Electrolux Professional AB (publ)

Good morning and welcome to Electrolux Professional Group. Today we are presenting our third quarter result. My name is Jakob Rubai. I'm Head of Investor Relations and Communications. And as always with me, I have Alberto Zanatta, CEO and Fabio Sarfalon, CFO. I leave the stage to Alberto. Please go ahead, Alberto.

Thank you, Jakob, and good morning to everybody. So Q3 is the third quarter of this year, third quarter where we are still above 10%. And if I look at the nine months, so the year to day performance, we are still ahead of last year, both in terms of sales and EBITDA. Going into the detail of the quarter, let me start from the cash conversion, because that is for sure the headline, considering that we had a strong cash generation with 135% cash conversion, cash generation that gave us the possibility to further reduce the ratio between net depth and EBITDA. Going at the sales, it is a quarter where we reported declining organic sales, slightly above 5%, and this decline is mainly driven by the performance in the United States. The decline of organic sales had also obviously an impact on the profitability, and our EBITDA decreased slightly more than 8% year on year, with a delta compared to last year of roughly 27 million, slightly less than 30 million SEC. If I look at the decline of profitability, decline of the margin, and EBITDA in absolute terms, as I mentioned, the first reason is clearly the the drop of volume, the decline of sales, in particular, I repeat, in the United States. A second reason that is important because the negative impact is even larger than the gap compared to last year is the currency, the negative currency transactions impact. We will detail a little bit more from which currency it comes, but the negative impact is around 40 million SEC. A third element that... that I want to mention when we compare the performance of 2023 with the one of Q3 2023 versus Q3 2022 is that the comparison between particularly laundry when in Q3 we started to invoice the product or the order that we cumulated in the second quarter of the previous year of last year And that were delayed or shifted to the second part of the year because of the missing component and as a consequence the unfinished product that we produced during that quarter. The total amount of this shifted order is around 220 million sec all in laundry. So it is impacting the laundry performance is this one. And I would say that roughly slightly less than a third was in Q3 and obviously slightly more than two thirds in Q4 last year. If I look at... the dynamic, the sales, the loss of volumes and sales that we reported in Q3 by geography, I already mentioned that the big drop is in North America and it is both in laundry and in food and beverage. In North America we had, in reality, the South America business going up, but it is so tiny compared to the North America that didn't clearly compensate the significant drop of volume that we had. The region of Asia Pacific, Middle East and Africa reported a growth that was quite significant in laundry and slightly up also in food and beverage if we exclude a large project that we had last year so like for light we had a growth both in food and beverage but significantly grow also in in in laundry due to the fact that we have been commenting this during the past quarter a point about china as you As you see, we are not noting anymore China as the negative one because we see things moving. They are not back to what we expected and what it should be, but we see things improving in China in the area. Europe is flat compared to last year, but also here we have two dynamics. We have the we have laundry slightly up and food and beverages slightly down. Slightly up and slightly down means 1-2% percentage point. But let's go into the detail of the two segments. So if we talk about food and beverage, food and beverage, we said it, we have been... down in Europe, and also here we have clearly two speeds. We have the Nordic country, the Nordic market that are reporting a softening of the demand, and they've been negative in the comparison with the last year, while the Mediterranean region is still growing both in terms of sales and in order intake. The big hit, you see, is in North America. And here you see the 10% in Asia Pacific, Middle East, and Africa because, again, I repeat, it was in particular related to the big order that we had last year. If I exclude that one, it was a very large order, one-off, obviously. And if you exclude this one, the trend is positive in the region. A couple of words about North America because I'm sure there are questions and there have been questions also during the past months about the situation, about us gaining, losing market share in the market. In North America, the business is structured basically in three typologies. The distribution, the institutional business that are the big kitchens that you can find in markets school, public sector and the chain business. The distribution business is tiny and it was the one that was affected by the stocking. Last year, we had a super good year in distribution. It was significant last year. Now it's getting back to normal. During the first part of the year, we basically, I don't mean we didn't invoice, but the invoice was tiny because all our distributors, they were selling the product that they bought in large quantity the year before. Now it's normalizing. In October, we see a positive order intake. It's the first time since the beginning of the year. So we believe that the stocking phase is over and this should normalize the trend. Institutional chains are basically 50-50 of the remaining business. That is the big, big portion of our business in North America. If I look at the chain business, I would say that what we see is that our customers, so the chain customers that are already buying our product, they didn't switch to other competitors. So we didn't lose customers. We clearly see this one. So they slowed down the order of new product. That means that they slowed down the opening of new restaurants, right? the replacement of existing product. They postpone the investments. The new customers, the ones that are testing our product, also in this case, we didn't lose any ongoing test. So we see that these customers are also continuing to test our product, both in the labs and in the markets, but they are postponing the decision. I believe the word postponing is... is a key one because this is what we saw during the last weeks of September when we reported also majority of the drop of the sales. The third part of the business in North America is the institutional, we said. That is majority of the legacy business that we had before the acquisition of Unified Brand. And this is probably where we had challenges. It is an area where we clearly had internal and external challenges. Internal related to the integration, because during the quarter, we have been running the full integration of the system, including, sorry, of the team, including the merge of from three to one IT system. But also we had some external challenges with our reps, and our representation in North America. So that is the area where we surely had more challenges in the market. Order intake for food and beverage, we see that with the dynamic related to Europe, better in South, a little bit weaker in North America, sorry, in the northern part of Europe, is on the same level of last year with the exception of USA. Laundry. If we go to Laundry, again, sales have been up significantly in Asia-Pac. They've been also up in Europe, slightly up in Europe. They've been down in the United States. And now the comparison in particular with what for what Europe is concerned, has to consider, as I said, that last year we had roughly a third of the 220 million of business that was shifted from Q2 to the second half of the year, roughly a third was in Q3. And it was in particular in September of Q3. So, So that is the big point of laundry. And we have also to remember that this shift of business was a shift of highly profitable business because we produced the product earlier, the fixed costs were there, independently if we were invoicing or not this additional business. So it was this shift of business impacted not only the sales, but also the profitability. The order intake of laundry was on the same level of last year. I believe with this said, Fabio, we can go into the financials.

Thank you, Alberto, and good morning to everybody. As you have seen, Q3 was a solid quarter with an EBITDA margin above 10% and 290 million in value. Despite the decline in sales, as you heard from Alberto, primarily in the US, and adverse currency transaction impact, it is really worth noting that we have been able to further improve the gross margin by 1 percentage point, but also the value-in-value gross margin increased despite lower sales. Positive contributions continue to come from price, more than compensating deflationary items like the labor cost. In the quarter, we also started to see a positive contribution from direct material, and the high-margin customer care business continued to grow more than total sales. few words on the currency transaction. As you heard from Alberto, the impact in the quarter was significantly, approximately 40 million SEC impact year over year. And let me say the big offender are the weakening of the SEC, both versus euro and Thai baht, but also the strengthening of the Thai baht overall, not only versus SEC, but also versus euro. And here are a couple of examples in laundry. You know we have a large production facility here in Sweden for laundry that buys raw material and components that are Euro-based products. in term of pricing. So a weakening of the SEC has definitely an impact on the currency cost of the raw material. The same applies still in laundry. We have a large production facility for laundry and beverage in Thailand. And despite the improvement that we are doing in that operation, the strengthening of Thai baht has a negative impact on the product cost. Moving outside the EBITDA area, it's worth to report that the finance net somehow increased compared to last year due to the increase of interest rates. It was 33 million SEC in the quarter. I would say an increased amount, but worth to mention that it represents really a sustainable piece of our P&L. Tax rate in the quarter was 26%, slightly above the average, but I would say no change on the overall guidance of 25% tax rate over time. Cash flow was strong, definitely strong in the quarter, confirming that cash generation is now normalizing at the historical good performance that you see also in the chart here. EBITDA was over 300 million, and this strong EBITDA has been combined with a reduction on the working capital requirement. A remarkable result I have to stress that we achieved while you continue to invest in CAPEX both on the product development but also in the automatization of our production facility. Operating working capital was 2.2 billion SEC at the end of September. Reduced compared to the level we had in June this year and 4% below September last year at the same currency. Receivable decrease in value because we generated lower sales compared to quarter 2 this year but also quarter 3 last year in terms of comparability. But what I wanted to mention to you is a remarkable improvement that we have had in inventory. With the stabilization of the supply chain and the action that we anticipated to you and with discipline put in place, Inventory was significantly reduced and it is now 8% lower than September last year at the same currency and further reduction as expected by year-end. We are definitely on the right track to revert the operating working capital requirement on sales. Our financial position has been further strengthened and we have now a ratio on EBITDA at 1.2 times. That is a significant reduction compared to 2.3 times that we had just three quarters ago. Cash availability was 650 million SEC. And here you have the graphs regarding the evolution of the ratio net debt on EBITDA. Worth to mention that this reduction has been generated thanks to a combination of increased EBITDA and EBITDA a reduction in debt of roughly $860 million sec year over year. Reduction that is achieved after having paid the dividend for additional $220 million. Looking forward for the future, I expect this trend to continue, meaning further reduction of the ratio net debt on EBITDA to continue. And this is particularly important because our balance sheet is strong and will be further strengthening going forward. And the reduction in debt is important, in particular in times like this one where the money is more costly than it was in the past. Last comment from my side on the financial development is about an important step that we did in quarter three. We launched a commercial paper program for a value of 2 billion SEC. We have issued 600 million in September on the program and we had really a pretty good and large interest from the investor. I believe that this is an important step in expanding our sourcing facilities. A step that, when you look at the combination of the normalized cash flow generation, this new commercial paper program, the 200 million euro unutilized, revolving credit facility, you clearly understand that we have definitely the means to support the business going forward, including also potential and possible many opportunities. With that, back to you, Alberto.

Thank you, Fabio. And now let's talk about things that are personal things, make me proud of what we do in this company. The meaning of that, besides the financial, we are also looking to make this company a better company in all the aspects, in particular the sustainability. So our target to reduce the greenhouse gases has been approved by EU. science-based so it is important in my opinion that they are confirming both our commitment but also our capabilities to be impactful on the planet not only i have i'm very happy to report that we are ahead of the plans that have been approved we are ahead at august and we believe that we can reach the target that we had, the intermediate target that we have in 2025, we can reach it one year ahead of our ambition. The second one, I'd like to report an event that we have been running all along October. It is an event that we call the Hive, and it is an event that was organized in the Center of Excellence, the big showroom or test kitchen that is located close to where we have our factory down in Italy. It was an event that collected... hundreds of key customers here we are talking about dealer consultants a chain customer that have been visiting us they've been spending one or two days in our facility getting a full immersion and understanding about the strength and the element that are making this company different from from others so talking about the full solution because you can clearly appreciate the The full 360 business that we can offer to customers from food, beverage, laundry, but not only customer care whatsoever. The themes were about sustainability and in particular the cost of ownership that, as I said more than once, is becoming very, very relevant for our customer on these days. and the digitally connected appliances that we can offer, not only appliances, but ecosystem. It was very successful. It has been very successful. And obviously, we will close it at the end of October. And it is something that for sure will pay back during the future, in the coming months. With this said, to conclude and summarize, It is a quarter where we reported weaker sales and profitability versus last year. In particular, talking about the profitability, is a profitability that declined mainly due to the volume decline in North America. The negative currency transactions impact that was reported roughly 40 million negative. That is larger than the gap of EBITDA with last year. And the comparison with the laundry business that I mentioned earlier. With this EBITDA decline, I think it's good to keep in mind that we improved the gross margin. We improved the gross margin thanks mainly to price and material. Improvement that will continue to be there also in Q4. So this means that the EBITDA in some way, beside the absorption, so the volume, was also impacted by cost clearly. And this is the reason why... we already put in place actions to reduce the cost. All across the business area and functions, we have actions to mitigate and reduce the cost. The second element is obviously the confirmed capability to generate cash flow. To generate cash flow, that is giving us the possibility to reduce the ratio between net death and EBITDA. The third comment is about the order intake. The order intake is on the similar level of last year. This means that the order stock is still a healthy order stock. It's on a normalized level. That means a couple of months of sales that is there. So order intake on the same level, with one exception, that is North America, that we see still suffering a decline of the demand. With this said, we clearly see recently developing a more negative customer sentiment. It is mainly in the US. If we want to say in Europe, it can be in a Nordic country of Europe. With this sentiment, we... put in place action to reduce the cost. We will see an improvement of the gross margin thanks to price and material continuing also in Q4. And we put in place actions to short-term reduce our discretionary spending. And this is in some way thanks in particular to the good order stock is giving us some comfort for the end of the year. With this said, Jakob, back to you.

Thank you. 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 the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star followed by two. Participants are requested to use only hands if they are asking a question. Anyone with a question may press star and one at this time. Our first question comes from Johan Eliasson from Kepler-Sjöbrö. Please go ahead.

Yes, good morning all. Thanks for taking my question. I was wondering, we see a very good cash generation coming out of the company and your net debt is rapidly coming down. I assume we are going into a bit of a slower environment as well, but we also have the fact that valuations of potential M&A targets is probably going down as well going forward. Do you think there are any possibilities for you to do some action on the M&A front now when we're entering the slower times? Or are you still sort of pretty busy with integrating the UB acquisition as you highlighted issues with IT projects? integration and stuff like that, not making it possible for you to sort of take on another acquisition in the near term.

As I said, thanks for asking first, because it's a good point in the meaning that it is also one of the reasons why we are on our own on these days, so to run acquisition and to grow inorganically, sorry. We have been scouting the market, continuously scouting the market. So the integration of UB, I would say it's been challenging and had some repercussion on the business during the past months. But from October 1st, we are running UB. The U.S. operation under one IT system, we have only one legal team company, so we did the merge. These are internal in some way, disruption if you want to say externally. We have been also merging the teams starting from the chain that was done earlier and recently also internally. the one for the general market, for the institutional market, that was the one where we suffered, by the way. So I would say that with October, I don't mean there are no more challenges, but for sure we have the possibility to eventually run an acquisition if it comes. And I hope you understand that, that is something clearly that we are working on, on everything as usual as every month. But in this moment, we are not, we are not, we are not in the condition to announce anything clearly.

Do you think price expectations for a potential seller is, is still too high versus where you expect them to be or, or what's the main issue right now?

I, the, The main issue, if you want to say generically, is the fact that in any case, there are not so many available targets. The valuation is still high. I remember during the COVID when the market went down significantly, and that was the period where basically nobody... been able to run any acquisition despite the the the value of the company theoretical value of the company was low is that nobody decreased the value devaluation of the company because this is a business where you know that typically you are able to extract value you can have a slow down yes you can but i mean in particular united states that's a market where the decline is faster but also the recovery is very very fast

Yes, but what you have obviously right now is significantly higher interest rates and then also on the sort of long term, if you look at the 10-year bonds, etc. So that should have a negative impact on price expectations, but you're not seeing that yet, I think. No.

Okay, thank you. Thank you. The next question comes from Gustav Heger from SEB. Please go ahead.

Thanks, operator. Thanks for taking my questions. Sorry, I was a little bit late into the call, so maybe you've already answered this, but starting with the FX impact on the 40 million SEC, firstly, if you could remind us, what was that impact in Q3 and Q4 last year as a reference? I didn't really get the explanation with the Swedish-based factory, how that would be negative with the weaker Swedish Krona. I assume most of those sales are in non-Swedish Krona, so we'll be benefiting from a weaker Swedish Krona. But perhaps you can just walk us through that. That would be helpful.

Thanks. Thank you for the question. First of all, two parts of the question. In Q3 last year, currency had really a minor impact on the profitability, whilst the major impact was this year, in particular in Q3 this year, due to the weakening of the SEC versus, I would say, most of the currency. I was bringing a couple of examples earlier related to our production facility in Sweden. We produce here a large portion of our laundry business, but we buy raw material and components with a Euro-based pricing, meaning that what we buy in Sweden and outside Sweden, based on Euro, is going to cost the insect equivalent much more. So what we manufacture in Sweden and we sell in Sweden, you know that Sweden is an important market for the laundry business, has a significant negative impact related to the currency. The second example I was bringing today is the major offender is the strengthening of the Thai baht versus Euro and versus SEC as a reference currency. Also here the increase has been significantly year over year and in Thailand we have a large production facility that is serving both the laundry part of the product portfolio and the beverage part of the product portfolio. So despite the good activity that we are doing there in the plant to continue to reduce the product cost, the strengthening of the Thai butter has been a negative offender on the profitability.

Perhaps I'm just not getting it, but the share of sales from laundry in sweden must be you know single digits right and i assume that the cost benefits from having production in a lower a weaker currency country uh and pricing mainly in other currencies would be a net positive right although the the gross impact from the transaction might be negative but as a whole it must be positive right or am i getting it wrong

It was not. It was not for the full year and in particular it was not in the quarter. So there was an acceleration of the currency impact in quarter three.

And by the way, Sweden domestic market is the second largest laundry market after United States. Even if the market in itself is smaller than many other markets, for us, the laundry market The laundry market, the laundry Swedish market is the second largest. We have a 70 plus percent of market share in Sweden is super high market share. So very important presence. And by the way, the famous shift of volume from second quarter to the third and fourth quarter was also with a large percentage exactly in the Nordic region.

Okay, yeah, I thought it was like 17% maybe. But then you had a comment on the reps in North America. I think historically there's been discussions on whether or not you have been able to attract the most efficient reps in America, given your size there. But can you just go in a little bit on what has happened? Have you lost reps in America? What has happened?

We had to change reps, yes. We are talking about mainly the reps of the legacy of the, let me say, non-UB business. Some of them... Some others have also been terminated to have an improvement. So when we change a wrap, there is a disruption, no question, because you have to train the new wraps, you have to have the product installed in their facilities for the demo centers. We cannot neglect that we had to work, we had internal and external trouble during the integration and this was mainly limited to the summer, I would say pre-summer, after summer period. These are things that we are and we will address, obviously, including staffing, training, support also from central functions. So currently we have, let me say, the coverage with the reps is done, is okay. So we don't have a problem on that side, but we have been going through many changes during the past months.

And is there any underlying reason to why the rips don't stick around, or is it just... There have been some leaving us.

Some leaving us. They've been also forced by competition. You know that this is something that is happening. Remember that during the past month, there have been a lot of changes in the United States, also as a consequence of the merger of Ali and Welbit. So there have been moves. in the American market. So the representation that we had, in particular, with the Electrolux rep, so the former, let me say, non-UB reps, was such that some rep, they left. There was also uncertainty. I believe I said that my experience about integration with UB was very successful. And I have to say, because we separated on time, we integrated on time, we delivered the plan that we were supposed to deliver. Then the recent months have been faced, we had to face some challenges related to the external reaction, uncertainty, what is going to happen, something like that. We said clearly that we were not intentionally merging the UB reps with the Elettrax reps. This is what is happening, but evidently it was a level of uncertainty that didn't work well on the Elettrax, former Elettrax, now UB reps.

Okay. Yeah, that's helpful. And then if we could talk a little bit about price pressure campaigns. Obviously, you have not been able to then offset high raw material prices with own price increases in Sweden and in the quarter. But as a general view, I guess, price on components and raw materials are going down globally. are you able to keep prices or are there any price pressures in the market and are you planning to offset some of this FX headwind in Sweden specifically by introducing some type of price action?

The answer is yes to both, in the meaning that yes, you saw that gross margin increase and the increase is related to the residual price increase positive effect and the increasingly positive effect of the reduction of the direct material this is something that we saw in q3 in particular the material it is what we started to be to see becoming significant in q3 and it will continue in q4 so this is the so the gross margin is improving the other part of the question is about specifically referring to the swedish market and in this case i'm specifically referring mainly to food, where all the food products are produced outside Sweden. And due to the weakening of the SAC, they are becoming more expensive. And indeed, we already planned and announced a price increase in the Swedish market for this product.

And in general, on a global scale, do you see any campaigns or price action from peers in response to sort of weakening market and lower input costs?

Okay, campaigns are always there, nothing really significant and nothing really related to the raw material or anything like that. So nothing that is worth to mention, let me say. Then... everybody's is running some campaign but we are in these days promoting every day combi oven also because we have new features and in particular related to the washing system the chemicals and the other stuff but i would not yeah i'm mentioning this now because you ask but otherwise it's not not something notable so there's no price pressure in the market I'm expecting that some pressure will come, in particular in the area where we are having a slowdown of the demand with the market, let me say, or a demand that is coming a little bit down. There will be for sure pressure. I'm not expecting a price reduction. Eventually, we will act with the specific actions case by case.

And finally from me, you mentioned the cost actions that have already started, and you referenced discretionary spend part of it, but could you elaborate a little bit more on the phasing of these actions, if you could give us an indication of the size and if there are any one-offs that might occur as a consequence of these?

Look, we had some one-off in particular. We had... the size of the production capacity in the factory in Italy that is the largest and also with the largest number of employees. The cost has been already taken but they are minimal costs that we are not even reporting as an item affecting comparability. So I would call it the normal things that we have to do to keep productivity up and efficiency up. the cost actions that I'm taking, in addition to the one that I just mentioned about the production capacity, are the one that normally you take when you see that margin is up and the fixed costs are still there with this slowing of demand to be ready, let me say, in case of you take action on the discretionary spending. Discretionary spending is... I don't know, postponement of employment, reduction of travels, but it's not a travel ban. It's a reduction of travel that are not impacting the business. Whatever other costs that you can see in the day-to-day activities. We are not in a restructuring, if you want to say, mood.

Okay, great. Thanks for answering all those questions, those formal questions. You're welcome.

Then we have a question from the web. Do you see the problems in the institutional business in the U.S. as temporary and fixable? Is the chain business more projects heavy?

Okay, first answer about the institutional business, yes, I see it as temporary. As I said, we established the network of reps. Some are new, some are the old one, let me say. Some are, by the way, the reps that are also representing Unifi Brand. So it was not done on purpose, but it came. So we have a team that we have been training in September heavily to educate them. Most of them, they also have demo places all around the country. So it will take time, a little bit of time, but I'm not expecting it will take so long. I think I already mentioned this happened during the financial crisis in 2009, during the COVID crisis two or three years ago. The United States has a characteristic in this market. It's going down quickly, but it comes up very quickly too. So it is temporary what is happening, absolutely, yes.

Then there is a question I think to Fabio. How was the 40 million EBITDA impact, the currency transaction impact, split between divisions? And what are you doing to reduce that negative impact going forward?

So when we look into the 40 million that we report in the quarter, I would say it has been fairly equally split between the two reportable segments, food and beverage and laundry. Clearly, the dynamic of the currency of the two reportable segments may be different, but they underline two major factors that I mentioned earlier, the weakening of the SEC overall and the strengthening of the Thai baht is the major offender. Let me spend a few words on the pricing. Alberto already anticipated the measure that we are putting in place on price, but I would like really to remind you all what we did on price in the last couple of years. If you remember, first we had the increase of raw material and component cost. Secondly, we had in particular end of last year and this year an increase of labor cost. The good strength of this organization of electrical professionals is that we are really good in recovering real price the inflationary item. We have proved it all along the past, but also in particular in the recent years 2022 and 2023, we have a good and disciplined price execution. This development of the currency, we cannot predict how it will look like going forward. But clearly, as you anticipated, Alberto, we are putting in place market by market the necessary action to compensate this negative impact.

Thank you. I leave it for the operator again.

As a reminder, if you wish to register for a question, please press star followed by one. Gentlemen, so far there are no more questions. Back to you for closing comments.

Okay, thank you very much. I say thank you for today and have a good day. Speak to you next time. Thank you and goodbye. Thank you, bye. Thank you, bye.