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

Good morning, and welcome to Electrolux Professional Group Q4 and Full Year Results Presentation. My name is Jacob Broberg, I'm heading up Investor Relations and Communications. And as always, with me, I have Alberto Zanata, our CEO; and Fabio Zarpellon, our CFO. We start immediately, and I hand over to you, Alberto.

Thank you, Jacob. Good morning to everybody. As it is in the highlight, we closed the quarter with an additional improvement of our financial KPIs. And being the last quarter of the year also, we confirm the growth all along 2024. The highlights of the quarter. The highlights are that we grew sales. We grew sales overall, but we increased also organically. The organic growth is coming from Laundry that has been well performing all along the year, and that is the other good highlight of the quarter, from U.S. Food and Beverage. We will come back to the subject. But during the past quarter, we reported a continuous improvement, a sequential improvement of the performance of our operation, food and beverage in the U.S. And we were predicting the change of the trend in Q4, and that is exactly what happened. In addition to the organic growth, we had also a margin improvement, a substantial margin improvement of close to 2 percentage points. And this one is coming from the good performance in Laundry, the one in Food & Beverage United States. But I have to mention also the strong performance in terms of margin development that we had in Food Europe. So in Food Europe, we didn't grow organically, but we improved significantly the margin. The improvement of the margin is coming, and we will come back in detail about that, but it's coming from price, in general, the efficiency in the operation and the reduction of the material cost from the volume growth in Laundry and Food America. The other financials to be highlighted, the cash flow that has been strong during the quarter despite the increasing investments and increasing investment in CapEx that we are doing to prepare for the launch of the product that will happen at the end of this year, beginning of the following one. This is important because, as I said, all the financial KPIs have been improving in Q4 and along 2024. And this is despite the investment we are making both in terms of tools, hard numbers to prepare for the new products, but also the increasing R&D investments. In the quarter, we have been around 5% of R&D cost versus on net sales. Last remark is about the order intake. Order intake was positive in both segments. If we go to the development of the sales, also this picture is good to be compared to the ones that we had in the previous quarter. So you see that Laundry is positive all across the geographies, very strong in North America. In North America, it has to be remarked the market is good for laundry at least. But I would say that our performance is clearly above the market trend. These are the sales that we are making to our partner, I would call partner more than distributor, the ones that we are working with in North America. But we know that also the external sales, the ones in the market are very strong and are giving us the possibility to gain market share. In Food and Beverage, we mentioned already the growth in North America. You see that also the one in Asia Pac, Middle East and Africa is slightly negative. That is a positive signal. Still the negative contribution is coming from Middle East and Africa. Food and Beverage is negative in Europe, still positive in the Mediterranean area while negative in Central North Europe related to the market condition also that are more challenging or at least soft in that part of the continent. And you have to take account that inside of that one, there is also the volume phaseout of a line that help us partially to improve the margin but had this effect on the business. Now if we go into the detail of the Food & Beverage, Food & Beverage, we grew the business, but the growth is coming from the acquired businesses because organically, we reported a decline. And the main decline, as what I mentioned, was mainly in Europe. What is -- what has to be noticed is that despite of the organic decline, we've been improving the margin. We've been improving the margin. In particular, in Europe, the margin has been pretty strong. And this is coming from the continuous -- let me say, continuous improvement that we are doing in the operations in this part of the organization. The challenging area or the challenging market are still the same, and they are the Central Nordic part of Europe and the Middle East and Africa, particular Middle East, I would say. What is good to see is that even if uncertainty is still there, we see that the order intake is higher than a year ago. We have a particular comment about the North America. We have been talking about the development of the business in the food and beverage business in North America, and the sequential improvement is confirmed. It is mainly supported by a pretty good growth of chains still in a market that is soft. You know that North America is one of the few markets. Japan is the other one, but for sure, North America is one of the few markets where there are official statistics and that are not showing a market growing 2024, but they are predicting a growing 2025. So with this recovering of the situation, with this recovery also of our presence in North America that is becoming clearly stronger, not only the chains that have been growing healthily all along 2024, but also the institutional business that on the opposite have been declining during the past quarter, but is showing sign of recovery. We believe that at least the situation that we have been experiencing at the end of 2023 and beginning of '24 is in some way progressing towards a more positive situation. One word more about -- sorry, North America also to preempt the possible question, if you have clearly I'm here to answer about that. I'm sure that everybody is talking about the tariff or better. What's possible impact of the tariff that the new administration is supposed to impose for the goods coming from outside North America. What's the possible impact on our business? The easy answer is that we don't know in the meaning that we don't know yet which kind of tariff, which is the level of tariff that will be imposed and on the goods coming from which product. What we can say is that at least listening to the first information that are mentioning tariff on products coming from product or components coming from Canada, Mexico and China, I would say that if this is confirmed, the impact on our business, overall business, would be not really material. We have to say that compared to 8 years ago when similar administration took over in the United States, and they were claiming similar actions on the goods imported into the country. Now we have 2 manufacturing facility. So yes, we are importing components from the 3 mentioned countries, but that is exactly the same situation of all the manufacturers that are operating in the United States. But at the same time, we have the possibility to assembly or performing final assembly of some products in the United States. Partially, we are already doing on beverage products that are coming from Thailand. So we are in a situation that is putting us in a much better condition compared to 8 years ago. And that is what we can say about the subject of the tariff. So if we now move to Laundry, again, another strong quarter for laundry. You saw when we were talking about the market development, all the geography developed very positively. In particular, Americas was very strong. Indeed, during Q4, even TOSEI had a good growth. TOSEI was positive contribution to the result of the group -- of the overall group being creative for the segment Food and Beverage. In the case of Laundry, because of the very high profitability of the, let me say, organic business, clearly, TOSEI in this moment is still slightly below, but the contribution is coming. This year, 2025 will be the year of TOSEI in the meaning that -- and now I'm not talking about only laundry, but the coming week in Japan, there is the large exhibition for food and beverage. And during this exhibition, we will start presenting all the product, Electrolux Professional product that will be channeled through the TOSEI network in the food and beverage business in Japan. During the second quarter, there will be a lot of activities to create value, the famous integration of the laundry operation. So important year where we should see -- we should start creating value, delivering value from the acquisition that we completed in January 2024. Margin improved, again, organically and not organically. And the improvement of the margin is coming from price, volume, material, all the elements that we can manage and control in the business. Good things as well as for Food and Beverage, the order intake is still higher than the one we had at the end of 2023. With this said, I believe, Fabio, we can have a deep dive on the financials.

Thank you, Alberto, and good morning to everybody. As Alberto anticipated, quarter 4 was another step toward our margin expansion. EBITDA moved from 10% of last year to 12%, up approximately SEK 100 million in value. So not only margin, but also important step further in value. When we look at our cumulative performance for the full year, EBITDA margin increased from 11% of 2023 to 11.6%. But if we exclude the onetime cost related to the acquisition, the step-up cost that are roughly SEK 50 million in value, the underlying EBITDA margin performance of 2024 is already at 12%. As Alberto anticipated, in the quarter, the improved EBITDA margin came from pricing, across the 2 segments, both in Food & Beverage and Laundry, more than compensating for both the inflationary items, like for example, the labor cost. We enjoy in both segments reduced material cost. And in the, let me say, segment mix, remarkable was the increase of the Laundry business, value prop who grew close to 12%, generating roughly plus 45% in terms of EBITDA value. Despite the organic decline, and as Alberto mentioned, they are linked to specific geography, Central North Europe, Middle East and Africa, also Food and Beverage strengthened the margin in the quarter, thanks to remarkable recovery in food and beverage in U.S. that was accretive also for the food segment margin, pricing and better product mix. And here, let me say, the phaseout of the low-margin product definitely is starting to step up and contributing positively to the margin expansion on top of the volumes expansion. When it comes to currency, both translation and transaction, they did not materially affect our performance in the quarter. Acquired companies overall contributed positively with somehow profitability altogether that was accretive at the group level. When we move to the other part of the P&L, finance net was SEK 31 million in the quarter, higher in value than quarter 4 last year because we have added additional borrowing required from the acquisition of TOSEI and Adventys. However, to be noted that the relative borrowing cost in percentage of the value decreased, thanks to lower interest rate, but also, I would say, a well-balanced funding structure. Tax rate for the quarter was higher than average, roughly 30% on income taxes due to one-off tax cost. To give a sort of guidance going forward, we expect the tax rate to stabilize roughly around 26% on sales. EPS overall, thanks to the improvement in the EBITDA, value increased to SEK 0.75 per share, up 27% compared to last year. Cash flow. As Alberto anticipated strong delivery in terms of operating cash flow, over SEK 500 million, showing and you see in the graph, not only the high value in the quarter, but the consistent delivery of cash flow across the quarters. On a full year base, we delivered over SEK 1.5 billion in cash that is the historical higher level of cash generation of this group despite the increased investment in capital expenditure to support the innovation projects -- product innovation project, both in food and in beverage. To give you some guidance going forward, CapEx will remain higher than the historical average in the incoming quarters. But at the same time, I do not expect it will materially affect the cash generation power of this group. When it comes to asset efficiency, rolling 12 months operating working capital on sales has been reduced to 16.4%, roughly close to 2 points lower than December last year, where we were north of 11%. The positive trend and the positive improvement came from a remarkable improvement in the inventory, while with the stabilization of the supply chains will continue to drive improvement of the inventory turnover. When it comes to our financial position, as you see from the data and the data anticipated, it remains strong with a ratio net debt on EBITDA at 1.4x, driven by an EBITDA increase and combined with, let me say, a reduction of borrowing. In terms of overall summary, clearly, we are entering 2025 with a pretty solid balance sheet, a consistent cash generation, a diversified funding structure, meaning with really the means to support the profitable growth of this group. Not only, I would like also to bring to your attention also, let me say, the fact that we are more and more well balanced from a geographical and business perspective. Europe today overall is below 60% of sales. Americas reached 25% and Asia Pac is 17%. So more and more also from a geographical perspective, we are well balanced towards also the attractive geography. And last but not least, the high-margin laundry business reached 40% of sales. So I would say also from a market and product segment position perspective, we are more and more well balanced to enjoy future development of this group. And with that, back to you, Alberto.

Thank you, Fabio. And as you heard, the financial KPI has been improved, and it is something that obviously we are happy about that. But what makes us very proud as an organization is something that is going beyond just the financial number. It is the fact that we are considered one of the best company in the world for what consider the revenue growth, the financial stability and the environmental impact. So we have been listed among the 500 best company in sustainable growth by the time. And it is an important thing in my opinion because we have been always talking about our leadership in sustainability and our ability to reduce the CO2 in being a company that is very inclusive, caring about the employee and the society where we are located, but to be recognized as among the best in the combination of all these things. So the real meaning of being sustainable, I think is something that makes all of us are very proud to be in Electrolux Professional. So coming to the conclusion and the summary, a few bullet points to summarize the quarter. So a quarter where we delivered organic sales, we delivered close to 12% together with the acquired company, the 2 companies that we acquired along the year, but we also improved organically. We improved the margin close to 2 percentage points, driven by the strong result of Laundry and the positive one in food and beverage in the United States and in Europe that even if we did not develop organically, we improved significantly the margin. Another quarter with a strong cash generation that is giving us the possibility to continue to invest for to develop the new product, both in terms of CapEx, obviously, but also supporting the above the roughly 5% R&D spending to develop this new product. We improved the operating working capital, making the best use of the assets that are made available to this organization. We closed the year collecting more orders than what we did a year ago. And this happened on both segments in Food and Beverage, in North America and in Laundry. And again, in the Q4, we finally came to positive also in the Food and Beverage business in North America, completely in some way, the sequential improvement that started a year ago. If I combine the market condition that we see more positive than what they were a year ago in North America and also in Japan, still the uncertainty is there for the Central North European markets and Middle East. But if we combine all these things with the increasing order intake, we are having -- we are looking at the Q1 '25 or the full '25 as a year where possibly we will continue our sequential improvement. Considering that Q4 is the last quarter of the year, a few comments also about the full year. I'm saying in some way repeating the same messages delivered for the quarter because we closed the full year with a growth. Organically, we were flattish and this is mainly related to the regions that I mentioned earlier and in general, North America that was clearly in a negative trend for the first part of the year. We closed the year with 2 acquisitions. You know that the inorganic growth was and is still one reason why we are here, we have our meaning or mean to be an independent company with the ability to combine the organic with the inorganic growth. And the acquisition have been strategically important because the one in Japan gave us the access to the second/third largest market in the world, balancing, as Fabio said, our presence in the Asian continent towards the European and the Americas. And the second one, even if tiny in terms of volume is strategically important because it's giving us access to a technology, a very important technology that we regard as the technology of the future cooking. Remember that cooking is the most profitable category that we have in our Food & Beverage segment. We improved the EBITDA. We improved it even more, reaching the 12% if we exclude acquisition and integration cost. So there is also, in this case, a sequential improvement. And we have been doing and delivering this result, continuing to deliver cash flow that is again important to support our investments, improving the operating working capital, reinforcing our sustainability leadership with an additional reduction, a further reduction of the CO2 emission. And we continue, by the way, to reward the shareholders with an increased dividend per share. So graphically, I would, in some way, remind the steps, the sequential steps that we have been taking since we listed, since we started our journey in the middle of the COVID, yes, we have always to remember that 2020 was in some way depressed year. That is the reason why we are still keeping at least as a reference, the 2019 that was the pre-COVID year when we were a division, not an independent company. But you see that the sequential improvement is showing a growth of the sales, close to 75% development of the top line, 221% development of the earnings and the cash flow that is 172% higher than what it was since the first year of listing. Again, another step towards our financial target, another step to confirm our leadership in sustainability, another improvement in our journey. With this said, back to you, Jacob.

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

[Operator Instructions] the first question comes from the line of Gustav Hageus from SEB.

May I start with Food and Beverage in the U.S. which was a bit of a relief, I guess, for everyone that you've now started to grow again there organically. Could you remind us a bit about the visibility you have now into 2025 and your confidence level that this is a bit of a change that will also trend into 2025. What's your visibility on that in terms of positive growth?

So the order intake is higher than a year ago and the pipeline of chains is still strong. I think I've been mentioning this for quite a while during the past quarters that even if the sales were declining, the pipeline of chains testing the product was good. You saw that, in particular, during the past quarters, many of these tests turned to become business. I would say that it's still a very strong pipeline of business with the chains and the order intake, so this means, in this case, test have been turning into order is good, and it is higher than a year ago. So at least this is the visibility we have for the business in North America.

And if we turn to EMEA, you referenced that Middle East is obviously strong. I think everyone can recognize the drivers of that. But the 2 other factors that you list out here, the Northern and Central part of Europe being a bit weaker and the phasing out of the semiprofessional refrigerators for food and beverage. Could you give us some sense of how you think that will develop into 2025 for EMEA?

Yes. Okay. So the semi professional range of refrigerator as well as the drip coffee for coffee because these are the 2 lines that we've been phasing out now is over. The comparison, I would say, is irrelevant or not material in 2025. So the situation should be clean from that point of view. What the market is concerned, it has been all along the year, the fact that Central and Nordic countries, they were developing weaker than the southern one. The market is soft in that part of the world in that part of Europe, I'm sorry. So for what we see, there are no big changes at least the beginning of the year. We see in any case that the Mediterranean area probably driven by the tourism. So in those countries, we are more towards the commercial restoration, while in the Nordic, we are more towards institution is characteristic of the market, I would say, they are still pretty good. For what concerns Middle East and Africa in the text that we have been mentioning mainly Middle East. So we see things moving in Africa. So again, projects -- that is a project business region where we play a significant role. And we also see some things moving in Saudi Arabia that is the new big, big market in Middle East. So it's still very uncertain. In this case, clearly, we -- all citizen of this world, we hope for a better situation in that region. There being good signal, but I still believe that the uncertainty remains pretty high in the Middle East. So let's see what is coming.

And on Laundry then, congrats on a very solid set of numbers in Q4. I was a bit surprised about the extremely strong growth that you mentioned for U.S. Laundry. Was it up 35% versus a comp that was down 6%. Is there -- are there any effects of prebuys or stock building effects or worries about tariffs or anything like that? Or can you explain what the strong growth comes from there?

So we have to remember that, again, in North America, we are operating with a company that has been partnering with us for over 60 years. So that is the reason why we call it a partner more than anything else. And obviously, the sales that you see are the sales to this company. We are in close contact with this company. because, again, it's more a partnering relation than anything else. And in this moment, there is not a prebuy for -- in order to mitigate the impact of tariffs, not at all. So we are working with them together with them or in particular, in our case, we are planning all the possible actions that we could take in case of tariff imposed on products that are coming from Europe and Thailand because laundry is Europe and Thailand. These are the 2 sources of product that are going into the United States. For the time being, we don't know if there will be an impact or not. And that is the reason why we are always -- but these good things to be done for every company. We are having plans in the drawers that we are discussing also in close contact with our partners. But for the time being, we have not been taking actions in any case in the United States.

But I appreciate that. But the 35% organic growth for laundry in the States, surely that cannot be a run rate.

No. It cannot be a run rate. Even if I tell you that we are gaining market share in North America, it is the fluctuation of the stock that we are having in North America. This happens due to the fact that this we have a large business with this partner in North America. It is enough the timing of the shipment of containers that have been beginning of the quarter, end of the quarter that can skewing a little bit the comparison. You should have looked at this one always in a multi-quarter perspective. So it's absolutely okay. But we know through our partner that also the sell-out has been so strong. But don't use that 3% as the run rate that we are having in the coming quarter, we would love, but...

But is there -- sorry to dwell on this, but as a multi-quarter, I appreciate that. But into Q1, then should there be a reversal given the very high growth in Q4? Or is this...

No, but the business is growing, okay? The business is growing. Now I don't have it in front of you the Q1 results, but I'm not expecting a sharp drop of the sales. Eventually, we should be on the same level, slightly higher, but I'm not expecting a minus 33% if this is what you are asking or you're looking for, not at all.

The next question comes from Ebba Bjorklid from DNB.

Actually, all my questions were answered previously. So I withdraw my questions.

[Operator Instructions] And the next question comes from Erik Cederberg from Handelsbanken.

And this is sort of a follow-up from Gustav's question. So regarding the development in the market conditions in Europe, can you elaborate on the dynamic where Laundry showed such a good organic growth, but food and beverage is down?

Yes. And it is the difference in the market in the meaning that 50% of our laundry sales are consumer-operated machine or even slightly more than that. So while the other 50% is going to what we call OP, so on-premises laundry that are the hotels, eventually the small restaurants, the ones that are washing and treating the linen towels in-house instead of outsourcing the business. And a slight percentage is going even to the industrial, but you know that industrial for us is a tiny, tiny business. And the third segment or macro segment is the health care, the hospitals. So these segments are different. In Food and Beverage, we are more exposed clearly, a majority of our business is in the commercial restaurants that is very good in the South Europe driven by the tourism. All the South European countries have been having very good tourist flow. If I think a country like Greece, Italy, Turkey, France, Spain, Portugal, they all reported a pretty strong summer for what tourism is concerned. The big cities, the same. To our understanding, also another big season that is the winter season with the Christmas days have been pretty strong. So the tourism is still a good engine, good element to develop the business in that area. But it's more critical in the regions where clearly, there is less tourism than the ones along the coast of the Mediterranean seas. That is the dynamic that we see, combined with the specific situations, the one in Central Europe is a specific situation that is clearly creating some problem also to the institutional business. So there are, let me say, customer segment dynamics that are pretty different from laundry and food and beverage.

This phase out of low-margin products in Europe. Is this something that has occurred only for Q4 or throughout the year...

No. It was all along the year.

All right. And the strategy going forward, should we expect this to continue?

Not for these 2 categories, so the drip coffee and the semi-professional refrigeration, but we are constantly looking at improving our product portfolio. We -- it is a normal work that we have been doing and we will continue to do to make sure that we are focusing our marketing and sales efforts on the high-margin product. This can be done when we are launching the new lines. In Q3, we have been launching in Q4, we started the production of the new undercounter diswasher. Also, that one is a completely new line, and we will complete this in next year, beginning of next year. We will complete this launch, and we will have also in this case, a new product that, by the way, is focusing our efforts in a more limited range of product, eliminating additional low-margin one. So it is a continuous job that we have to perform within our business area to focus our resources to develop high-margin products, products that are driving customer care, products that are enhancing the digital capability, but at the same time, products that are replacing ones with lower margin.

All right. Perfect. And then just a final one, if I may. So Fabio, you mentioned that we should expect higher CapEx going forward. Can you explain why that is? And also, is it possible to divide how much of this is growth investments?

Okay. So if we look at the historical level of CapEx of this group, it was, let me say, between 1.5% to 2%. Somehow this -- in the last quarter last year, we reached 5% that I would consider somehow a peak for the single quarters. But in terms of financial guidance, we should expect the CapEx to be, let me say, around 3% overall for the incoming quarters. Then we may have a peak and valley that to happen. This CapEx is mainly related to product development, meaning we have in the pipeline important initiative, both in laundry and in food and beverage to bring to market innovative products. And this CapEx is related to the product development itself as well as the preparation of our operations in order to allow the introduction of this product in the market. And this is, I believe, important to underline because when we look at our performance in terms of EBITDA improvement, in terms of cash generation reduction on net debt, this is not done, let me say, squeezing the lemon, but is done whilst continue to create the conditions and product development is one example to create a sustainable profitable growth going forward.

The next question comes from Henrik Christiansson from Carnegie.

Question on the margin and the progress for 2025, if we ignore the volume component. You talked about material costs coming down and helping profitability here in this quarter. Is there more tailwind to go into 2025? And then also, what do you expect on price for 2025?

We expect that the price increase already announced at the end of last year, but is not on the same range of what it was in '24. That was already lower than the one in '23. So we are increasing price to compensate the inflation, in particular, labor inflation items. For what material is concerned, I think we believe that we can have a positive impact from material also in 2025. It is still an area with a strong negotiation. I mean, probably the uncertain geopolitical situation is influencing this one. So we try to take advantage as much as possible of these things. But most probably there will be also into 2025, a limited positive contribution from material. We will -- clearly, we will stretch as much as we can this possibility, but that is the point. So yes, price increase to compensate the labor inflation and some positive contribution from material.

We have a question from the web from Stefan Stjernholm at Nordea, who asks about how do you see R&D costs in 2025 versus 2024, up or down as measured as a percent of sales R&D costs?

We see the R&D cost remaining stable in absolute value compared to what we have been reaching in 2024 is a peak value. So we believe we will have a stable value of our R&D investment. You have also to consider that we are also utilizing what we call global engineering center. So common facility on that matter, but we are in a peak. We are working hardly to bring to market innovative solutions. So we know that these are high investments, but we are also convinced that we will have the payback of bringing this new product to market that can make a difference. The example was the undercounter that I was talking about the previous quarter. It is a clear example of the kind of product that we bring to the market.

Thank you. I don't know, operator, if we have any more questions. Operator, do we have any more questions? Okay. Thank you, everyone. With this small technical error at the end, we would like to thank you for today and wish you a good weekend. Speak you next time. Thank you, and goodbye.