Electrolux Professional AB (publ)

Good morning and welcome to Electrolux Professional Group Q2 result presentation. My name is Jakob Ruba. I'm heading up investor relations and communications. I'm here in sunny Stockholm today. I have Alberto Zanatta, our president and CEO, and Fabio Sarpalon, our CFO with me. And as always, we kick off with Alberto. Please go ahead, Alberto.

Thank you, Jakob. Good morning to everybody. Q2 was a strong quarter. During the quarter, we delivered organic growth, sales development around 15% and organic above 8%. But in particular, we expanded the margin and the earnings by 65%. So we delivered a profitable growth. is another step towards our financial target, an important step that is bringing us closer to the target that we have. The result was achieved, we have to say also, despite the performance of an area that we expect to be the most profitable one, the North American food market, That reported a decline in sales and a good margin, but a margin below our expectations. To be said also that the comparison with 2022, as to consider that last year in Q2, we had items that have been affecting the comparability, like the divestment of the Russian operation, accounting for 35 million SEC. And also during Q2, The laundry business suffered. Laundry business in particular, the overall business was suffering because of the supply chain challenges. But in particular, it was laundry that was affected by missing production. We had to stop production for missing component in May. It went through for some weeks where we were not able to complete the product. So we produced, if you remember, product with the missing electronic boards and And then we started to deliver them in Q3. So in some way, we have been missing business that we estimate with an impact of roughly 30 million SEC negative in Q2. So even if I'm adding these two items to the 2022 numbers, the 2023 performances in Q2 are showing a profitable growth, a profitable development. The third element of the financials is obviously the operating cash flow. And we had a strong generation of cash in Q3. That is, by the way, normalizing the performance for what cash generation is concerned. Last year was affected by a relatively weak cash generation during the first three quarter of the year. This year we started the year already much better in Q1 and in Q2 we are at a normalized level. confirming that this is a company that can generate more than 100% cash conversion. If we move now to the analysis of the different dynamics in the different geography in the different regions, we have to say that you see that We have basically the Americans positive, Europe positive and flat Asia-Pac. Let me start from Asia-Pac because, again, it seems to be the area where we did not grow. The reality is that in that area, last year, we delivered the large... very large project in Uzbekistan. You have to consider that the project in Uzbekistan that was both for laundry and food delivered in the second quarter of last year accounted for roughly 15% of the total sales of the region so if i'm excluding that one also that region is growing significantly the business along along the year in particular in q2 food was killed in china even if below our expectation in india Again, food was the one affected by Uzbekistan as well as London, but mainly food. More than two-thirds of the Uzbekistan project was food. The average was good all across the regions, and London, again, all across the region, in particular, again, India and China. Now, Europe, very strong performance in Europe, in particular beverage and laundry that we've been growing all across the different countries in Europe. Clearly, beverage is the season high quarter, so very important to do strong in such a way. Food grew a little bit less than before. beverage and laundry, but still very good performance in the Mediterranean area. Mediterranean area we call the Hispanic or the Iberian region, Greece, Turkey, and remarkable performance also in Finland, where we completed pretty large projects. The region with the Larger gap, let me say, or differences in thermal trend is United States, where we had laundry performing super well, while beverage was slightly positive and food was negative. And again, I'm repeating here the comments that I made during the Q1. In North America, we experience a declining demand of our product in relation to the stocking of our distributors. It is in particular related to the distributors that are selling the refrigerators that have been at the stocking since the beginning of the year. We see some Some positive sign with new orders coming. We saw this happening at the end of June and continuing into July. So let's now have a deep dive into two segments, starting, as usual, from the food and beverage. Overall, food and beverage was organically growing growth. 0.5, so a flattish business. Again, remember the Uzbekistan project that was pretty large and we delivered it in Q2 with good performance in Europe while, again, the sales declined in the Americas. comments already made, and in Asia, with a reference to be considered about the Uzbekistan project. In particular, beverage, within the food and beverage, was very good. Beverage was the one suffering the most years ago during the pandemic, and it is the one recovering more than any other on these years. China grew, yes, double the growth, but is less than what we were expecting because the recovery and the reopening of the Chinese market is slower than expected. Margin improved significantly, so the profitability improved, and it was mainly thanks to the price and the mix-up, thanks to customer care, where in our operation we grew the participation. Participation means customer care sales versus the total sales of the company, and we grew the participation of the customer care business to the total sales. If we go to laundry, laundry performance were really strong. But again, We have to look at the comparison. There was also the Uzbekistan project. Inside, indeed, sales were super strong in America, in Europe. In Asia-Pacific, there were single-digit growth compared to the double-digit in the other two regions. But again, in Asia, we had the Uzbekistan project who was delivered. In this case, also the margin, the margin grew more than 100%. That is good, clearly. And it's driven also for price, but in this case also volumes. So volumes had a very positive effect on the laundry business. Two comments about the laundry, two additional comments. In addition to the fact that, again, the comparison with last year has to consider also the fact that in Q2 we did not sell a lot of product because we produced incomplete units that have been recovered in Q3. So there's been a sort of shift there. of business from q2 to q3 last year and we said that the impact in the earnings is roughly 30 million in addition to that one if we i think is it has to be a mention a comment between the q1 and q2 of this year where in reality we had a super strong March in Q2 and a relatively weak in April, that normally they should be normalized. March was an extremely long month and April was an extremely short month. So I would look at the two quarters together with a normal progressive development of the business in Laundrie. The other element in Laundrie is also that we increase, in particular in Q2, with a catch-up versus Q1 again, so we should divide between the two quarters, the R&D investments, because we started a very important project to renew the architecture of some land in the laundry portfolio. With this said, I would let now Fabio go in deep into the analysis of the financial performances.

Thank you, Alberto, and good morning to everybody. As you have seen from the financial data, since quarter two 2021, supported also by the market recovery, we have been consistently increasing both the top line and EBITDA performance compared with the previous year. And this, let me say, pattern of consistency, positive consistency improvement, I believe it is beside the data such an important pattern of our development. In Porto 2, we generated close to 400 million sacks in EBITDA and a margin of over 12%. Also here, consistent improvement, both in food and beverage, where we are over 12%, and in laundry, where we are over 16%. The value increasing EBITDA was roughly 150 million. Alberto mentioned that in the comparison we needed to consider the last year we had roughly 35 million one-time costs related to the investment of the business in Russia and the disruption of the supply chain that we had in laundry affected the profitability to last year for roughly 30 million. But even excluding these couple of items, the improvement has been roughly 90 million, so plus 40%. That I consider really a remarkable improvement. Back to the comment of we are growing, but we are also growing profitably. EBITDA was increased thanks to a combination of higher gross margin, but also lower selling administrative expenses on sales. We have expanded the gross margin value by 19%, higher than sales. This increase was driven by price, more than compensated in the quarter and also year-to-date the inflationary items. The volume growth in laundry, the mix-up of customer care, these were the main drivers of the gross margin increase. Also in the quarter, happy to report that with the stabilization of the supply chain, also the logistic costs have been decreasing quarter on quarter. Selling administrative expenses increased in the quarter in value also because of inflationary items, but the weight on sales has been reduced by roughly one percentage point, meaning that we are growing profitably, getting also productivity improvement of our organization. And this result has been achieved whilst continuing to invest in innovation and digitalization on the company. This is, I believe, an important also thing to consider because we are growing, growing profitably, but we are also investing to create the condition for a sustainable, profitable growth also going forward. Coming out from the EBITDA A few words about the financial net. Financial net in the quarter was 24 million lower than the level of quarter one. It has been helped by reduced level of funding, but also we had positive contribution from currency transaction in the not second denominated deposit. The tax rate in the quarter was 20% below the average. At the same time, also to give you a sort of guidance, I expect that for the quarters to come, to go back to the guideline we gave in the past of around 25% of tax rate on the income. Income for the period was close to $260 million. Earning per share at 0.89 sec per share. Also here, remarkable result. We doubled more or less the net income compared with the last year quarter too. Then a few words about the cash flow. Alberto already mentioned it earlier. We are back to what we say is a normalised cash flow. This group historically has been a strong cash generating group. The level of operating cash flow has always been above the EBIT and EBITDA generation. And also this quarter, I would say, After, let me say, a good quarter one, we further improve the cash flow, despite the additional requirement we had on the operating working capital. Few words on the capex in the quarter. The level of capex has been relatively low this quarter, but I expect it's going to normalize to historical spending in the quarter to come. I mentioned operating working capital development. Year over year, operating working capital increased by 20%. Five points, five, six points are currency translation related, and the rest is increase of the operating working capital value. Also related to the pricing, that is affecting the value of our goods, but also the value of our receivable. Here to be said that I consider somehow we are reaching the peak of the operating working capital in terms of weight on sales. And now I believe that with the stabilization that we have in the supply chains, we have finally the conditions to work on improving the operating working capital, in particular on the inventory side. Yes, we have now the condition to review the safety stock, for example, of this product, the size of purchasing, for what concerns the component, bringing down the inventory to a normalized level. When it comes to the receivable, as reported in the previous quarter, the situation is pretty good. I believe we have the historical low past due on sales than ever. Overall, you see our position, our financial position is pretty solid. We reduced relation debt on EBITDA at 1.3 times. So significant down compared to the level we had in December. In the quarter, we have repaid another part of our term loan, we repaid 15 million euro on top of the 35 million euro we repaid already in quarter one. So overall 15 million repayment in funding in two quarters. We have now, we started quarter three with a strong liquidity. We have over 700 million in liquid fund and 200 million euro revolving credit facility fully available. mean overall as a conclusion solid quarter overall good profitable growth and a pretty strong balance sheet and with that let me say i'm really look at this group with a solid group with really also from a funding perspective the condition to support the profitable growth and with that back to you alberto thank you fabio and uh

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

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

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question is from Gustav Agels from SEB. Please go ahead.

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

I may take the question. First of all, for what concerns the R&D cost in quarter two for laundry, we needed to consider that there was a sort of catch-up of spending also compared with quarter one. Going forward, I expect the R&D cost that we continue to invest in terms of R&D to keep the premium position that we have in the market. But the increase will not be at the same level we have seen in Q2 this year. For what concerns the margin development going forward, I believe that we need to look at current performance of laundry putting together quarter one and quarter two. I believe that this is, I would say, a good proxy of the underlying business development and profitability of laundry.

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

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

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

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

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

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

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

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

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

Yeah. And just to be totally clear, that surcharge that you had, including that, do you still see prices going up net, including campaigns and surcharges and whatnot in H2? No.

No, but the surcharge, they were last year, and we closed the surcharge at the end of 2022. In some cases, converting them into price in the country or in the situation where there were inflationary items that were clearly too high. But other than that, I repeat, we are not applying the surcharge anymore to any customer anywhere. So we will benefit from the reduction of the transportation cost during the second part of the year.

Yeah. My question was the total price paid by the customer may be surcharge or list pricing or campaign. That is still higher year over year in H2 versus last year, right? Yes. Yes. Perfect. Thanks for taking my question.

As a reminder, if you wish to register for a question, please press star and one on your telephone.

Jakob Ruben here. I have one question from the web. Will you be able to use the somewhat soft US food and beverage market to do value creating M&A? And do you see a strong M&A pipeline?

Yes. We are looking at M&A as usual, so we continue to monitor the market. Priority, but it is not the only area where we are looking at possible acquisition. The balance sheet is strong. The net theft, the ratio between net theft and And EBITDA is going down. So there are all the conditions to possibly entertain discussion with companies. Obviously, I cannot comment more than this. I would not relate the softening of the U.S. market with more possibility in terms of M&A. At least this is the experience that we had also during the pandemic. It's not that... because of the market is weaker, the more companies are coming to market. I didn't see this one happening. So I will not relate the two things, but we are continuing to look at the possible acquisition.

Thank you, Alberto. I don't know if we have any more questions, operator. No more questions from the phone. Okay, if we have no more questions, I hope everything was very, very clear. So with that, I say thank you for today and have a good day and summer. Thank you and goodbye.

Thanks to everybody. Thank you.