Electrolux Professional AB (publ) (EPROB) Earnings Call Transcript & Summary

Good morning, and welcome to Electrolux Professional Group Q2 Results Presentation. My name is Jacob Broberg. I'm heading up Investor Relations and Communications. I'm here in sunny Stockholm today. I have Alberto Zanata, our President and CEO; and Fabio Zarpellon, our CFO, with me. And as always, we kick off with Alberto. Please go ahead, Alberto.

Thank you, Jacob. Good morning to everybody. Q2 was a strong quarter. During the quarter, we delivered organic growth, sales development of around 15% and organic above 8%. But in particular, we expanded the margin and the earnings by 65%. So we delivered profitable growth. It is another step towards our financial target, an important step that is bringing us closer to the target that we have. Result was achieved, we have to say also, despite the performance of an area that we expect to be the most profitable one, the North America food, that reported declining sales and a good margin, but a margin below our expectations. We said also that the comparison with 2022 has to consider that last year in Q2, we had items that have been affecting the comparability, like the divestment of the Russian operation, accounting for SEK 35 million. And also during Q2, the Laundry business suffered. Laundry business in particular, the overall business was suffering because of the supply chain challenges, but in particular, it was Laundry that was affected by missing production. We had to stop production for missing component in May. It went through for some weeks where we were not able to complete the product, so we produce, if you remember, product with the missing electronic boards, and then we started to deliver them in Q3. So in some way, we have been missing business, that we estimate with an impact of roughly SEK 30 million negative in Q2. So even if adding these 2 items to the 2022 numbers, the '23 performances in Q2 are showing a profitable growth, a profitable development. The third element of the financials, is obviously the operating cash flow and we had a strong generation of cash in Q3. That is, by the way, normalizing the performance for what cash generation is concerned. Last year was affected by a relatively weak cash generation during the first 3 quarters of the year. This year, we started the year already much better in Q1, and in Q2, we are at a normalized level, confirming that this is a company that can generate more than 100% cash conversion. If we move now to the analysis of the different dynamics in the different geography, in the different regions. We have to say that -- you see that we have basically the Americas positive, Europe positive and flat Asia-Pac. Let me start from Asia-Pac, because again it seems to be the area where we did not grow. Reality is that, in that area, last year, we delivered a large -- very large project in Uzbekistan. You have to consider that the project in Uzbekistan, that was both for Laundry and Food Delivery in the second quarter of last year, accounted for roughly 15% of the total sales of the region. So if I'm excluding that one, also that region is growing significantly the business along the year and in particular, in Q2. Food was good in China, even if below our expectations, in India. Again, food was the one affected by the Uzbekistan, as well as Laundry, but mainly food more than 2/3 of the Uzbekistan project was food. Beverage was good all across the regions. And Laundry again, all across the region, in particular, again in India and China. Now, Europe. Very strong performance in Europe, in particular, beverage and laundry, that we have been growing all across the different countries in Europe. Clearly, Beverage is the seasonally high quarter, so very important to -- to do strong in such a way. Food was -- grew a little bit less than Beverage and Laundry, but still very good performance in the Mediterranean area. Mediterranean area, we call the Hispanic or the Iberian region, Greece, Turkey and remarkable performance also in Finland, where we completed pretty large projects. The region with the larger cap, let me say, or the differences in terms of trend is United States, where we had Laundry performing super well, while Beverage was slightly positive and Food was negative. And again, I'm repeating here the comments that I made in -- during the Q1. In North America, we have been expected -- we experienced a declining demand of our product, in relation to destocking of our distributors. It is in particular related to the distributor that are selling the refrigerators, that had been destocking since the beginning of the year. We see some positive sign with new orders coming. We saw this happening at the end of June and continuing into July. So let's now have a deep dive in the 2 segments, starting, as usual, from the Food and Beverage. Overall, Food and Beverage was organically growing 0.5%, so a flattish business. Again, remember the Uzbekistan project, that was pretty large and we delivered it in Q2 with good performance in Europe, while again the sales declined in the Americas, comments already made. And in Asia, with reference to be considered about the Uzbekistan project. In particular, Beverage, within the Food and Beverage was very good. Beverage was the one suffering the most years ago during the pandemic, and it is the one recovering more than any other, all these years. China grew, yes, double-digit growth, but is less than what we were expecting, because the recovery in the reopening of the Chinese market is slower than expected. Margin improved significantly, so the profitability improved and it was mainly thanks to the price and the mix-up, thanks to customer care where, in our operation, we grew the participation. Participation means customer care space versus the total sales of the company, and we grew the participation of the customer care business to the total sales. If we go to Laundry, Laundry performance were really strong. But again, we have to look at the comparison. There was also the Uzbekistan project, [ inside ] indeed sales were super strong in Americas, in Europe. In Asia Pacific, they were single-digit growth compared to the double-digit in the other 2 regions. But again, in Asia, we had the Uzbekistan project, who was delivering there. In this case, also the margin, the margin grew more than 100%. That is good clearly, and this is driven also for price, but in this case, also volumes. So volumes had a very positive effect on the Laundry business. 2 comments about the Laundry, 2 additional comments in addition to the fact that, again, the comparison with last year as to consider also the fact that in Q2, we did not sold a lot of products, because we produced uncomplete units, that they recovered in Q3. So there has been a sort of shift of business from Q2 to Q3 last year. And we said that the impact in the earnings is roughly SEK 30 million. In addition to that one, if we -- I think, is -- it has to be, mentioned, a comment between the Q1 and Q2 of this year, where in reality, we had a super strong March in Q2 and a relatively weak in April. But normally, they should be normalized. March was an extremely long month and April, an extremely short month. So I would look at it -- the 2 quarters together, with a normal progressive development of the business in Laundry. The other element in Laundry, is also that we increased, in particular, in Q2 with a catch-up versus Q1 again. So we should divide between the 2 quarters. The R&D investments, because we started a very important project to renew the architecture of some line in the Laundry portfolio. With this said, I would like now Fabio going deep into the analysis of the financial performances.

Thank you, Alberto, and good morning to everybody. As you have seen from the financial data, since quarter 2, 2021, supported also by the market recovery, we have been consistently increasing both the top line and EBITA performance compared with the previous year. And this, let me say pattern of consistency, positive consistent improvement. I believe it is beside [ that as ] such, an important pattern of our development. In quarter 2, we generated close to SEK 400 million in EBITA, and a margin over 12%. Also here, consistent improvement, both in Food and Beverage, where we are over 12%, and in Laundry, where we are over 16%. The value-increasing EBITA was roughly SEK 150 million. Alberto mentioned that in the comparison, we need to consider that last year we had roughly -- we had SEK 35 million one-time costs related to the divestment of the business in Russia. And the disruption of the supply chain that we had in Laundry, affected the profitability in quarter 2 last year for roughly SEK 30 million. But even excluding these couple of [ items ], the improvement has been roughly SEK 90 million, so plus 40%, that I consider really a remarkable improvement. And back to the comment of, we are growing but we are also growing profitably today. EBITA was increased, thanks to a combination of higher gross margin, but also lower selling and administrative expenses on sales. We have expanded the gross margin value by 19% higher than sales. This increase was driven by price, more than compensated in the quarter, and also year-to-date, the inflationary items. The volume growth in Laundry, the mix-up of customer care, these are -- these were the main driver of the gross margin increase. Also in the quarter, happy to report that, with the stabilization in the supply chain, also the logistic cost have been decreasing quarter-on-quarter. Selling and administrative expenses increased in the quarter in value, also because of inflationary item, but the weight on sales has been reduced by roughly 1 percentage point. Meaning that we are growing profitably, getting also productivity improvement of our organization. And this result has been achieved, whilst continuing to invest in innovation and digitalization of the company. This is, I believe, an important also, thing to consider, because we are growing, growing profitably, but we are also investing to create the condition for a sustainable profitable growth also going forward. Coming out from the EBITA, a few words about the financial net. Financial net in the quarter was SEK 24 million, lower than the level of quarter 1. It has been helped by reduced level of funding, but also we had positive contribution from currency transaction in the non-SEK denominated deposit. The tax rate in the quarter was 20%, below the average. At the same time, also to give you a sort of guidance, I expect that for the quarters to come, to go back to the guideline we gave in the past, of around 25% of tax rate on the income. Income for the period was closer to SEK 260 million. Earning per share SEK 0.89 per share, also here a remarkable result with double, more or less the -- in net income compared with last year quarter 2. Then few words about the cash flow, Alberto already mentioned it earlier. We are back, of what we say is a normalized cash flow. This group historically has been a strong cash-generating group. The level of operating cash flow has always been above the EBIT and EBITA generation. And also this quarter, I will say, after, let me say, a good quarter 1, we found that improved cash the flow despite the additional requirement we had on the operating working capital. Few words on the CapEx; in the quarter, the level of CapEx has been relatively low this quarter, but I expect is going to normalize to historical spending in the quarter to come. I mentioned operating working capital development; year-over-year, operating working capital increased by 20%. 5.56 points are currency translation related and rest is increase of the operating working capital value, also related to the pricing that is affecting the value of our goods but also the value of our receivable. Here to be said that, I can see that somehow we are reaching the peak of the operating working capital, in term of weight on sales. And now, I believe that with the stabilization that we have in the supply chains, we have finally the conditions to work on improving the operating working capital, in particular on the inventory side. Yes, we have now the condition to review the safety stock, for example, of finished product, besides purchasing for what concern the component, bringing down the inventory to a normalized level. When it comes to the receivable, as reported in the previous quarter, the situation is pretty good. I believe we have the historical low past due on sales than ever. Overall, you see, our financial position is pretty solid. We reduced our ratio on net debt on EBITDA at 1.3 times. So a significant down compared to the level we had in December. In the quarter, we have repaid another part of our term loan, we repaid EUR 15 million on top of the EUR 35 million we repaid already in quarter 1. So overall, EUR 50 million repayment in funding in 2 quarters. We have now, we are -- we started quarter 3 with a strong liquidity. We have over [ SEK 700 million ] in liquid funds and EUR 200 million revolving credit facility fully available. I mean, overall as a conclusion, solid quarter. Overall, good profitable growth, and a pretty strong balance sheet. And with that, let me say, I'm really -- look at this Group -- with a solid Group, with -- really also from a funding perspective, the condition to support the profitable growth. And with that, back to you, Alberto.

Thank you, Fabio, and now I -- when I started, I said that we are -- we have been making (sic) [taking] another step towards our financial targets. But I'm also proud to say that we are making (sic) [taking] other steps towards our overall goals. The overall goal is to be the most sustainable company in this industry, and this is also certified by external institutes, that are rating this company highly, for what concern the sustainability objective. And in this case, I'd like to report that in the Q2, we did another step towards the reduction of the CO2 emission. We have a target to be carbon-neutral, and we are making these steps quarter by quarter because these are things that we can achieve also through one-by-one step, and we made another step and I have also to say that, we are ahead of our plan. So we can do better. Everybody can do better for the environment, for the sustainability of our business. Sustainability is not only obviously reducing the CO2 emission of our operation, but it also means to bring to market products that are sustainable, that are reducing the impact of the utilization of this product, the utilization made by our customer, this product. And during the Q2, we brought a new product to market. We brought the high-speed oven, we call it the GourmeXpress. That is a product targeting the customer care -- sorry, the chain customers, because it is small, flexible, rapid, so fast cooking, and save energy, save energy for our -- for the operation of our customers. So we continue to bring -- we continue the [ standards set ] invest, to develop innovative solution, with a target to bring to market a sustainable solution for the operation of our customers. This is, I believe we mentioned the other product that we were in testing with other chains, that is the Hero dryer. And the Hero dryer was under test in Q1, and now we will be launching in Q2. And it is another product targeting customer needs, resolving problems, but also reducing the operations -- the running operations. With this said, I would like to conclude, or to summarize the quarter, saying that we deliver profitable growth. It is another step towards the financial targets, but as I mentioned, just recently, not only the financial target but the overall goals of this company. We improved significantly the margin and the earnings, and the market -- this development was supported by quite positive market demand, with the exception of what was mentioned in the United States. The order intake was good all along the quarter, with the exception of North America, again. And freshly also, the amount, today, order intake -- so the order intake in July is positive. And in this case, is positive also in North America. We continue to invest to bring new products. We will continue to invest in new product. I mentioned earlier the increase of the R&D spending in Laundry. Laundry is the most profitable business, is a high-margin business, is a business where we have been leading the market historically also, thanks to the innovative solution -- sustainable and innovative solution of our laundry appliances. We continue to invest and we are planning to bring additional solution to market. We are currently sitting on a good order stock. We are talking about roughly 2 months, so it is lower than the one we had last year. Absolutely, yes. But I said more than once, that the last year order stock was unhealthy, because it was an order stock that was -- let me say, boosted by orders of customers that were placing order, even if they didn't need that product, just because they were afraid not to have it on time, when it was needed. And it was also boosted by delays in production, that were leaving product in inventory, just because they were -- we were not able to deliver the complete package. So it is lower than last year. But today, it is a healthy order stock. There are some projects inside, yes, as usual. This is a company that is very strong in projects. We are, I remember, again, the only company that under 1 brand is able to deliver a full project for kitchen, beverage, and laundry solution. The Uzbekistan case that I mentioned earlier, is one example. So we have some projects that we should deliver by the end of the year. They could go into 2024. But at the same time, we have more than 2 months of order stock. And order intake, that is being relatively good, recovering a little bit also in the United States in July. So this is the reason why, similarly to what we said in Q1, we are cautiously optimistic. Cautiously because we will need to see what is happening around us, and we have to consider all the things that are happening in the environment where we operate. With this said, and back to you, Jacob.

Thank you, Alberto. And with that, we open up for questions. Please go ahead, operator.

[Operator Instructions] The first question is from Gustav Hageus from SEB.

I have a few from me. If I may start with that, if I understand correctly that R&D or development project that was ongoing and was allocated some costs in the Laundry division in Q2, could you elaborate a bit? Is that something that is also going to carry into Q3 and affect margins, or is that isolated to Q2? And when looking at Laundry margins into H2, do you think Q1 or Q2 margins for laundry are better proxies for what to expect in the second half?

I may take the question. First of all, for what concern the R&D cost in quarter 2 for laundry, we need to consider that there was a sort of catch-up of spending also compared with quarter 1. Going forward, I expect the R&D cost to -- that we continue to invest in internal R&D, to keep the premium position that we have in the market, but the increase will not be at the same level we have seen in quarter 2 this year. For what concern the margin development going forward, I believe that we need to look at the current performance in Laundry, putting together quarter 1 and quarter 2. I believe that this is, I would say, a good proxy of the underlying business development and profitability of Laundry.

All right. So that's helpful. And then I am curious on the working cap. Obviously, a very strong organic operating cash flow in the quarter, and saying that the working cap to sales has peaked now, is obviously positive. But given that your history is a bit volatile coming out in the COVID -- in midst of the COVID and so forth, it's hard to sort of extrapolate, what would you consider to be an optimal inventory level for you as things stabilize, in relation to sales or in absolute terms, that would be helpful?

Okay. For what concern the -- let me comment on the overall working capital and then spend a few words on the inventory. First of all, our financial target in term of operating working capital on sales, is to be in the area of 15% or below. I believe we have the ingredients to achieve this target over time. When I look into our development and the reason behind the increase of the operating working capital is not related to receivable. I mentioned earlier that the quality of receivable is, I will say, pretty good, pretty solid. It is not related to accounts payable, where we are [ acting ] consistently with the history. The deterioration came from inventory. Now with the stabilization of the supply chains, I believe we have the condition now to work into this area, reducing the inventory level, whilst maintaining and even improving the weight of inventory on sales. It's clear that this will require time, but I have seen already in quarter 2 this year, even if it is not visible in the trend, but tiny, but we have had a reduction of the inventory value quarter-on-quarter, at the same [indiscernible]. So it will come, it will not come fast, but we will start to see the benefit already in the second part of the year.

And sort of a number or a range where you would be happy in terms of inventory, as of end of the year?

Inventory, our expectation, according to the plan, is that we will bring down the inventory compared to the level we have today. So, the guidance will be towards, what I would say even lower to the level we had at the end of last year.

Also to consider that if -- when comparing the inventory value, because one thing is the percentage, that is fine. But the inventory value, the product today are -- they have a value -- unitary value much higher than the one they had in 2019 and because of the increase of the cost of materials. So it is more important and that is what we are looking for. We are looking at the percentage, because we increase the price and we increase the cost of the material. Because if we just look at the pure cost of a single product, it is much-much higher. The value of the inventory, same number of items -- the value of the inventory is higher than the one we had pre-COVID.

Yes, that's reasonable. And that sort of feeds into my last question on pricing and so forth. Is it fair to assume that you had mid-single-digit or high-single-digit contribution in the quarter from price increases? And then a follow-up on that, you're -- we are starting to hear now from some companies, the -- of course, not in your sector, but related sectors that they see prices coming down net year-over-year in H2. Do you see any -- do you hear any discussions with your partners on price pressure or perhaps the inflationary environment will translate to more campaigns and so forth from your end?

No, we don't -- first, yes, price is positively contributing. Yes, but we don't see this -- we don't see price coming down yet at least. Even if I have to say that this is an industry where rarely I saw that one. For sure, in particular, with the large customers, there are discussions about the price. But still the impact of the delta between price and material is not a situation where we are entertaining this kind of discussion.

And a follow-up on that, if I may. On costs, on your end, in terms of freight costs, land freight, ocean freight, external factors, is there going to be a benefit for you in H2 versus H1, or a similar year over -- or is it going to be a similar...

Yes. There will be a benefit in Transport. We see clearly the container cost, station cost going down as well. For instance, last year, we had a surcharge to cover the transportation cost, the energy cost, and we are not applying that one anymore, because I cannot apply to customers something that in reality is going back to normality.

Yes. And just to be totally [ clear ], that surcharge that you had, including that, do you still see prices going up net, including campaigns and surcharges, and whatnot in H2?

Now the surcharges that we had last year, and we closed the surcharge at the end of 2022, in some cases converting them into price in the country, or in a situation where there was a -- there were inflationary item, and that were clearly too high. But other than that, I repeat, we are not applying the surcharge anymore to any customer, anywhere. So we will benefit from the reduction of the transportation costs during the second part of the year.

Yes. My question was the total price paid by the customer, maybe surcharge or list pricing or campaigns, that is still higher year-over-year in H2 versus last year, right?

Yes.

[Operator Instructions]

Jacob Broberg here, I have one question from the web. Will you be able to use the somewhat soft U.S. food and beverage market to do value-creating M&A? And do you see a strong M&A pipeline?

We are looking at M&A as usual, so we continue to monitor demand [Technical difficulty] priority. But it is not the only area where we are looking at possible acquisition. The balance sheet is stronger. The net debt -- the ratio between net debt and EBITDA is going down. So there are all the conditions to possibly entertain discussion with companies. Obviously, I cannot comment more than this. I will not relate the softening of the U.S. market with more possibility in terms of M&A. At least, this is the experience that we had also during the pandemic, is not that because the market is weaker, more companies are coming to market. I didn't see this one happening, so I will not relate the 2 things, but we are continuing to look at a possible acquisition.

Thank you, Alberto. I don't know if we have any more questions, operator?

There are no more questions from the phone.

Okay. If we have no more questions, I hope everything was very, very clear. So with that, I say thank you for today and have a good day and summer. Thank you and goodbye.

Thanks to everybody. Thank you.