© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Inwido Q2 2023 Report Presentation. For the first part of the conference, participants will be in listen-only mode. [Operator Instructions] Now I will hand the conference over to CEO Henrik Hjalmarsson; and CFO Peter Welin. Please go ahead.
Good morning, everybody, and welcome to this presentation of Inwido's second quarter 2023 results. My name is Henrik Hjalmarsson, I am the President and CEO. And with me, I have Peter Welin, CFO and Deputy CEO. We will spend the coming 20 minutes or so going through the highlights of the second quarter, after which time, there will be plenty of time for questions and answers.
But first, for those of you who are new to us, Inwido is a leading window group in Europe with a clear market leader position in the Nordic region and a strong and very recently, even more so rapidly growing presence in the U.K. and Ireland, and I'll come back to that shortly. We have net sales of SEK 9.4 billion in the last 12 months with an operating -- return on operating capital of 16.8% and roughly 4,300 employees at the end of the quarter in the geographies you see marked in dark blue on the right-hand side of the screen. Our production locations are in the white dots on that same map. And we market and sell all the fantastic brands that you can see on the bottom part of the screen.
But first, before we get into the second quarter results, a few words on the announcement as of yesterday with the largest acquisition to date for Inwido of Sidey Group in Scotland. Sidey is Scotland's largest window and door company and a market leader in the big and growing market of renovation and social housing, with sales of approximately SEK 800 million in the last 12 months and an operational EBIT of approximately 15%. This means, as I said, that Sidey is the largest acquisition to date for Inwido and a really important step in the continued growth in Business Area Western Europe in general and obviously, in the U.K. geography in specific.
Sidey is in a strong growth phase, and the prospects for continued growth are really good, largely thanks to the fact that the Scottish geography has come quite far in terms of starting to make reality of the energy renovation ambitions that we have shared within the European Union. And legislations around energy efficiency of buildings, properties and residential homes has also increased and will continue to increase. We acquired, in step 1, 70% of shares at a multiple of just below 6x operating EBIT. And the current majority shareholders as well as management will then hold on to the remaining 30% for a period of at least 3.5 years.
Summarizing the second quarter, then. I think overall, in summary, it's a robust result and margin in what has been quite a challenging market, where we see a continued weak new build activity, particularly in Sweden and in Finland, where we have the largest new build exposure, and consumers that are a bit more hesitant given interest rate increases as well as, obviously, ongoing inflation. This means that the sales and the order intake has softened a bit, obviously, with reducing market volumes. But we are still in the quarter doing a pretty healthy job of defending margins, thanks to continued good cost control and also a full impact of continuous price increases that we've done through '22 and into '23, to mitigate the input material inflation, with particular impact then in Eastern Europe, which I'll come back to.
We've seen a continued higher competition in the e-commerce space, as I think is the case for many other e-commerce players, which has required considerable investment in marketing and sales. And at the same time, we've also entered a new market in the Netherlands, which has then impacted margins in the business area in the quarter negatively. It's really pleasing to see new incentives popping up with regards to energy efficiency of buildings and latest one in Sweden, which I'll come back to in a little bit.
Looking at the numbers for the second quarter. Sales decreased by 9% or organically by 13% to SEK 2.263 billion. Operating EBITA, down SEK 36 million to SEK 261 million. As I said, operating EBITA margin fairly stable, down only 0.4 percentage points to 11.6%. Order intake, down 21%, which means that the order backlog decreased by 41% to SEK 1.575 million (sic) [ SEK 1.575 billion ] against, what I would say, very high comparables from last year, which was a period of unusually long delivery time. Continued strong cash flow from the business at SEK 430 million in the quarter, up from SEK 350 million last year, really enabling the strong balance sheet with a net debt versus operating EBITDA of 0.7 or excluding IFRS, then, 0.4. And this is obviously a key strategic element for us as we continue to pursue inorganic growth opportunities.
If we summarize then the development of the first 6 months, we've seen a sales decrease of 4% to just shy of SEK 4.4 billion. Organically, that's 11% down, with an operating EBITA that's down by SEK 47 million to SEK 430 million and a -- which means then an operating EBITA margin of 9.9%. The earnings per share, slightly down from last year at SEK 5.26 per share.
If we look at the business areas, starting with Business Area Scandinavia, where we, as I mentioned earlier, saw a weaker industry market in particularly Sweden. Sales in the quarter was 12% down to just shy of SEK 1.2 billion, with an operating EBITA margin of 14.3%. As you can see in the ring chart on the right-hand side, we do have some fairly considerable industry market and new build market exposure in Scandinavia, and that's obviously been one of the key contributors to the softer sales. However, with a strong position and a clear majority sales to the consumer market, that has then mitigated part of that, particularly with the development in Denmark. It's really pleasing that in a period of lower activity, we've taken some strong strategic decisions supported by the Board to continue to invest for long-term profitable growth. Most notably, then with the SEK 100 million investment in Elitfönster facilities in Vetlanda to combine up a one-site factory footprint with improved capacity, improved profitability and a more sustainable production footprint. The order backlog at the end of the quarter, 47% down year-over-year.
If we look then at Eastern Europe, we saw, obviously, thanks to, as I mentioned, continued good work with mitigating input cost material inflation with price increases, strengthening margins. Sales down 3% to SEK 569 million, with an operating EBITA margin considerably up year-over-year at 13%. The price increase activities that we've taken throughout the year in -- particularly in the long lead time channels have now taken full effect, and that's bolstered our margins in the quarter. We've seen -- and as you can see in the ring chart on the right-hand side, Eastern Europe is where we have the largest exposure to the industry and new build market. And we have seen the weak industry market affecting sales as well as the order intake, whilst the consumer market is actually holding up a bit better. The order backlog at the end of the quarter, down 47% year-over-year.
Looking at the business area e-commerce, where it's really pleasing to see the entry into a new market. Sales grew 1% to SEK 271 million. We launched Sparkozijnen.nl in the Netherlands, which will become our eighth market and the 12th brand in the e-commerce business. The margin, however, as I mentioned, slightly down year-over-year, 3.9%, largely due to the market investments and sales investments to really fight a landscape that is characterized by tougher competition than we saw a year ago, and obviously, costs linked to launch in a new market. The order backlog at the end of the quarter, 8% down, but we are obviously continuing to prepare this business for long-term considerable growth.
And lastly, on Western Europe, we saw a strong development in Ireland in the quarter. Sales down 8% to SEK 227 million with an operating EBITA margin down by 3.1 percentage points to 6.8%. The Western Europe quarter was really characterized by a considerably lower consumer activity in the U.K., following even higher inflationary pressures that we see in some other markets and also then higher interest rate increases. Of course, more cautious consumers. However, part of that was then mitigated by a strong development in the Irish market with both higher sales and profits. The order backlog at the end of the quarter, minus 3%, and obviously for Western Europe, the acquisition of Sidey is completely transformative and gearing us for a considerable long-term growth potential.
A few words then on one of the really important strategic drivers for us, which is our sustainability work. I'm personally really happy that thanks to the ongoing focus we have and the large battery of activities, we see a continued positive trend with fewer accidents in the business impacting our employees. However, in general, in the quarter, we've seen a drop in production volumes across the board. And with a lagging work in terms of pulling down the baseload of our impact on the environment around us, it takes time to compensate for the lower volumes to -- in order to continue to reduce the impact per unit on things like energy efficiency, as well as waste. So we're working very hard, making sure that we can continue the positive trend per unit despite operating with slightly lower units.
With that, I'm going to hand over to Peter, who's going to take you through some of the numbers. Peter, please.
Thank you, Henrik. And we start with this picture showing the income statement. To the left, we can see the income statement for the second quarter this year as well as last year in the middle, the year-to-date figures, January to June, and then to the right, rolling 12 months. If we start with the quarter, sales was down 9%. Organically, it's down by 13%. The lower volume has a negative impact on gross margin as well as the operating EBITA margin and EBITA margin. However, the gross margin was improved in the quarter from 24.9% to 26.7%, thanks to higher prices during last year and the beginning of this year, our sales prices. We have also implemented cost savings within the group, and we also have a positive mix impact.
The EBITA margin was down by 0.4% from 12% to 11.6%, showing that we are able -- or more or less able to defend our margin despite the lower volume. EBITA has then been reduced by 12% or SEK 36 million from SEK 297 million to SEK 261 million. And the Swedish companies have received electricity benefits in the quarter from the Swedish government due to high costs in -- during last year. These benefits have been booked as positive restructuring costs, meaning below operating EBITA and has an impact on EBITA. Due to the reason that the benefits are related to last year. These benefits then offset restructuring costs as well as acquisition costs in the quarter. And the total net impact is a slightly positive restructuring cost compared to last -- compared -- in the quarter. And thereby, the EBITA is higher than the operating EBITA.
Further down the income statement, we can see that profit after tax has been reduced by 9% from SEK 215 million to SEK 196 million. And earnings per share is down by 8% from SEK 3.66 to SEK 3.36. Looking at year-to-date, January to June, sales is down by 4%, organically, it's down by 11%. The gross margin has been improved. There was improvement in Q2 as well as in Q1, and operating EBITA has been reduced by SEK 47 million from SEK 477 million down to SEK 430 million, a reduction by 10%. Further on income statement, you can see that profit after tax is down by 8%, and also earnings per share is also down by 8% from SEK 5.74 to SEK 5.26. Rolling 12 months, sales is now on a level of SEK 9.357 billion. The operating EBITA is SEK 1.042 billion, equals a margin of 11.1% and earnings per share is SEK 13.26.
This page is showing the sales development and the order intake for the second quarter from 2018 until 2023. To the left, we can see the sales development. And to the right, we can see the order intake. If you start with sales, the sales in the quarter, SEK 2.263 billion, it's the second highest sales ever for Inwido in the second quarter. Reported sales is down by 9%. Organically, it's down by 13%. Scandinavia, minus 70%; Eastern Europe, minus 11%; e-commerce, minus 2%; and Western Europe was minus 13% compared to last year.
The order intake has also a negative growth of 21% in the quarter. Negative, especially within the industry markets. And then especially within Scandinavia and Eastern Europe, where we have a higher degree of industry sales within those segments. If we exclude the acquisitions, the order intake is down by 20% compared to last year. The total order intake for Scandinavia was minus 23%. Eastern Europe had minus 33%. E-commerce was plus 18%, and Western Europe was also plus 4%. And the order intake for the second quarter this year is higher compared to the level of 2018 until 2022.
With a lower order intake but relatively high sales compared to last year, that backlog has decreased in the quarter and is today 41% lower compared to end of June last year. However, in 2022 and also in 2021, the order intake in the second quarter was quite high, especially in the second quarter of 2022. At that time, Inwido was not able to increase the capacity so rapidly, and thereby, the order backlog grew and the delivery times were just prolonged. Today, the order backlog is on a more normal level, still higher compared to the level of 2018 and 2020, and the delivery times are back on a normal level. So the backlog end of the quarter is SEK 1.575 billion.
This page is showing the return on operating capital. And we are above the target of 15%. Today, or end of June, we are on 16.8%. Return on operating capital is defined as EBITA rolling 12 months in relation to operating capital, the average latest 4 quarters. Compared to December 2022, return on operating capital has been reduced by 1.5% units from 18.3% to 16.8%. The main impact is, of course, the lower results. The lower result or the lower EBITA has reduced return on operating capital by 0.9%. And the rest of the reduction, the 0.6%, comes from higher operating capital. Operating capital has been increased by SEK 300 million compared to December due to IFRS 16. IFRS 16 has increased by about SEK 50 million due to prolonged agreements and also due to inflation. We also have a higher working capital. We also have a negative currency impact, CapEx, as well as full implementation of the acquisitions. 16.8% is still above the target of 15%.
This page is showing net debt and net debt in relation to operating EBITDA, including as well as excluding IFRS 16. The net debt has increased during 2023, which is normal due to seasonality and a dividend payment in May. Excluding IFRS 16, the net debt end of June was SEK 508 million compared to SEK 861 million last year, a reduction by SEK 353 million. At the same time, IFRS 16 debt has increased and is today SEK 476 million, and it was SEK 396 million last year, and it has increased due to prolonged agreements and inflations. The net debt in relation to EBITDA is now on 0.7, including IFRS 16, was 1.0 last year and 0.4, excluding IFRS 16, was 0.7 last year. So Inwido has a positive cash flow generation in the quarter, and the cash flow is actually higher this quarter compared to last year.
As Henrik informed, we concluded the acquisition of Sidey Group yesterday evening. And if we had included Sidey Group within these calculations, the net debt versus EBITDA would be increased by about 0.4 to 0.5, still far below the target of 2.5.
Okay. So in summary, the second quarter, as mentioned, obviously characterized by softer markets and declining market volumes. However, we feel we've been able to defend margins thanks to good cost control and a full impact from price increases, which proves the resilience of the business model. We're continuing to invest for growth, both in Business Area e-commerce, but also, for example, with the important investment we're making in Sweden for Elitfönster. We see continued good long-term growth opportunities with increasing energy efficiency requirements for buildings, which will increase in the coming years, very much fueled by the ambitions of the European Union. And last but not least, after the end of the quarter, then the acquisition of Sidey Group in Scotland, being a one key part of continuing the growth towards the SEK 20 billion sales target, and obviously, accelerating growth in the U.K. considerably. We now -- so with that, we open up for questions. Operator, please?
[Operator Instructions] The next question comes from Sofia Sorling from Carnegie. Please go ahead.
Sofia here from Carnegie. I have a couple of questions here. Let's start with Scandinavia. So you mentioned this order intake decline of 21% in Scandinavia. Could you give us some detail on if you see any acceleration in -- by the end of the quarter? Or if you see similar seasonality or more normal seasonality now during the Q2 quarter? That's my first question.
I think the pattern is fairly normal, I would say. So it's in line with what we'd expect in terms of the pattern of the order intake in terms of -- in line with what we normally expected.
Okay. Great. And also Eastern Europe, you mentioned -- you talked a little bit about this strong profitability. I noticed that you had much higher gross margin. And you mentioned that some -- this was partly due to the high consumer sales compared to industry sales. Is this the only reason for this high margin beat in Eastern Europe? Or is this something else also explaining this high profitability?
The main driver of the profitability improvement in Eastern Europe year-over-year -- and I think it's also fair to say that, I mean, we've been quite clear pointing out that in terms of the order backlog, the comparable is very, very, very high. In terms of the margin for Eastern Europe, the comparable is actually on the low side. But the big driver of the margin improvement is price and the full impact of price increases following the considerable input material inflation we saw last year.
Okay. Okay. I see. And yes, and e-commerce. So you mentioned this step in profitability here due to further market investment. Could you say -- give us some more detail of what type of investments have you done here? Because you've entered the Netherlands, as you mentioned. But I mean, is it investments in order to expand the interface of your website? Or what tangible investments have you done that actually dampened the margin in e-commerce?
Yes. So there are a few things. One clear one is obviously cost associated with the entry into the Netherlands, which just entering a new geography does carry some costs. So that's one part. One part is cost for expanding the omnichannel proposition. So notably, investments in showrooms. One that -- just a second, one in Copenhagen, for example, a new one in Copenhagen, and actually one which is just about to open in Stockholm as well, just as examples. And then there were also costs associated with brand building, brand activity. So above the line marketing. And lastly, there are also what I would characterize as higher cost of doing business in the sense of increasing costs in the current environment for lead generation and for lead conversion.
All right. Okay. And yes, this positive order intake in e-commerce, what is the main driver behind this, if you measured year-over-year? And also, like could you give us some details on which country is the strongest in e-commerce?
Yes. Actually, it has been a little bit of the -- of a mix. But what we've seen over the past month has been an improving trend actually in the Swedish market and a robust development in Denmark, with a more hesitant development in Norway. But given the -- we should still remember that e-commerce is a small part of the total window market. So the development for e-commerce is not really a good indicator of the overall market development, but I think more a consequence of how successful we've been in implementation and partly competitor activity. But that's the way it's looked recently.
All right. Okay. And yes, I have many questions, but I will just end with one here and don't stop the line. But on this acquisition that you announced yesterday, can we expect you to make any continued acquisitions during 2023? Or will you -- will the strategy be to hold back a little bit now? Or what should we expect?
I mean, obviously, closing the second quarter with 0.4 net debt versus EBITDA, excluding IFRS 16. And then adding 0.4, 0.5, as Peter mentioned, getting us to just shy of 1, we would see that there is room for continued acquisitions without -- then obviously, the exact nature of that and the size, et cetera. And I think it's also fair, given our experience in the timing of this, to be a little bit cautious in terms of when it will happen. So I'm not going to promise anything more in '23, but we're definitely working on and we see considerable potential in continuing consolidating the market. So we will do more, and we're working along that way.
The next question comes from Rasmus Engberg from Handelsbanken. Please go ahead.
I had a couple of questions regarding the acquisition. Can you first start by explaining what -- how did this business perform in the last 2 years? Has it been growing consistently? Or what's been going on there?
Yes. Yes. Hi, Rasmus. Sidey is a growing business. It's got a really good track record in terms of building a strong position, particularly then in the renovation of social housing or -- which is then the equivalent to Swedish [ Almanita, ] basically, and have built a very strong position there and growing there, but also growing in the other channels. So it comes off a healthy trajectory. And a not insignificant part of that is a clear ambition as well as legislation around the energy efficiency of buildings in the Scottish geography.
And what type of product is it? Is it only wood or predominant wood? Or is it plastic? Or what type of products do you do?
It's a mix actually of both aluminum, PVC and timber and AluClad timber, AluClad wood. The majority is PVC, but a fair amount of wood-based products and aluminum-based products as well.
Just maybe for Peter, this 30% stake that management and old owners will hold, will that be treated as a minority or is there some sort of earn out debt structure in it since then?
There are -- it's going to be treated as minority. So we are going to consolidate the full results. And we have also done -- it's a call put on the remaining 30%. And the value of the call put will then be booked as interest-bearing debt in our balance sheet. And thereby, we will take in a full income statement and then reduce earnings per share by 30% of the net results from Sidey.
Very good. Just back to a previous question. With regard to the profitability in Eastern Europe, I'm not sure, has it ever been this high? Is this kind of like a one-off? Or do you think this level is anywhere, in any way, sustainable?
It has been this high before, absolutely. And as I said, I was a bit honest before and also saying that obviously, almost a 5 percentage point improvement looks fantastic. But we should remember that the input material inflation started to hit in Q2 last year, and we were lagging with price increases during last year. So the margin in Eastern Europe last year was a bit of a disappointment, to be honest. So the number is good, and the team in Eastern Europe have done a fantastic job. But it has been better, and last year's number was a little bit of a disappointment. So the comparable is a little bit easier in that sense.
There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.
Okay. We have received some questions. We start the first questions, comes from LBV Asset Management. And they are asking from which month we are going to consolidate the acquisition of Sidey Group?
And this is going to be from July. So from July, the Sidey Group will be consolidated.
The second question was regarding the minority shareholders or shareholder, if they're going to stay for a long time, how the condition is regarding the minority shareholders?
First of all, there are many shareholders because its old shareholders, 2 of them, together with the management holding remaining 30%. And we have a call put on remaining 30%, and that is going to be exercised in 3.5 years from today, and they are going to stay until this 3.5 years. And the value of the call put in the future is going to be based on the future results.
Then we have received 4 questions from Goldman Sachs. The first question is regarding competition on e-commerce. The question says, I don't remember you mentioned high competition for e-commerce in recent calls. Are there new entrants here, same competitors ramping up marketing questions?
Yes. So a fair point. And the reality is that there are not any new competitors. But what has happened is that as for other actors in the e-commerce space, the overall market activity is down, which means that although as such, the competitive situation remains the same. Competitive pressures in terms of fighting for business increases with less business to fight for, in a sense. So that's what we mean with that. But it's a good clarification. So we're not facing new competitors or new entrants, but just a more hesitant market, which is saying increased the competitive pressure in that market space.
Second question from Goldman Sachs is, so far, how are customers reacting to your marketing in your new entrance on the Netherlands compared to other regions?
In all honesty, I think it's a little bit too early to say because it's quite a new initiative still, and it does take a bit of time to set up and evaluate the reliable lead generation. So I'd like to take a rain check on that question and come back to that after the next quarter and hopefully give you a little bit better answer, that.
The third question from Goldman Sachs is, did price increases affect Eastern Europe sales more than other regions?
No, I would not say so. And I think it's important to remember that given the fairly high industry exposure that we have in Eastern Europe, the lead time for imposing or implementing rather, price increases is longer. So it's more a consequence of a time lag than it is of taking -- we're absolutely not taking any exorbitant price increases in Eastern Europe that we're not doing anywhere else. It's just taking us longer to get full impact from it in Eastern Europe.
And the last question from Goldman Sachs is, what market share does Sidey have in Scotland? Do they only sell in Scotland?
So Sidey, it's really hard to give any good -- the market data in the U.K. geography in general, the Scottish geography in particular is not reliable enough to give any really good indication of market shares. But we know that it's the largest local player. And we -- there was a second question to that, sorry?
Do they only sell in Scotland?
Yes. And the sales, they sell almost exclusively, for all intents and purposes, only in Scotland, yes.
And then we have a question from [ Rickard Dye. ] He is wondering, as you are generating increasingly strong free cash flows, do you see good opportunities also in the future to deploy those at high rates of returns? I'm thinking of M&A, internal investments or even share repurchases.
So we see opportunities over the strategic period and then most notably, to get us towards our 2030 target of SEK 20 billion of sales, to generate good returns on the cash that we generate and on the balance sheet group that we have, both in terms of internal investments, like, for example, the 1 we've approved and initiated in Elitfönster over the past quarter. But obviously also with strong acquisitions at decent multiples, like with Sidey now that we just completed.
That was the last question. And so no further questions. So we will hand back to the operator, if there are any further questions on that side?
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you.