Fagerhult Group AB

Thank you and hello everyone. Welcome to today's presentation of Fargo Group's third quarter results for 2024. My name is Magnus Hegemark. I'm the head of M&A here at Fargo Group. On the call today, we have our president and CEO Bodil Sonneson and our CFO Michael Wood. The presentation will start with Bodil giving us a brief update on the results for the third quarter. Bodil will then continue to update us on some strategic highlights, today focused on what has happened since the fluorescent ban was initiated and what we can do to help our customers with LED lighting, renovation and smart solutions. After that, Michael will follow with more details about the performance of the group. Finally, Bodil will conclude with a recap and then we will open up for questions. We will first take questions from the conference call, then we will open up for questions from the webcast. You can post questions in the chat window on your screen, and I will read them up for Bodil and Michael. Before we start, let me also remind you that today's session is recorded and will be available on our website later today. With that, I hand over to you, Bodil. Please go ahead.

Thank you, Magnus, and welcome from me as well to everybody to this Q3 2024 webcast. So the third quarter results were not in line with our ambitions caused by a softer market conditions over the later part of the summer. We have therefore taken actions with an even higher focus on cost reductions in the group. And as you know, we started this in Q2, and we start to see the effects of it already. Additionally, we've also executed unrestructuring programs in three entities, VACO, LTS, and Allights. In VECO, this also included the final withdrawal from the horticulture market in combination with the strategic overview of the business that was announced in Q2. We expect the benefits in operating margin in Q4 as well as in 2025. In the market, we still see large differences in activity depending on both geographies and segments and whether it's public or private spending. Being present in many markets and segment is one of our big benefits. From customers and projects during the summer, we saw a slower decision-making process caused by the general market conditions, which was more visible in collection. Also, there are some specific events like the UK election that slowed down decision-making in public spending. Premium, that is more involved in public spending in the Nordics, for example in hospitals and as a high level of renovation project, had a much better quarter with an organic order intake of 6.6%. We also see positive signs from the fluorescent ban and I will come back to that later on in the presentation. That means that we see continued megatrends continue to support and remain favorable for our industry that does not change and provide a solid foundation for our strategy and future growth, which is completely in line with our strategic focus areas. So we continue to work hard and make progress in smart lighting, sustainability, and people and talent. And as an example, we have this quarter done our first launch of our cloud-based service offering in smart lighting. The service launch will be my focus from an innovation standpoint in today's presentation. And you can, in the report, read about another few innovations that we have launched in the quarter as we continue product development activity on a high level. But let's start as always, but have a quick look at the numbers for the quarter. And first, I want to point out that we have presented our results based on the commonly used concept of items affecting comparability. This is to provide completely clarity and assist in the understanding of the numbers and the results. So order intake in Q3 was 1.873 billion Swedish crowns, which represents an organic decline of 5.1%. And net sales at 1.919 billion Swedish crowns showed an organic decline of 5.2%. At the EBIT level, we delivered 181 million Swedish crown with a 9.4 EBIT margin and EPS was 0.58 Swedish crowns per share. And if we then look at the quarter to date in figures, the year to date order intake is at 6.106 billion Swedish crowns, which represents an organic decline of 2.5% compared to 2023. And net sales declined organically with 2.2 to 6.266 billion Swedish crowns compared to 2023. And operating profit is at 598 million Swedish crowns, which represents an operating margin of 9.5%. and EPS is 1.99 Swedish crowns per share. And as always, Michael will give you more information when we come to the financial section of this presentation. And first, I will show you some things that have happened in the quarter. So as always we'll give you a flavor of our strategic group focus areas and today we'll give you a quick update on the fluorescent band and what it means for our renovation business and focus and we will also investigate what advantages it brings to work with our smart solutions organic response in renovation projects. And in the first stage as a control system and how that becomes a bridge into continued energy optimizations for our customers. And then we will look into the future with the soft launch of the service offering for smart lighting that happened this quarter. So you probably remember that fluorescent tubes as part of the ROHS directive were banned a year ago in Europe and the UK followed six months later in February 2024. And the ban prohibited EU production and EU importing of fluorescent tubes. But what was already held in inventory on the market were allowed to be sold. So that's the background. And our expectations were that inventory levels to be quite substantial and that it would take time for the phase out. The indicators we now see that this is happening far quicker than we thought and that inventory levels are going down quickly in mainland Europe and somewhat slower in the UK, which is normal as they were six months after us. So this is positive news as it generates more opportunity for renovation project. And as we spoke about in Q1, we have several renovations and refurbish concepts within the group. So if we look at the replacement for existing fluorescence installation, we offer two different possibilities. We can do retrofit of the luminaire and upgrade it to new LED technology. This will give the customer the lowest carbon footprint option and is very cost effective. We will also make sure that we quality test the solution so that its CE marked is kept. In some cases, though, it might make sense, as you see the second option here, to go for new LED lighting solutions. In both cases, we will recommend a solution with sensors to optimize the energy consumption and make the solution future-proof. There is a third solution that exists that we don't do, which is to use lead tubes, and we don't recommend this. It might at first seem like a cost-effective solution to use lead replacement lamps, but the fact is that they have one they have a shorter life expectancy they are 20 to 30 percent less energy efficient than a new or professionally upgraded lead luminaire and that makes if you look from a total cost of ownership this is the option is actually costing more than the other more professional solution also with lead lamps you need to make sure that the original CA market is still valid for the solutions As you know, we have a vision to be 100% smart by 2030. And this implies that by 2030, we need to have sensors in all our lighting solution. And this goes hand in hand with us achieving our sustainability targets. So our in-house developed smart lighting solutions for indoor application is called organic response. And this system provides a very easy stepping stone into smart lighting because the solution can in its first phase be deployed as a lighting control system where the wireless capabilities make system design and installation easy and cost effective as no separate communication cables needs to be pulled through the building. And this is a huge saving for the project and those involved. And the easy commissioning and speed of deployment thanks to wireless makes the solution ideal for renovation projects. And in this first phase, the system can deliver energy savings up to 40%. And then by adding gateways and connecting the system to the network, we can, in a second phase, allow the customer to start reaping the full benefits of smart lighting, including energy savings up to 70%. So what you see here on the slide, trying to present it in a pedagogic way. And the updated European performance of buildings directive implies smart lighting solutions in new and renovated buildings. And the member states needs to implement this new directive into local legislation by the latest of spring 2026. So this quarter, we passed an important milestone within our smart lighting initiative with the launch of a service offering for organic response. And the service will help us to speed up the adoption and articulate the benefits with smart lighting. And as you can see here on the slide, it's a tiered offering. And the service will optimize the performance of the lighting system through the whole life cycle and help our customers to meet their sustainability targets while ensuring a quality lighting experiences. So for the brand companies in the group, the services are also a tool that will allow a closer interaction with key stakeholders, including real estate owners, real estate managers and larger end customers who value the benefits with smart lighting. So if you want to read more about the solution, I recommend you to go to the website of organicresponse.com that has been completely updated during the last months to reflect the new solution. And I'm sure we will be coming back to this topic also in future webcasts. I will end this section with an example of a nice project from Whitecroft that was won this quarter. It's a very nice proof point of what we've just been talking about with smart lighting and about sustainability. It's an office building in London's new net zero business and innovation district at Brent Cross. The whole project has therefore had high focus on sustainability and energy efficiency. And Brent Cross is one of the key growth projects of the Mayor of London and will, when it's ready, host offices for 27,000 people and will be a completely new town centre location. And this building that we look at here, you can see it's partly in wood. It's called Brent Cross One, and it's the first commercial building to be part of the Brent Cross regeneration scheme, designed and built by the construction company BAM for the real estate company Argent Developments. And BAM and Argent selected organic response wireless control solution due to its energy savings, ease of installation, future-proof flexibility, and ability to integrate with other building services. So with that, I will hand over to Michael with a picture of a university project in Tasmania, which this time is done with VF lighting. and it's situated near a penguin colony. So the campus is therefore ecologically sensitive zone and has very special demands with the approach to lighting. So with that, please go ahead, Michael.

Thank you, Bodo. And a good morning to all our guests from me as well. As Bodo has mentioned, the results for the third quarter did not meet our expectations or ambitions. I am, however, confident that as a result of the enhanced cost focus plus the three restructuring programs, the group's profitability will benefit in the coming periods. The enhanced cost focus comes from a very, sorry, comes from every business in the group. And we already, we see an average of 6 million set per month reduction in those targeted areas. The three restructuring programs in VACO, LTS and R-Lite reduce the group's headcount by approximately 2%. And the payback for the organizational restructuring starts in November and will take just over eight months for a full payback return on the IACs that have gone through in Q3. The impact of the softer market conditions can be seen here in the lower net sales level, but with a positively developing gross profit margin, and a current and enhanced ongoing cost-based reduction, the operating margin is at a steady level. Remember that the Q3 results does not include the benefit from the restructuring programs. This will start during the fourth quarter and take us into next year. Order intake levels were better towards the end of the quarter and have remained at a better level since. And we are monitoring this very closely as you might expect. The group's ability to meet customer delivery expectations is at a good level across all brands. And this is a strength of our operating model with lead times from some factories being three to four weeks. So that what we see is longer decision making, but shorter lead times when that decision is made. And we have the capability to respond to that. The improved gross profit margins are due to quite a few things. Active portfolio management is an ongoing process here at Fargo Group in all brands. Pricing techniques and material cost reduction and all these activities have contributed for the ongoing development of the GP margin. Operating cash flow remains healthy with an ongoing high degree of inventory and accounts receivable focus and management. And in the fall, sorry, with the fall, we are seeing in the Europe for bank rates, the interest expense is also expected to reduce in coming quarters. Plus, we expect the net debt to reduce further in the rest of the year. We look at the year to date, net sales are organically 2.2% adverse to last year, we begin to encounter currency headwinds, as you can see, there is switched from plus six to minus 45 in the quarter on the FX differences, beginning to see currency headwinds from the tailwinds that were there for the first six months of the year. Profitability will be improved as a result of the cost focus and the restructurings, and this will enhance the margins and earnings per share going forward. Operating cash flow remains healthy. The group has a good cash conversion process and executes well year after year. Sales development. Due to the softer market conditions, we can see the rolling 12-month net sales took a slight dip in the period, but remains at 8.4 billion Swedish crowns. There are many opportunities on the market, and the megatrends remain supportive and favourable. When the new build market activity begins to return, we will see a further improved position here. A point to make here is regards to the UK market. Bodal's mentioned a couple of specifics regarding the UK market. The UK market is particularly impacted by the recent governmental election, the temporary lower levels of public sector investment, plus the liquidation of ISG, one of the largest installers on the market. In 2023, ISG's net sales number was 2.2 billion sterling. So it is a sizable contractor, and it shakes the supply chain in the industry when something like that happens. As a result of all these things combined, Net sales in the third quarter 2024 were 111 million sec lower than in Q3 2023. Margin. The rolling 12-month operating margin before IEC holds steady at 9.5 to 10.5 percentage points, and this will be improved by the cost focus and the headcount reduction. Further development should be possible when the markets return to a more active level. Collection, business area collection has had a weaker order intake period during the summer period. Operating the high-end segments of the industry, business area collection has seen the most instances and biggest impact of the longer decision-making process and therefore project delays and postponement of deliveries where the order has already been received. So we're seeing it in two areas particularly strongly in collection, slower and longer decision-making to win new orders and then many changes when it comes to executing on the delivery. There is a strong focus on cost reduction to support and protect the profitability, and it is important to point out that over the longer term, we see a dip in the quarter, but over the longer term, the operating margin continues to develop in a positive way. This has been a trend during the last few years, and we see it continuing. Bodle mentioned the growth in premium. BA premiums had its strongest order intake and profitability period for the year in the third quarter. Organic order intake was plus 6.6% growth, and the operating margin at 13.7% is the highest this year. The Fargo brand is already benefiting from the fluorescent lamp band as these inventory levels begin to be fully consumed in some markets, and we do expect this to continue. We see a very strong future for smart lighting solutions and viewing the results for business area premium with respect to the growing investment in organic response results in an industry leading year to day operating margin of 14.8% here year to date when you see the combination of the lighting brands without the investment in organic response. So a healthy operating margin for the two businesses. The restructuring program at LCS will begin to deliver further benefit to the operating margin in premium, and that will positively impact in the fourth quarter and into 2025. Looking at professional, whilst the longer term trend for profitability is positive for BA professional, the third quarter was disappointing. In the UK, we continue to see positive year-on-year development in sales and profitability. In Australia, we continue to see a steady and in control operation, but steady at a low level. And the ambition, you're aware of the difficulties that we had in 2021 and two. And the ambition has been to create a stable, more in control platform in Australia. And the new leadership team is delivering upon that plan. In coming years, we plan for growth down in Australia. In Turkey, market conditions are particularly tough. And here we also execute on the restructuring program to reduce the cost base. Bodil's mentioned, so I'll repeat it. The Brent Cross project is a proof point of how the market is turning and how our businesses offer winning solutions for lighting and sustainability. Lastly, infrastructure. Infrastructure slide 90 days ago created some conversation points. And in the Q2 report and on the Q3 earnings call, we reported a full review of the VACO business. This has been completed, and we finalized the withdrawal from the horticulture segment, as well as execute on a significant headcount restructuring program in Holland. The operating margin has partly recovered, you can see clearly on the right hand side, has partly recovered in the third quarter and we expect further improvement to come. Order intake in the business area has now been positive for both Q2 and Q3 and we look to close out the year in a good way and look for further improvement in 2025. Cashflow. On the cash flow side, we do continue in a very positive way now with 10 successive quarters of generating a positive cash flow. It will, as previously reported, be difficult to match the 1.2 billion achieved in last year, but we do still see room for improvement in some businesses in improved working capital management. As you can see, the net debt reduced in the quarter, As the operating cash flow was once again quite healthy, we report a net debt of 2.46 billion Swedish crowns adjusted to 1.7 billion Swedish crowns for IFRS 16 effects and the net EBITDA ratio remains less than two. Meaning we are in a strong balance sheet position for M&A opportunities. Cost savings and the restructuring programs combined with lower interest expenses and the medium-term lowering of the group's tax rate will all improve the earnings per share. And these are all activities that we see no reason why these can't be executed and delivered upon. Before handing back to Birdle for closing and Q&A, just a very short summary message. Yes, the softer market conditions did affect the group's results in the third quarter. During Q3, we have taken many difficult decisions. We have a focus on cost reduction and confident this will improve the result going forward. The mega trends increasingly impact the business in a positive way. Brent Cross and the Fluorescent Lamp Ban are examples of this and test cases which are very positive towards our strategy. And despite the softer market conditions, there is no reason to lack confidence for the medium term. And with that, I say thank you for listening, and I hand back to Bodil.