7%. Organic growth was slightly higher than in Q1 and Q2 and slightly higher than expected. Adjusting for the one-off gain from sale of property in Q3 last year, gross profit margin increased by 1.5 percentage point. Although satisfied to note the overall margin increase, we had expected higher margins from projects. Cost of doing business ratio increased from 15.3% to 16.6%. The ratio in Q3 last year was lower than normal due to reverse of management incentives and capitalizing IT costs. EBITDA came in at DKK 98 million. In Q3 last year, we saw the DKK 14 million gain from the sale of property and DKK 9 million one-off due to reevaluating management incentives and capitalizing the IT cost as a catch-up. When adjusting for these items, the underlying EBITDA is 30% higher than Q3 last year on a like-for-like basis. In Q3, we saw a couple of millions additional losses from customers, and we do see slightly higher risk toward losses than normally. Earnings were approximately DKK 5 million shy of our expectations due to the gross margin pressure from project activities. Let's turn to the margins. Q3 margins improved from 21.8% last year to 23.3% this year when adjusting for the property gain last year. B2B margins impacted margin positively with 0.8 percentage points. We were satisfied with the margins within repair and maintenance and with the B2C margins, while margins from project activities in Denmark and Sweden were lower than expected due to competitive pressure. B2C margins impacted margins positively with 0.4 percentage points. The B2C share of sales ended at 17.3% in Q3. The increased proportion of B2C impacted the overall margins by 0.1 percentage points since the B2C segment brings a higher margin. The acquisition impact was 0.2 percentage point and reflecting 1 month of impact. Let's leave the margins and turn to the segment info. The B2B segment accounted for 82.7% of the Q3 revenue and the B2C segment accounted for 17.3%. We are quite satisfied with the segment performance. B2B revenues grew 8% organically, which was slightly higher than expected. We were satisfied to see healthy development within the repair and maintenance margins, while the project margins suffered from the competitive pressure. B2C revenues increased 25% compared to Q3 last year. Organically, the segment grew 14% being the highest organic growth in 2025. The B2C margins increased by 3.1 percentage points and ended at 33%. The increased scale in the B2C segment resulted in a significantly improved segment EBITDA margin at 11.5%. If you look at the indirect non-allocated cost, it showed a significant increase, partly due to the one-off gain from property sales last year and partly due to DKK 9 million brought to income with regards to the reversed management incentive and a catch-up of the IT cost being capitalized. Now let's turn to the investments. And please be aware that the chart does not include M&A investments. The normal level of maintenance investment in AO is estimated to be DKK 60 million to DKK 90 million on a yearly basis. If you look at the past years, we have seen sizable investments related to growth initiatives and ensuring higher capacity. The investments in Q3 2025 amounted to DKK 36 million against DKK 17 million in Q3 last year. The increase of DKK 19 million is mainly due to the warehouse expansion in Albertslund. Full year investments 2025 is expected to be slightly lower than DKK 200 million, a significant part relating to the expansion of new and more efficient warehouse in Albertslund to handle outsized articles. Let's look at the net debt. Cash flow from operations before working capital adjustments came in at DKK 100 million at par with last year. A large part of the cash flow is reinvested in working capital and in investments to facilitate present and future growth. Net working capital ratios have increased during the past years due to a broader assortment due to adding inventory levels to deliver trustworthy service during unstable supply scenarios and due to us having to accept longer credit terms to customers. If you look at the net interest-bearing debt, it ended at DKK 1.2 billion against DKK 1.3 billion last year. Interest-bearing debt over EBITDA was 3.0x compared to 3.9 last year. Net debt over EBITDA is expected to be approximately 2.5x EBITDA end of 2025. Let's turn to the guidance for 2025, which is unchanged, yet further narrowed. In August, we expected sales to increase by 9.5% to 12.4%. Now we expect sales to increase by 10.5% to 12.4%. The reason for increasing the low end of the range is that third quarter sales were slightly higher than expected. We expect organic growth in Q4 to be more modest than year-to-date. The reason being that we had quite a strong Q4 last year and also due that we have 1 sales day less in November than last year. The top end of our revenue guidance assumes a 6.5% growth in Q4. We expect an EBITDA in the range of DKK 420 million to DKK 440 million. The higher end of the range has been lowered by DKK 10 million due to the lower project margins. And we expect earnings before tax in the range of DKK 245 million to DKK 265 million. The higher end of the range also lowered by DKK 10 million. The most significant risk towards our guidance is if the margin pressure will increase further in 2025. This concludes the presentation, and we are ready to take your questions.

[Operator Instructions] And the first question will be from the line of Kristian Tornoe from SEB.

A couple of questions from my side. Maybe starting with the project segment. So you highlight the price pressure. Can you talk a bit about demand or growth in the project segment? Are you seeing increasing activity within projects? And what's your own analysis of when the competitive dynamics would be more in balance?

Kristian, well, the overall project market out there is increasing as we see it. There is a -- and as you know from -- also from earlier webcast, we remain selective in AO. So if we don't see the profitability in a project that allows us to earn a decent margin, then we will not accept the order, then we will not bid for the order. We think that there is still an imbalance between the capacity of the supply and the demand. But to be honest, we were surprised to see that it hasn't changed the dynamics. And what we said back in August was that we had seen these extremely fierce competition or competitive pressure when it came to projects in the first half. And we did expect when demand gradually would be more in balance with supply that there would be a, you could say, higher margins out there. And to our surprise, we didn't see that in Q3. And what we are saying now is that we may not see that in Q4 either. So when will it change? I think to what we hear now we are not talking 2026 today, but to what we sense and hear from the new building area also -- yes, from the new building area that we may see growth in 2026. So we would still expect to see a higher margin from projects, but this is not part of our guidance for Q4. We don't expect it in Q4.

Is there any -- I mean, segment differences within the project segment, I'm thinking electrical, plumbing, drainage and so on, is this competitive pressure broad-based in projects?

Yes, it's pretty broad, Kristian. So it seems to be a double-sided hit. So across business areas, we see this intense competitive pressure. But we also see that even smaller projects, they are taken into negotiations from customer sites. And thereby, you could say, transforming almost a repair and maintenance order to a project order, which harm the margin.

Okay. Then my next question is also on the gross margin, but a bit more forward-looking. So as I understand your strategy, you will try to push an increased level of sales within the workwear segment to your B2B clients from next year. How should we think of the mix impact on the gross margin if you are successful? So if footwear gets a higher proportion of your B2B sales, will that have a positive or a negative impact on your B2B gross margin?

We have a higher margin on workwear. The numbers will be relatively low compared to the B2B total revenues, Kristian. So the impact on group margins, group B2B margins will be relatively small, 0.1, 0.2 in that neighborhood, very small. But they carry a healthy margin and just getting started. And we expect over time, an increase. And that -- obviously, it will impact margins positively, but it will also impact customer service positively because it's important to us to be in a strong position when it comes to all under one roof. And we have lacked assortment within workwear and now we are having this assortment in-house, and we are looking forward to dressing up our customers.

Sounds good. Then just 2 questions to your guidance. You're indicating lower organic growth for the fourth quarter. But looking at the low end, that would imply 0% growth in Q4. So I'm just curious to what extent this sort of slowdown in growth is something you've seen in your October numbers or it's more based on the 1 working day less assumption in the quarter and a tough comparison and so on?

I don't want to go into October, Kristian, but we would be disappointed if we ended in the low end of the range in Q4.

Okay. I think that's quite clear. And then moving down to your EBITDA guidance, again, sort of looking at what it implies for Q4, it would correspond, if my math is correct, to sort of 10% to 26% EBITDA growth year-on-year. So obviously, again, assuming in the lower end, 0% top line growth, but 10% EBITDA growth would imply some sort of margin improvement. Can you maybe help us understand where that's coming from?

Sure. We always -- or we tend to say when we are in Q3, when we are forecasting Q3 or when we are summing up Q3, don't expect miracles in Q3 because, as you know, almost half the quarter is dominated or flavored with holiday periods. So if we are looking at a Q4 compared to Q3, it's another animal. We will have a higher revenue in Q4 than what we saw in Q3, typically approximately DKK 150 million. Those DKK 150 million, they will, of course, bring a healthy add-on to the bottom line. On top of that, we typically see an increase in Q4. Last year, it was 1.5% higher than Q3. I don't think one should estimate a 1.5% difference between Q3, Q4 this year, but it will be higher. And on top of that, we also expect margins in Q4 to be higher than margins in Q4 last year. So we have a higher revenue, which will -- if you say DKK 150 million, for instance, as it was last year, you can do the math, but it will be a healthy add-on. And if your revenue -- Q4 revenue increases approximately 1% compared to last year and compared to Q3, it would add another healthy proportion to the EBITDA. Then we will spend more OpEx, maybe a little bit less than if you take the average from year-to-date because we had some smaller items that will not recur in Q4. And then as part of the increase in margins, you normally have the impact by reaching the stair cases in the supplier bonuses and normally, we await calculating those bonuses into when we see them being secure or very likely, and that will typically be in Q4. So in summing up, Kristian, you cannot compare Q3, Q4. Q4 will bring a higher revenue, but it will also bring a higher margin. If you compare the higher revenue and higher margin, you will get a healthy addition to what we made last year. And last year, we made DKK 80 million in EBT. So take the revenue increase and the margin increase on top of the DKK 80 million, then you will reach a healthy fourth quarter forecast.

Sorry. I mean, not exactly because I understand the drivers from Q3 to Q4 because you will have a higher top line. But my question is just as much if you end in the low end of your guidance, I know that's not the ambition, but it's nice to understand the dynamic because the low end implies no revenue guidance year-on-year in Q4. So even with the assumption of 0% revenue growth year-on-year in Q4, you are expecting an EBITDA, which is 10% higher year-on-year, so a higher EBITDA margin. And you're indicating that your OpEx will be up year-on-year. So it must be your gross margin, which should be significantly higher in Q4 this year than last year. Otherwise, I have a slightly hard time getting the math.

I think you should assume the gross margin being approximately 1% higher than last year and then the revenue being higher as well. And according to our math, but perhaps we can combine in a bilateral talk. But in our math, it will bring -- yes, it will bring us inside the range, obviously.

Sure. So I think -- I mean, your point is for 1 percentage point higher gross margin year-year and is that both B2C and B2B driven?

Yes.

[Operator Instructions] As there are no more questions in the queue, I will hand it back to the speakers to handle any written questions.

Thank you. And we got a few written questions. One being, do you have any figures for the Swedish B2B revenue still around or below 10% of total? Well, you're right, we don't disclose the revenues for the B2B Sweden. But the growth in B2B Sweden is higher than the growth in the AO Group. If you look at the overall ratio for the group ratio, then B2B Sweden is below 10%. And if you look at the total revenues for Sweden, it's approximately 10% of the overall revenue. But as I said, growing faster than the growth overall. Then we have a question with regards to the future. What has been the effect of Ahlsell buying Sanistal until now? How has the competitive landscape changed, if at all? Have they become more price aggressive? Well, we saw intense competition before Ahlsell bought Sanistal, and we see intense competition present as is now. We don't see a big change from the takeover, from the collaboration of Ahlsell and Sanistal. But in Denmark, the 5 large technical wholesalers, they account for approximately 80% of the installer business within technical wholesaling. So the competition is quite fierce and also, I dare say, even more fierce than in other Scandinavian countries. Then we have a question. If you look into the future 5 to 10 years, would you say that most of the growth will come from selling to more trades than now or from geographic expansion. So I think it's not either/or. We want both, and it's our target to pursue both. As I said in the beginning, we believe that the best way to serve our customers is to even strengthen our position within everything under one roof. In doing so, we can serve more trades, but we can also serve each trade more completely because there is a significant cross-selling between the trades. So when offering a broad assortment as we do, then inviting customers to our 54 shops in Denmark, then our observation is that each trade buys quite a lot being assortment, not really related to the trade. So this is quite important for us. And we do foresee quite some growth potentials from being able to expand cross-selling and having everything under one roof. You're right that we have a good footprint in Denmark. But even in Denmark, we can -- we see potentials -- growth potentials both between -- both within the separate trades, but also due to the megatrends, the green transition, the electrification and the, you could say, climate change, storm water, et cetera. We will gradually become -- or it is our vision or target to become -- to evolve from a Danish into a Scandinavian wholesaler. So you should see growth in -- you should expect on the longer-term growth in Sweden and Norway. Yes. I think that's answering this question. And then we have a last question. Could you elaborate on how cross-selling is progressing within workwear segment? Could you update on progress on the Stockholm area? Are you able to get higher margins in Sweden versus Denmark? The cross-selling within workwear segment, it's getting there, and our customers are able to buy workwear from AO workwear. It's not a -- you would say it's not done one night, not even within 1 month or 1 year, but it's a journey. Now we -- what we experience now is that our professional customers, they are getting familiar with the assortment. And we are sure that we will increase our sales to B2B customers in the future. It hasn't been -- it has not been a big synergy in 2025. We did not expect that either, but it is a synergy that we expect will kick in from 2026. The Stockholm area, well, there -- there's not necessarily a higher margin in Sweden than in Denmark, but there seems to be a higher margin in the Stockholm area than in the rest of Sweden. And we also see that. But as we are also saying in the webcast and in our interim report, projects sales within Denmark and Sweden is undergoing fierce competition. So also margins in Sweden are pressured from -- yes, from competitive pressure. Yes, I think that was the questions we received. Thanks for that. And then only from our side to sum up and say we saw a third quarter 2025 being quite satisfying from our part. We were surprised about the margin from the project sales and the earnings, the quarterly earnings was approximately DKK 5 million shy of our internal expectations. Thanks for listening in and see you when we webcast Q4 and full-year annual report in February. Bye for now.