Electrolux Professional AB (publ) (EPROB) Earnings Call Transcript

Good morning, and welcome to Electrolux Professional Q2 report results. My name is Jacob Broberg. I'm heading up Corporate Communications and Investor Relations. With me, I have Paolo Schira, our new CEO; and also Fabio Zarpellon, our CFO. And I leave the floor to you, Paolo, please go ahead.

Thank you, Jacob. Good morning, everybody. And I think probably since I started 2 months ago in my role, it could be good to give a few words a little bit about my agenda. I'm using the last couple of months -- I've been using to travel across the different countries, meeting many of the colleagues. And I'm very happy and energized after this interaction because I saw a lot of energy, a lot of passion and willingness from the different colleagues to move Electrolux Professional to new heights. So very, very energizing. And I took the chance of this interaction with the colleagues also to share a little bit what is my agenda moving forward. Now we are a company with a very long legacy more than 100 years. And as every established companies, we've been expanding work in many areas. And that's why I want to bring forward what we call the accelerate and simplify mantra. So the idea is fundamentally to refocus on fewer things, significantly fewer things, but then secure the magnitude, the impact and the speed that we execute on those fewer priorities are amplified. And of course, this has to come strategically from the areas where we are stronger, where we have more chances to win, where also our margins are higher. So, the first element is really about define, sharpen and better the core and then double down in this initiative. Now having outstanding solution as we have, having a strong value proposition as we have is not enough, then if we don't reinforce the front end, if you don't work in what I call the commercial excellence and the customer proximity. We have already an advantage that we are present in many countries, close to many customers. But clearly, we can make a major impact over there. Now these things will call for investments. And I want to allocate early that we want to fund this investment, these double down by subtraction. So fundamentally to redistribute, refocus the investment we do in these fewer bets we want to work on. This also requires that we work in a more disciplined way in our portfolio and in our cost management overall. So that's a little bit, Jacob, the first introduction. And of course, I will share more of my vision and the next steps as we move forward. But I think it's the right time to get to the quarter 2 results. The picture on quarter 2 is a little bit mixed. So top line has been decreasing 3.8%, mainly driven by U.S. and Middle East, Africa and Asia. With different dynamics in Middle East, Africa and Asia, main reason of the decrease of the top line has been some postponed projects we count to invoice now in quarter 3. Still on the top line projection, I think it's good to mention that we have a positive ordering intake overall for the group as well as a healthy order stock entering quarter 3. Now the positive part, I said, mixed picture on quarter 2 is about the overall profitability. So EBITA has been slightly improving compared to prior year quarter 2. In full transparency, a contributor to the profitability increase has been a tariff refund in North America. But even if we were to remove this SEK 21 million of contribution, the overall underlying profitability has been robust, which is positive. This is despite the overall situation of what we call inflationary item being the input material, being the logistic cost, have seen an increase in trend. Now to be reported in this quarter also that the currency that in the previous quarter had a negative effect has been neutral. And since I mentioned about inflationary items or somehow inbound rising cost. I also want to mention clearly we've been very disciplined in the price increases. And we expect with the price increases and with in some part of the business, surcharges that we are introducing as we speak, we count to cover all this negative effect throughout the full year 2026. The other element I'm very keen to mention and as announced previously, we have been launching last year an efficiency program impacting resources, impacting manufacturing footprint. And this is progressing according to plan. So year-to-date, we are -- we can declare saving up to SEK 45 million, SEK 25 million in the quarter and the full year projection of SEK 80 million is confirmed and then this is going to grow also in 2027. So also this part is contributing positively to keep the robustness of the business. Now giving a perspective on the different regions in the different businesses, you see here as well somehow a mixed picture, probably starting from U.S., a decrease overall in the U.S. business. Probably with different drivers and different dynamics. Maybe a touch of color on the part of the laundry business. Last year, in quarter 2, we were anticipating some deliveries to U.S. in anticipation of the U.S. tariffs. So this decrease somehow is related to this effect. If you were to look on the units delivered to the market, actually, it is growing. So the overall situation there is in a good place. On Asia, I think I mentioned earlier, there are somehow a couple of components contributing to the lower net sales. Part of it is the known geopolitical situation in Middle East. But we don't have canceled orders there. For sure, there are some logistic challenges to get to the different location. The other one, some major project in the Asian region where from the customer side, there have been a request to postpone the delivery and invoicing. So this will count to invoice in quarter 3. Overall, Europe and I remind you, Europe represents 60% of the total business for Electrolux Professional. There's been a moderate growth driven mostly by laundry that is continuing delivering very well in the European region. In food and beverage in Europe after several quarters of growth, we had a stabilization, but we expect them to continue in the trajectory we have seen previously. Giving then a bit more perspective, Jacob on the different business segments. So food & beverage is the area where we saw softer growth, so the decrease of almost 6%, I think I mentioned already the contributors being mainly U.S. and a smaller extent, APAC-MEA. What is -- I believe, very important to acknowledge is here the performance of the profitability. In the case of food & beverage, there is only SEK 3 million of contribution for tariffs refund in the U.S. So the overall business is defending very well despite some of the rising costs I mentioned earlier. Here to mention among the different activities done well by the team to deliver this profitability has been a normalization of R&D cost. I think this you have been hearing in the past. We reach a peak in the past, now it's more normalizing, but normalizing it doesn't mean that we decelerate our agenda, the opposite -- we have really exciting products coming to market the beginning of next year, and we are really keen to see the benefits out of this introduction. Overall, in the food and beverage, the order stock is healthy. So we start quarter 3 with a good amount of orders we are very keen to invoice throughout the quarter 3. Last but not least, is about the laundry situation moderate growth in laundry, driven a lot by Europe. I mentioned about the U.S. situation and Asia, almost stable. Good profitability, development. Here is where actually we see most of the contribution of the tariff refund. But overall, the underlying margin, the situation seems to be positive. And Laundry is the area, not the only area, but the main area we're introducing surcharges. So on top of the price increase we introduced beginning of the year. In laundry, we introduced now in the summer months, the surcharges in the different markets. The reason why surcharges are mainly introduced in laundary are very simple is the business where most of these rising costs are impacting right now, the logistics, the input costs, et cetera. And that's why we are implementing them. Overall, the reaction from the customer has been accepting. So it's been a fairly positive or not negative reaction. Overall, in laundry, we do see a strong order intake and order stock. So overall, a positive situation. I think with that said is probably the time for you, Fabio to give us more color on the detail of the numbers.

Thank you, Paolo, and good morning to everybody. As Paolo previously mentioned, Q2 profit was negatively affected by lower volumes as the main offender particularly in U.S. as well as material tariffs and higher logistics costs. However, and I believe it is a good achievement. We were able to maintain the EBITDA margin. Now let me elaborate around the different components that sustained the profitability in the quarter. Currency translation was still negative affecting our top and bottom line, but no material impact in terms of EBITDA margin. The strengthening of SEK has been somehow reduced. So if I look at the currency translation effect in EBITDA value was reduced to roughly SEK 10 million for the quarter. Currency transaction instead finally turned positive. We have a few million positive impact on the EBITDA in the quarter. Tariff cost, higher than last year, but we were able to fully compensate them in the quarter with the price increase, not only as Paolo anticipated that we got this SEK 21 million of tariffs refund in the quarter. The quarter, as such, has been also positive impacted by the benefit from the execution of our restructuring program. In quarter 2, the gross margin and EBITDA was positively impacted by overall SEK 25 million in cost saving. And the program, as anticipated, by Paolo is proceeding according to plan and the contribution for the overall year is confirmed in the area of SEK 80 million or roughly 0.6 points in margin. Going forward, moving into 2027, the guidance we have given earlier of cost saving is confirmed. So the expectation is next year, we will further increase the benefit to SEK 175 million or 1.4 points in margin. In the quarter, we continued to invest in R&D, but the spending was somehow reduced compared to the high level we have reached in quarter 2 last year. Going through the remaining of the P&L, finance net was SEK 16 million lower than last year, thanks to reduced overall average borrowing and a cost-efficient funding structure. The tax rate in the quarter, no surprise was 25%, in line with the guidance. Let me say lower cost of funding, lower tax cost allow us to increase the EPS to SEK 0.8 per share compared to SEK 0.75 per share despite lower EBITDA and EBIT. Positive cash flow generation in the quarter. somehow but lower than last year. This comes definitely from lower EBITDA, increased inventory and the payment related to the execution of our restructuring program. Now let me give you more flavor in particular when we move into the asset part. So this picture shows somehow still a good asset management for the group and a solid balance sheet. Rolling 12-month operating working capital increased to 17% compared to 16.3% of December last year. Here, let me say, 2 major offenders that I see them definitely as a temporary one. One is inventory and the second is AR. A portion of inventory increase in the last 2 quarters due to delay in project sales deliveries. We have the goods in-house ready to be shipped. We need the green light from the customers. And what I see a temporary stock increase due to production transfer from the facility that we are closing to the existing one. So both, let me say, are temporary increase in working capital requirement at expected somehow to reduce and come to the end -- towards the end of the year. The increase of receivable is mainly related to country mix. We have grew in the quarter in country with a longer payment term. I have no concern on the quality of the receivable. Overall, as you see in the ratio net debt on EBITDA, our financial position is strong. We have an increase of the net debt in the quarter 2, but this is due to large specific payment we had in the quarter. In the quarter, we have roughly SEK 400 million of cash-out, SEK 270 million, if you remember, are related to payment of dividend, we have roughly SEK 60 million related to final purchasing price payment for Royal Range and similar amount for a refund of medium-term loan. So overall, a solid company with a robust P&L and a strong balance sheet. And with that, back to you, Paolo.

Thank you, Fabio. And probably before going to the conclusion and then open up for the Q&A. Just one comment on an initiative I'm very proud of that we recently introduced in the Laundry segment. It is called R+vive and it is, I think, representing the essence of Electrolux Professional Group. As you all know, Electrolux Professional is proud to be a leader in innovation, but also a leader in what we call the sustainability. So what it is this R+vive all about? This is about the initiative of Electrolux Professional Laundry to remanufacture machines. So the word remanufacture is picked intentionally. So it's not refurbished, it's not just cleaning and make some fix. It's really to take machine out of the market and machines that can have more than 10 years and to replace visual parts whenever they are damaged as well as functional parts. Now why I'm proud of this initiative first? Because thanks to the modular platform introduced in laundry years back, it is possible actually to do this work of remanufacturing in a seamless and smooth way. It is possible to utilize more than 60% of the weight of the machine. So the overall environmental impact of our machine in terms of the components, the material is significantly reduced. But even more important is by remanufacturing the machines, we are able to introduce all the energy devices, all the innovation we have been developing in the last years. So in terms of greenhouse emissions or the scope -- the famous Scope 3, this machine are actually as good as a completely new machine with amazing savings for the customer and for the planet. So we just introduced this initiative, starting from some markets and the idea is to make a real business out of it. So very excited, looking forward to see it as one of the pillars for our future development. Now with that said, probably it's the time to go on in the summary. So I think I repeat myself and what Fabio said, a little bit of a mixed picture. So decrease of top line driven by U.S. and to a smaller extent, to Asia Pac. But the positive part is the profitability that remain very solid, partially supported by tariff refund, but even without tariff refund, I think the underlying business is positive. Specifically, some parts of the business have been growing. We mentioned laundry also keen to mention that on our Japanese business with TOSEI, we had the second quarter in a row with the growth and also bottom line development, so positive. And overall looking forward, the positive situation is that the order stock is in a good level. And of course, it is our task with our teams to make sure we invoice it in quarter 3. And there is no order cancellation, which is also very positive. So it is a good order stock. Having said so, Jacob, I give back the word to you.

Thank you, Paolo. Thank you, Fabio. With that, we open up for questions. Operator, please go ahead.

[Operator Instructions] We have the first question from Fred Johan, SEB.

Starting off with a question on the U.S. tariff refund. Is there any remaining refund to be recognized in H2 as well? Or was this solely a Q2 refund?

We have a submitted request for additional fund. This will go through the scrutiny of the U.S. government authorities, but the expectation is that there will be some more positive refund also in the second part of the year.

And in terms of magnitude, is the level you recognized SEK 21 million here in Q2. Is this in line with what you expect for sort of if we see it in Q2 -- either with Q3 or Q4 as well? Or is this sort of a -- yes, how should we think about the magnitude.

Okay. What I can say is that we have submitted additional requests. So far, our requests have been positively scrutinized, but we are not going to give order of magnitude for the remaining part of the year.

And the second question on the sales decline in APAC, EMEA. This was, as I interpreted, attributed to postponed project deliveries. Could you give any more color on the size of this backlog and the time of delivery? You mentioned Q3. Is that sort of confirmed? Or is that your best estimate currently?

So yes -- so I think I alluded to it earlier. So there are 2 somehow components to this slippage to quarter 3. One of it is the known Middle East situation. The other one is some major projects we had roughly, we estimate in the surrounding of the SEK 30 million, the amount of orders we have not been able to invoice and ship during the quarter. We count to ship them and invoice them in the coming months. The positive, as I mentioned earlier, is we don't have any relevance on about order cancellation and other things. So it is as it is now a good order stock, and we count to invoice it now in quarter 3 mostly.

Very clear. And if I may continue. So the U.S. food and beverage business has been weak since essentially last summer. What specifically is driving the prolonged weakness here? Is it end market demand, competitive dynamics, inventory or something else? And what are some of the leading indicators that you are watching for a recovery here?

Sure. So I think, Johan, what you're reporting is factual. And we already started seeing it last year with a kind of 2-gear, 2-step, 2-speed pattern, first half rather strong, then second half is weak and this weakness has been prolonging now in the first half of '26. Now no wonder that I've been in one of my first trips in the new role visiting the U.S., working with the team. And I see there are a lot of good activities happening. So a bit of weakness on our side, we believe the market probably is not a booming market, but it is a positive market. I think in both the kind of market segments we identify that are called the chains and the general market. I think we have opportunity to capture better growth than what we have been doing. So I think it's up to us, Johan, to your question to revert this trend. And I think we have the means to do it. It is a lot about hard work. It's a lot about execution and the like. Specifically on your question on the leading indicators. Now they vary depending on the part of the market, as I described, general chains. If I were to pick one for illustration purposes, the chain market is typically based on rollouts. So it's about delivering units in test for some of the big chains, the American chains. And then once you are approved, then you can move on to the next phase that is about delivering many units. So first test and then roll out. So here, the leading indicator is we are doing several tests with several of the big groups. Probably in the first half, we've seen some of the big groups on the test they were doing with us because of the instability, geopolitical, et cetera, to probably wait a little longer. But that's the kind of work we are doing. So continuing feeding this funnel this pipeline, and there are several tests ongoing and account that some of them will be converted into sales in the second half.

Very clear. And a final 1 maybe from my side here. So again, on food & bev. So order intake, you described as decreased somewhat while the order stock is higher. Could you give a more precise indication of the order intake, sort of growth/decline year-on-year here in food and bev? And yes, that is my final question. .

So the overall order intake has even within the food and beverage are kind of a mixed picture. So in some areas, improving some areas a little bit lower. But it's not materially very negative. The positive thing is, it is higher than -- has been higher than our invoicing. So the reason of our significantly higher order stock entering the quarter 3 is the fact that actually we got more orders than what we've been able to ship and invoice. So despite the nuanced picture between territories and other things, broadly across the different businesses, the order stock is in a healthy situation. Order stock again, very basically, the orders we have in-house qualified that are not yet being shipped and invoiced. So I think the start for quarter 3 has this significant order stock that we are keen now to invoice in the coming months.

Very clear. Maybe if I can squeeze in 1 final, maybe just a clarifying question. You stated, of course, price increases and surcharges are expecting to offset currency tariff and sort of logistics headwind into H2. I interpret this as predominantly relating to laundry, but is there -- are you implementing similar surcharges in food and bev as well?

So the biggest part of surcharges is going to be in laundry, though there are some part of surcharges in also some areas in food & bev not in a broader scale as it is in laundry. And somehow the reason is what we discussed earlier. So laundry is somehow the most impacted about the tariffs and some of the logistics and inbound cost. On the other side, in the food & bev, this has been managed. It is possible also there to mitigate this rising cost because the price increase we did at the beginning of the year, which is now fully rolling out as we speak is creating the result to compensate. So different dynamics between the reported business segment, but the net effect is the same on both. So the good price and overall also cost management is helping then to mitigate -- to compensate these headwinds.

Thank you, Johan. Jacob here, and I have one before going back to the operator, I have 1 question or 2 questions from the web. That's from Stefan Stjernholm at Handelsbanken. The first question is R&D costs are lower year-over-year in Q2. Can we expect a further year-over-year decrease in the second half? And the second question is, given your positive comments on order intake, order stock, is it fair to assume at least flat organic sales growth in the second half. So we start with the question on R&D.

Okay. As we have discussed also during the previous call, during 2025, we have reached somehow historical peak for what concern the R&D cost in absolute terms but also in percentage of sales to support some major product launches one in laundry and the other one in food, in particular, in the cooking area. We were anticipating resize of the R&D spending in the second part of this year. As anticipated earlier, we start to see already the positive impact in quarter 2. And this is related to the food & beverage segment. Whilst in the laundry one, we are still on par with last year in preparation of the product launch that will be finalized and executed at the end of the summer. When I look into the second part of the year, I can confirm the previous given guidance of resize of the R&D spending, both in absolute term and in percentage for both segments.

Thank you, Fabio. And Paolo, the question on, if we should assume flat organic sales growth in H2 or not?

So Stefan, as you well know, we don't provide forward-looking statements on the quarter. So I'll probably try to stick a little bit more on where we sit. So we started the quarter with a strong organic order stock. And I think it is in our hands now to secure that we convert it into sales. And I add on this one that clearly, it is my priority as the new CEO really to work with the different teams to work on the top line development. I think it's an area where we can make an impact. And I think we have amazing solution that we can market to the different customer groups. So I think that we have all the elements to work and improve and the starting point of this quarter is in the right foot if you may allow me to say that.

Thank you. Please, I move back to you, operator, if there are further questions.