Electrolux Professional AB (publ)

Good morning and welcome to Electrolux professional Q3 presentation. My name is Jakob Rybak. I'm heading up investor relations and with me as always I have Alberto Zanatta the CEO and Fabrizio Bellon the CFO. And I start with handing over to Alberto. Please go ahead Alberto.

Thank you Jakob and good morning to everybody. Q3 in a summary it is another quarter with the continuous sales growth with the margin and earning expansion and development. It is a quarter where we had to face some challenges that limited the development of both the top and bottom line in particular the supply chain that is much better than what it was months ago but is still creating some destruction in some specific area and production facility we had to face the increasing energy cost that is not impacting the material way our business but obviously is impacting the business of our customer and we had to face the logistic transportation cost the third element limiting the expansion was also the inefficiency in our factory inefficiency due to the strictly related to the supply chain challenges On the other hand, the negative elements that we mentioned have been compensated by positive activities. The first one is the price. The price is now offsetting the material cost in the quarter and in the right direction as we mentioned already beginning of the year to have a complete offset of the negative development of the material cost along the entire year. We had a positive effect of currency and we had clearly a positive effect of the recovery of volume and sales in laundry. Last quarter we had the laundry business underperforming our expectation because of missing components the electronic board that was not made available because of the lockdown in Shanghai in China now the components are available We mentioned that on that quarter we pre-produced product to make sure that we were in the condition to increase production as soon as the components were made available. It is what happened and during the Q3 we have been increasing significantly the sales of laundry appliances. The other element to note during the quarter is the development of the cash flow that is still limited and is mainly because of the growing operating working capital, in particular account receivable and inventory. One comment and then Fabio will go deeper into the analysis about the inventory. the inventory is also increasing because we had a significant increase of this safety stock of components so the components that created problem in production during the previous quarter now we increase the safety stock and this has an impact obviously on the inventory still high is the inventory of booked product so product that are already sold with the name of the customer but we still have in our inventory because of delay in completing the setup of the place where they have to be delivered the third element in the inventory development that is i would see i would call it a positive one is that we increase we finally increase the what we call free stock so stock of product that are not booked for customer but that we can make available to for the replacement business this is important in particular if we have to prepare for a possible downturn when typically the replacement business is the one prevailing on project and other kind of business if we look at the development of the sales i would say that it is strong in every area i would point out obviously the development in north america that continue to be far above the development of the other region and the development of laundry, partially pushed by the recovery of the volume of the production that we didn't complete in Q2, but also because it is a good business developing all across the continent in a quite good way. the area that presented a softening of the development of the sales is Europe and in particular food and beverage the order stock so the order that we have in house and that we have to deliver to customer is still good higher than last year significantly higher of last year and it is still equivalent to roughly three months of sales again as a reference last year it was two and a half months and in the pre-pandemic so normal time let me say is typically one and a half months order intake compared to last year in particular in europe food and beverage is softening compared to last year but it's still in on the level of the pre-pandemic period level Other comment about the market because we just received the result of market research, the official data that are reporting the development of the out-of-home market, the out-of-home spending. So what we as consumer spend out of home for traveling, eating, sleeping in the hotel and so on. And we see that on a yearly basis, so considering From January 1st to the expected December of 2022, it is a market that is still not completely back to the 2019 level, but the gap is clearly closing. and the closing of the gap is mainly due to the fact that also the segment that beginning of the year suffered or didn't restart the growth business traveler for instance in Primis they are now recovering pretty fast airports are full not only with tourists but also with people traveling for business Entering the detail of the two segments about the food and beverage. Food and beverage developed very well in North America. We are pleased and I repeat this one and during the investor day in a couple of weeks we will have the possibility to further comment the result of the recently acquired operation Unify Brand but we are very pleased of the development of the business in North America. In food and beverage we could have done even better because in particular Unify Brand had the most significant supply issues in the quarter missing components we had exactly the same problem that we had in laundry a component missing and we pre-produce product that we are going to finish to deliver to the customer mainly chains during the coming weeks not of the magnitude of laundry, but still significant for the business, for our business in North America. The other area that deserves a mention is the oven. The daily production of our combi oven is close to double than what it was before summer. also here we are paying this significant increase of the demand and the output with some inefficiency because the supply chain is not stable it doesn't allow us to further increase production as we would love to do on the positive side material cost increases are compensated by price and we are in line with what we said to have the overall delta offset by year end. Comments about the laundry quarter. In this case, I have to say that the development of the sales is strong. It was expected because it was expected to have a strong development of the laundry business because in addition to the, let me say, day-to-day business, we have also the recovery of the pre-produced product of the sales coming from the pre-produced product. also in this case as well as in food the north american market deserves a mention as the market where performance have been significantly higher than in the other region also in laundry in this case finally the price is compensating the cost of the material in laundry We clearly had to report inefficiency, so this means that we could have done better. The inefficiencies are related to the activities to recuperate the product that we reproduce during the last part of spring, beginning of summer. Last comment about laundry is one of the offender of the increase of the inventory because in particular in laundry we significantly increase the component safety stock of the electronic parts the ones that we are missing during the spring summer this year. With this said I would say that Fabio up to you to enter into the detail of the financial

Thank you, Alberto, and good morning to everybody. As you have seen the material, electric professionals reach 11.4% EBITDA margin in the quarter, over 300 million SEC in value. We need to go back to the first part of 2019, so meaning pre the pandemic, to see such level of EBITDA generated in a single quarter. Food and beverage further strengthen the profitability reaching the 10.5% and laundry deliver a strong quarter over 17%. Unify Brands, the recent acquired company, delivered also a strong quarter, being accretive for the food and beverage, but also for the overall group profitability. And we did report no material change in the group common cost. When we move from the quarter into more a year-to-date picture, if we exclude the provision for Russian divestment, year-to-date we deliver over 800 million in EBITDA. we are over 10%, 10.2% is the year-to-date profitability compared to 499 million SEC of last year year-to-date, meaning a growth of 65% in EBITDA year-on-year. When we look into the P&L structure, we face a decline of the gross margin. The gross margin was 33.2% in the quarter compared to 34.9% in the quarter of last year. I would bring to your attention two components of declining of gross margin. One, or let me say half of it, is related to the fact that now we have a unified brands as part of Electrus Group. As I mentioned earlier, from a profitability perspective, a unified brand is a creative for the group, but has a different P&L structure. large part of the business of unified brand is changed and we change we operate with lower gross margin but i would say with a pretty lean cost to sell that is bringing the profitability of this organization and the chain business that we know at a very attractive level The remaining part of the decline of the gross margin is back to what Alberto mentioned. Even if in these days the disruption of the supply chain have been significantly mitigated, we suffer for it into the quarter and this has affected the productivity and the product cost into the quarter. On top of it, we also face increase of the transportation cost. Back on price, price in the quarter more than compensated the material and the bought-in product cost increase, both in food and beverage and in laundry. In quarter four, the positive gap between price and material cost is expected to further improve delivery but already anticipated a full coverage by year-end of the price with all the material and bought-in product cost increase. On the sale administrative expenses in value they increase year over year because also they add on only five brands but the weight on sales reduced below 22% compared to 24.6% of last year. The investment of the company Continuum, in particular the investment on the digitalization of our product offer as well as the digitalization of our process in the companies. When it comes to the structure of our balance sheet, at the end of September our operating working capital sales was 15.6% on sales compared to 16% of September last year, slightly up compared to the level we reached in June. we continue to operate with, let me say, low utilization of operating working capital on sales. When we compare the two quarters, meaning the quarter of September this year to the quarter of September last year, we have a significant increase in operating working capital or roughly 1.1 billion SEC. There are, let me say, four components behind it. Two, let me say, are not daily operational related, meaning we have a significant impact from currency translation, SEC getting weaker against other currencies that contribute to roughly 100 million SEC. We have Unified Brands that are now part of Electros Professional perimeter, adding on another 400 million. The remaining 600 million comes from, let me call it, the remaining business department and two areas to point it out. Receivable increase, yes, receivable increase because also sales increase significantly year over year organically. What I'm happy to report is that the quality of our receivable is and is expected to remain good. Inventory increased as well, and the increase was part of a conscious decision to increase the safety stock of four components as well as to have a higher stock of finished products to secure product availability. On top of this let me say business decision clearly as you may guess the value of the stock increase also because of the higher material cost that is incorporated into it. When it comes to our capital structure, our ratio net debt on EBITDA is at 2.3 times and value that is still well below our financial target of 2.5 times. Clearly net debt increased compared to the same quarter of last year and let me say the main reason behind it is the spending, the cash out that we had for the acquisition of Unified Brands. I have also to report that in the quarter we have had a further push up of the net debt value because of an EFRS-19 adjustment of the Swiss pension fund that we have and this adjustment is roughly 256 million SEK. It is an accounting adjustment that has no impact on the financial debt of the group, on the cash flow, as well as for the income of the group. I was mentioning earlier about the acquisition of Unifi Brands. Back in December we acquired the company leveraging the cash available as well as the utilization of the revolving credit facilities. As we announced in September we have replaced the utilization of the credit facility with a term loan of 140 million euro that has a pretty interesting duration of 18 months with the possibility to extend two times additional six and six months. As per today, October 27, we have completely reimbursed the revolving credit facility so we have in place the full extent of revolving credit facility that is 200 million euro. As you can see from the chart, we have a pretty sounded financial and debt duration. We have no covenant in place and we have a situation that allows us to enter 2023 with strong financial power and no maturity obligation for what concerns our loan. Last comment on my side is on the cash flow. Alberto already mentioned we have had a limited cash flow for the quarter and for the year to date. Despite the good EBITDA performance the operating working capital increase absorb majority of the cash generated. My expectation is that now that the supply chain is stabilizing, we are already started to review the safety stock requirement. This means that already in quarter four, I expect a reduction of operating working capital as well as a return to a solid cash flow generation already from quarter four. And with that, back to you Alberto.

Thank you Fabio. Obviously in the current situation I think I mentioned that if the energy cost is not materially impacting our operations this is impacting our customers operation and as a consequence the sensibility about sustainable solution products that are reducing the consumption of water that has to be warmed up water electricity gas is growing the concern about how to use these resources is growing both for environmental reasons but even more for economical one i've only said that sustainability means to be economically conscious environmental conscious and socially conscious and that is what we have been putting ahead of our development keeping in mind every time we were developing and bringing to market a new product this is clearly paying back and with this chart we want to represent that in each and every product category family segment we have been during the last months years introducing product that are significantly reducing the consumption of energy. Energy in general that means electricity or gas. This subject is on the table every time we talk and we meet with customers and these are things that we can prove with fact in front of them when a discussion arises. There have been many tenders recently where the valuation about the consumption of energy is becoming the most important element to select the winner of the deal. Concluding and trying to summarize the big things during the quarter, a quarter where I repeat, we had a development of the revenue, a development of the earning and a development of the margin. As Fabio pointed out, in particular in terms of margin in absolute term, the earning in absolute term and the margin are back to pre-pandemic level. Organic sales are developing mainly in laundry and in North America with Unify brand. Order intake, order stock in particular is still strong and is giving us confidence about the short-term development of the business. We have roughly three months of sales in-house and the order intake is still coming. But obviously there is uncertainty in front of us. We all read and listen to what is happening in the world so there is uncertainty for what is going to happen in 2023 I mentioned to you the result of the of the research of the survey about the out-of-home industry or the hospitality industry that is the one where we operated and the fact that it is still on a recovery phase is different from other industries because we didn't have a 2001 booming year. 2001 was still a year where we were far away from the 19th level and we have been gradually catching up and we are still catching up in particular in some segments that are recovering lately during the past months. Due to this uncertainty, we already started preparing on different scenarios. We have been working on scenarios where the recovery is completed and that the start of the historical normalized growth can continue. we have to work on stagnation with zero development and obviously also negative scenario where there is a possible recession we did this when the pandemic hit this industry we are doing this today obviously the learning is that the approach that we have is that is better to be prepared for the worst and hope for the best than to be catched in unprepared in front of negative event in any case the final comments is that if i use the analogy of 2009 so the financial crisis that hit the market the industry not only us in this case but every industry where we had a business decline of roughly 10%, I see that there are different conditions. Our company is different from the one that was hit by the recession at that time. First, we have a recent experience, very recent experience that is the pandemic downturn, the massive downturn that pandemic determined that we have been able to manage a relatively well that massive decline it is more than double than what we experienced in 2009 with similar dynamic in the meaning that food and beverage with a negative or hardly hit by the decline and then laundry that proved to be more resilient. The second point is that we are better balanced geographically. What I mean is that now the business in the Americas is over 34%, if I remember well, so significantly larger than what it was in 2009. And we all know that North American market in particular is eventually faster in being hit by the recession but is also much much faster in recovering. The third element is that we are better balanced also from the customer segment point of view. During the financial crisis commercial restaurant chains had great years because people didn't change the habits so they continued to eat out of home but they scaled down choosing to eat in let's call places where the menu was more competitive from the price point of view and these are clearly the offer of the commercial restaurant chains thanks to the acquisition of the unified brand but also thanks to the activities that we have been carrying on along the year we are much better balanced today compared to that time for what concern the sales to commercial restaurant chains The fourth element is that we are much stronger than what we were in laundry. Laundry business developed very well. We had some headache during the second quarter. I would say headaches that are over. We are well set both from the industrial point of view and the commercial point of view and the laundry business is resilient. Also during the financial crisis when as I said the overall decline of the business was 10% laundry declined less than half than food. In that time we didn't have beverage. last but not least the fifth point that make me confident that we are better prepared than before to possible downturn of the business is that we invested heavily in digitalizing our company we invested recently in having a new organization that should provide agility and flexibility and the better focus and being closest to the business With this said, Jakob, I would pass to you and open for questions.

Thank you, Alberto. And operator, please go ahead for questions.

Thank you. Ladies and gentlemen, anyone who has a question may press star and 1 at this time. The first question comes from Agus Gustaf of SEB.

Thank you. This is Gustaf Agus with SEB. a few questions if i may firstly on sort of geographical outlook i appreciate you say that the us is thus far a bit bit stronger which makes sense given i guess higher share of read or chain restaurants there but but i'm looking at bookings data recently and from opentable.com and that sort of I see some different developments where the U.S. is actually the weakest now compared to 2019. Is that something that you feel, too, that seed-to-demand, while not restaurant demand for your product, is starting to come down in the U.S.? I'm happy to hear your thoughts there.

Okay, I answer immediately to this question in this case. From the geographical point of view, what we see in this case, so I'm not referring to the research that was published last week, but what we see is that the demand for our product in North America is still strong. we are both unified brand and the other product lines are having a good development you see also geographically in Q3 the number that we published earlier the 32% growth that is organic so excluding unified brand so this means significant development of the sales other area that is still positive and we are expecting that it will be I don't mean completely not impacted but for sure less impacted than any other is Asia and the reason is because Asia was declining until spring this year so Asia just started the recovery Japan just started the recovery Southeast Asia just opened the border for travelers. So that is just the beginning of the recovery curve and is expected to continue. We see this with projects and with business in general. The only area where we see a softening of the business and this mainly on the order intake more than in the pure net sales is Europe because Europe was by far the strongest part of the business in particular the South European countries during the first two quarters and half I would say.

Could you help us walk us back to the post-financial crisis era for you? Obviously, you weren't your own entity then, but looking at the divisional numbers for Electrolux, you shrank the business five years in a row. Could you walk us back to what happened? I know you divested something in 2010 and so forth, but what happened? Did you lose market share at the time? Was the industry declining?

Okay, 2009 we lost 10% of sales, 11% was food, 5% was laundry. I believe in that time, 2009, every industry and every region went down. Then 2010 we had rebounds everywhere, including the European countries. It was an important year because there have been a lot of incentives from the different governments to have the business recovering. And then in 2010, we had the big difference compared to our competitors, in the meaning that from 2010, so 2011 onwards, the US market continued the growth. it was a booming period for the American market that one while if you remember well 2011 2012 and partially 2013 they've been the year of the crisis economical crisis in Europe in particular in some countries in Europe where there was I would say a deep recession. So that is the big difference between our situation and the situation of our competitor. So if I look at the globally, you surely will see that the competitor grew more than us because they've been growing in North America while we were based in Europe. That is the reason why I'm saying that compared to 2019, we have quite a different situation because the share of our business in North America is much larger than what it was in 2009. because the laundry business is much stronger than what it was in 2009 because the share of our business with the commercial restaurant chains that have been the ones suffering the least is much larger than in 2009. During those years the institutional business in Europe that was I would say probably more than half of our business largely half of our business was completely blocked because government didn't have the money to invest in staff canteen or in other things like that. Companies, they didn't invest in staff canteen, but invested eventually in machinery. That is the big difference, by the way, compared to the pandemic crisis, where in reality a lot of investment has been done in hospitals or in institutional facilities.

Thank you. And then lastly, regarding those price increases that you now guide for from January, selected ones from January next year, how confident do you feel about net price increases given the macro environment and the raw materials coming down and so forth? And do you believe this is something that will be followed by your industry peers or that'll be helpful?

okay so first the surcharges that we applied since May this year are now consolidated because the surcharges were over at the end of October so they will be consolidated into the price and this is justified by the increase of energy by the increase of transportational cost, then we are planning another increase beginning of next year to face to compensate the labour increase that we expect to have next year. it is not defined yet it will not be on the same level of the increase that we have in 2022 it will be in the single digit area so it is it is what we are planning competitor I didn't see an announcement yet or here and there something but I believe as it happened also in 2022 this is an industry that is reflecting in some way inflationary atoms transferring them to the price. can the price increase stick have the positive result that they are providing until now this is also related or depend on the scenario that we will face in 2023 it is obvious that in in a recessionary scenario, in a scenario when the market will go down, then as it happened during the pandemic, eventually the price leverage is weaker. So I would say that for the time being, considering the knowledge we have and considering how the things are going, we are sticking to our plan and we are confident that as we did in 2022, we will successfully apply this price variation in the coming months.

Thank you. That's very clear. Let's go to one more question.

Sorry, does that conclude the questions?

Those are those, yeah, thanks.

Thank you. Ladies and gentlemen, as a reminder, if you wish to register for questions, please press star 1 on your telephone. The next question comes from Johan Ellertons of Kepler Chevro.

Hi, this is Johan. Thank you for taking my questions. I also wanted to dwell into what's different today versus 2009, but I think you've done it quite well already. Just a follow up on this labor inflation. Is that geographically different from, I mean, the labor inflation you had was probably mainly driven by the US this year. Where do you see it coming through now?

yes there are big differences from the geographical point of view it is too early to comment about that again if we read what is in the paper in the news we should expect an increase of the labor cost because it's connected to the inflation to the growing inflation I can tell you that we just started to meet also the unions in the different countries, at least in the big ones, where we have union negotiations. The one in Europe, Italy, France, Sweden, for instance, these are the big ones in Europe. it is very early to say something honestly as I said we are preparing for an increase of the labor cost with an additional price increase beginning of 2023.

And talking about Thailand and your new plant in Rayong that's still yielding also in the potential wage inflation scenario the expected benefits

absolutely yes Thailand is I was finally I have to say I was in Thailand in September because I remember that we built that factory and I just saw this from video that were posted by the colleague who were there finally I was in September visiting the Thai operation I have to say that I've been extremely impressed by what we have been able to to complete in that in that location we have a We have a state-of-the-art facility that is producing laundry product and beverage product. It is a facility that has been built with the most modern technologies. With a lot of automatization along the line, despite the very low labor cost, it is a facility that we can expand. So it is not limited as it is already now, but also eventually also building additional parts because we have been good in buying additional lands around the building that we have. But the main thing that impressed me were the people. We had an amazing skill and passionate people. And he will do that. Thailand is like the Asian country. There is an inflation in the meaning that the wages are growing. But I would say that in this moment is probably the most, without probably, is the most competitive facility that we have. Excellent.

And then on these price hikes, are you seeing competitors announcing similar ones or going before or after what you've seen out there in the market? You mean the price?

Price, yes. It is early again. I believe announcements about price are typically coming in the coming weeks. So I'm not expecting big differences, honestly. We saw some already introduced, mainly the Americans, because the Americans are faster in doing these things and more aggressive. but I'm not expecting anything different than what has been done in the past and what we are planning to do.

Okay and then finally you mentioned for example this combi oven your production volumes are now two times where they were before the summer. Do you see that you have sort of lost or gained market share because of the supply situation there or how has it played out?

I would say that it's hard to say that because also our competitor had a very long delivery time, in particular during the spring. And the main competitor, they had a super long delivery time for the oven. Now everybody's coming back to a reasonable time, still longer than what it was pre-COVID, at least for us, but not dramatically longer. I think and I mentioned this when I was giving comment to the inventory development that obviously it is not good to have an operating working capital that is affecting the cash generation in such a way. But on the other side, finally, I believe it's probably the first time since winter this year that we have what we call free stock. Free stock means product that we have in stock. We have a selected number of product that we promise availability on end. That means you place an order, we ship product to you. We finally have some products that are free so we have we have been able to create a free stock gradually clearly we want to have a good free stock because when you play in the replacement business you need to have a free stock because in the replacement business not for every product but If we talk about fridges, the small dishwashers, even the small ovens, sometimes if you don't have it available, then the customer is forced to go somewhere else. So I would say that in the past month, the situation was similar. the one of our competitor in some cases we have been proud to say that we were even better now we are i see a recovery or an improvement of the situation in a general improvement of the situation good and then finally maybe it's a bit a little bit early obviously your net debt is still high but

If there would be some acquisition opportunities rising next year in a potential more cautious market, would you have the ability to do some acquisitions as well? And what areas are you still

interested in in such a case okay so and then Fabio can correct me but if we are going to run an acquisition of the same size of unified brand we are still below the the limit that we declare in the meaning that we will be above the 2.5 but we said that in case of acquisition we can go higher than 2.5 i'm not talking about 10 so higher than 2.5 in a reasonable way with a limited time to go back again to the 2.5 and i believe we are in the condition today despite the let's call weak cash generation or weaker than what we were used to do cash generation during the past quarter so the answer is that an acquisition in that range is feasible we have the financial tool Fabio went through that and I believe it was a clear explanation about the fact that we can do it If it happens to have it, we are still scouting the market. We started the day after closing the Unifi brand. It is not something that you can pause. You have to do continuously because because you have to be ready the day the company becomes available. Priorities are still the same. So still the United States is on top of the list. The United States and chains are on top of the list because it is true that We are much better balanced compared to the past. I believe now after the three big companies that are in the United States, there is a handful of companies that are falling with a significant distance. We are among them today. But at the same time, the gap between this company and the big ones is larger. So there is room both for consolidation and growth. So United States and chains first. Secondly, we always said that if there are companies that are giving us the possibility to further growth, the high margin businesses, so companies that are creative or that are helping us to accelerate the reach of our target to be a 15% EBITDA margin company, they are obviously very interesting for us. Okay, thank you very much. Welcome.

Thank you. Ladies and gentlemen, that was the last question. I would now like to turn the conference over back for closing remarks.

Okay, thank you. Thank you for the question. Thank you for today. So with that, actually, we close the conference call for this time and speak to you next time. Have a good day. Thank you and goodbye.