Lindab International AB (publ) (LIAB) Earnings Call Transcript & Summary

Hello, and welcome to Lindab's Q2 2020 report. [Operator Instructions] Today, I'm pleased to present Ola Ringdahl, CEO; and Malin Samuelsson, CFO. Please go ahead with your meeting.

Hi everyone. And welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO of Lindab Group. And I'm sitting here together with our CFO, Malin Samuelsson. We go to the agenda slide, and we follow the same structure as we usually do. And I'll give an overview first before we get into the financials. If we move to the overview on Slide 4 and some highlights from the second quarter of 2020. We had a good development in terms of sales in the Nordic region despite the COVID-19 situation. However, in the rest of Europe and in quite many countries, we saw countries going into lockdown and that affected our sales quite a lot in those countries. In total, during the period, net sales declined by 14%, and to 2.2 million -- SEK 2.2 billion. And we saw a very tough downturn in April and May. But June, we actually came back and saw a little bit of growth. Now despite these lower sales, we reached an adjusted operating margin of 10%. And that is actually an improvement compared to last year. The financial performance for the business area was good in all 3 cases, despite these challenging times. And we think that the profitability in Profile Systems was especially strong. Cash flow was also quite strong despite the fact that we continue to invest substantially in automation and efficiency. And we decided at the AGM decided to pay a dividend to shareholders in 2020 on the same level as we did in 2019. So all in all, I can summarize that the quarter 2 with high profitability, continued investment and improved cash flow. We move to the next slide and look at the geographic development. And we can see on this slide that in the Nordic region, we had growth during the period, a lot of it driven by the Profile Systems, that is especially strong in the Nordics, but we also have satisfactory development of Ventilation Systems. In Western Europe and countries in Eastern Europe, there was a lot more effect from the lockdown. And we suffered badly in April and May, but gradually in June, the situation improved. Now we move over to the financials on Slide #7, and I hand over to you, Malin.

Thank you, Ola. So we are at Slide #7, and we are looking at the group financial highlights. The net sales amounted to SEK 2.218 billion. Organically, the sales decreased by 12% and currency had a negative impact of 2%. Adjusted EBIT margin improved as Ola mentioned before, to 10% versus 9.3% previous year due to reduced operating costs but also strengthened gross margin. Net profit amounted to SEK 76 million compared to SEK 181 million during the same period previous year. It was related to lower sales, onetime costs due to the strategic decision to close down IMP Klima Group and higher tax. So we move over to the next slide, Slide #8 and look at Ventilation System. Net sales for Ventilation Systems amounted to SEK 1.297 billion. Organically, sales decreased by 16%. The sales volume was impacted negatively in a number of markets due to COVID-19, especially Western Europe and CEE/CIS while sales in the Nordics region was in line with previous year. The lower adjusted EBIT margin amounted to 9.6% versus 10.4% previous year. It was explained by reduced sales due to COVID-19, but partly offset by strength in gross margin and clearly reduced operating costs. So we continue on Slide #9, with Profile Systems, where the net sales increased by SEK 60 million to SEK 685 million. The organic growth was positive by 12%. Sales increased largely due to deliveries of industrial projects in Sweden compared with last year. Since the majority of the construction sites in the Nordics have been open throughout this quarter, COVID-19 did not have any significant impact on the sales volume. Adjusted EBIT margin increased to 13.4% versus 9.6% previous year. The improved adjusted EBIT is explained by strong volume growth and a noticeable reduced operating costs. And we move to Slide #10 and Building Systems. The net sales amounted to SEK 236 million, with organically the sales decreased by 37%. The decreased sales during the quarter was mainly explained by particularly large project deliveries in Q2 previous year, and that was primarily in Germany and Poland. Sales was also affected by the imposed restrictions related to COVID-19 at the beginning of the quarter. The adjusted EBIT margin of 6.4% versus 7% previous year. The lower EBIT margin is explained by significantly lower sales volume, but partly offset by strength in gross margin and lower operating costs. Net order intake increased in the quarter, but the total order backlog at the end of Q2 is lower than a year ago. So we now continue at Slide #11, where the free cash flow adjusted for M&A amounted to SEK 229 million in Q2. The improvement in cash flow is driven by changes in working capital, which was partly offset by higher paid tax. Net debt decreased to SEK 1.869 billion, which gives a net debt-to-equity ratio of 0.4%. And we continue on Slide #12, and I hand over to you, Ola.

Thank you, Malin. We will go into the chapter called acquisitions and structural changes. We're on Slide 13. So in June, we actually made an acquisition and this was in Ireland, where we acquired the technology of Thor Duct. And it is used to extract smoke and prevent fire from spreading within buildings, especially strong in multi-compartment fire protection. The home markets for this technology, that is Ireland and also the U.K., and we see this as an interesting growth opportunity for Lindab in those countries with possible expansion outside of those geographies, but we start by focusing on those 2 countries where we see a lot of potential for this technology. The acquisition includes customer contracts to a value of EUR 2 million, and it will add a positive contribution to our profitability. We want to be more active in -- within acquisitions. And we see this as an early step to do so. But not so much after that. On Page 14, we see that we also made an acquisition after the quarter 2 ended. So in the beginning of July, Lindab acquired Crenna. Crenna is a market leader in rectangular ventilation ducts in the Swedish market, almost all of the sale is in the Swedish territory. And rectangular ventilation ducts, that is an important part of the Swedish market. We estimated that it is around 40% of the market for ventilation ducts. And usually, you combine the rectangular ducts with the circular ducts to build a complete system. So with the acquisition of Crenna, who has a very strong position in the Swedish market, we -- Lindab together with Crenna can offer a complete range of ventilation ducts for all kinds of needs in the Swedish market from the very south to the very north of the country. Crenna's production site's in Enköping, not so far from Stockholm, could also be developed into a central hub for production within Lindab and will help us to better serve the northern part of the Stockholm area. Crenna has revenues of approximately SEK 120 million, around 85 employees. It is a very well-run company under the leadership of the Managing Director, Niklas Hyttsten, and he will remain in the company and lead Crenna within Lindab Group going forward. Operating margin for Crenna is in line with that of Lindab Group. And Crenna will be a subsidiary and part of business area Ventilation System. We are very happy to welcome the Crenna team into the Lindab Group. On Page 15, we continue. Now this is not about acquisitions, but unfortunately, about discontinuing a business. In the second quarter, we took the difficult decision to close IMP Klima Group. And they have the main operations in Slovenia, but they also have subsidiaries in Serbia, in Montenegro and in Bosnia-Herzegovina. Lindab acquired IMP Klima in 2015. And we did start to establish a presence in the air handling units market where Lindab did not have a presence before. We are talking relatively large and customized air handling units here. Now despite our joint efforts and despite the best possible efforts from our colleagues at IMP Klima, the company had weak profitability and has continued to show weak development. It has been loss-making for several years. So we took the decision to close down. And that decision was accelerated by COVID-19 that made it even more difficult to achieve substantial turnaround. We will have onetime costs. We have shown in quarter 2, SEK 74 million. And most of the effects are on the balance sheet and the smaller part will impact the cash. There will be some more onetime costs following in the next couple of quarters as we wind down the business. But the largest part has been taken during Q2. Now we move to Slide 17 and talk about the way forward. And of course, in this kind of presentation, we have to make some special comments about the impact of COVID-19, and we try to do so on this slide. In quarter 1, if we go back a little bit in time, the effects of COVID-19 were mainly limited to some countries who experienced an early lockdown, such as Italy. But it accelerated over the end of March. And from April onwards, we saw more significant effect, especially in countries with significant lock down such as France, Italy, U.K., Ireland and Poland. And in all these countries, Lindab has significant operations. So there, we suffered quite badly. I can also add that in those countries, we are especially active within the area of ventilation systems, so it had a lot of effect on that business. But thanks to our decentralized organization, we could act fast, and we adapted our business to the new market conditions and lowered the cost levels in all subsidiaries. We can also say that the supply chain that we have built up over the years, with production close to the customers and with the local sourcing and manufacturing rather than a lot of imports, that helped us to keep a very high delivery performance throughout this period, and that is so important for our customers. We also aim to stay open throughout the crisis everywhere where we have operations. So we stayed open in all countries as much as it was legally possible. We have limited the presence of staff at some sites, but we have remained open, and we have delivered to all critical projects. Looking ahead, what will the COVID-19 impact be in quarter 3 and quarter 4, it is very difficult to say. We plan according to different scenarios. The fact that we had good sales in June does not mean that we think that there is no more COVID-19 impact. We think that there will be an impact and lower demand relative to the time before COVID-19. How much lower? That is the question. We don't know. We plan according to different scenarios. If we go to Slide 18 and talk about our focus areas. And those of you who have been in this meeting a few times, you will recognize the slide. I tend to use it over and over again, but I think it's important to mention that our strategic focus areas actually remain unchanged despite the COVID-19 situation. We continue to strive for sustainable profitability in line with targets. And this is achieved through a decentralized approach and very clear accountability in every part of the organization. The same targets for Lindab remain as before the crisis. However, it can, of course, take a bit longer time to reach them when this pandemic has hit Europe and the rest of the world. We continue to work a lot with customer satisfaction. And we think it is more important than ever during a crisis like this. We have had, as I mentioned, exceptionally high delivery performance throughout the crisis, and we'll really walk that extra mile to secure deliveries to customers even during severe lockdown. For example, we have delivered to many important hospital projects when the communities have tried to mobilize and fight the disease. While handling the short-term challenges, we must also plan for future. So we continue to implement the key elements of our strategic investment program, and it is a substantial program. And we focus especially on the projects that will lead to improved efficiency and safety. There are some less critical investments that we have postponed until after the crisis. But I would say that the absolute majority of the planned investments, they run according to the plan. We move to Slide 20 and the summary. So to try to wrap this up, quarter 2 was an eventful quarter for Lindab. Decline was -- will drop in sales in April and May, followed by a little bit of growth in June compared to last year. So that was -- that is worth mentioning. In terms of results, we believe that it was a result that we can be proud of. We managed to quickly adapt our cost to the new situation. At the same time, we have stood up for our customers and for our employees and for our shareholders who will actually receive a dividend this year, and that is -- that cannot be said about all shareholders and companies these days. And we believe that we -- with our robust supply chain and with our production and distribution system that is very close to the customers, we have had very good delivery performance and continue to reach high customer satisfaction. And we continue to invest. We believe that for the future, that is what will make Lindab stronger and more competitive. And looking at the future, we are prepared for a situation with lower demand, and we will continue to strive for profitable growth. With that, Malin and I thank you for listening, and we open up for questions.

[Operator Instructions] The first question from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. I have a few questions. First of all, you said that you expect or -- yes, lower demand over the next year compared with the pre-crisis level. So I wonder if -- is it something that you see in the order intake backlog currently? Or is it more of a general macro view that you see from indicators and so on?

Thank you, Carl. We -- let's say, in our bread and butter business, where we sell over-the-counter, standardized products and so on, we don't see so much of that right now. But for the more project-oriented business, we see that decisions take longer time. There is a delay in making up your mind about quotations, order confirmations and there can be financing issues, et cetera, with our customers. So we see that things are taking longer, and that is a sign that the project business will be a bit more soft going forward. What that actually will mean in real numbers, is, of course, difficult to say, but there must be some impact from that kind of behavior where people are thinking about the risks a bit more than they might have done a year ago.

Okay. Perfect. And given, let's say, 10% to 15% lower volumes, if you compare it to the pre-crisis level, do you think that you still would be able to reach your financial target of a group EBIT margin of 10%?

The 10% to 15% is your qualified guess.

My guess, exactly.

I don't believe we have -- we have not mentioned. But if you get a little bit time to adapt, yes, I think that Lindab could make those kind of -- we could achieve our profitability targets, even if volumes are down, as you mentioned. But we cannot do it overnight. It takes some time to adapt an organization to a new demand level or sales level. Now we have done it in a crisis mode. But if you have to do it in a most sustainable way, you have to rebuild a little bit more.

Okay. Perfect. And in terms of the demand situation -- in the countries where they had strict lockdowns, what can you see there currently?

In the countries that were affected the worst, our sales was down by 70%, 80%, sometimes even more, sometimes up to 90% for several weeks in a row. And that is, of course, an extreme situation. Now we are back to, I would say, the worst countries on 70% of the normal level. And there are countries who have been in this worst lockdown that are actually back to normal levels again. So rough answer around 70% to 100% of previous levels. Maybe to add one aspect. We still don't know if there is a catching up effect in that or not. A lot of the delays, where there you need to -- still need some time, so that can mean that the construction work can accelerate during a period, and then we don't know for how long it will be like that. So whether countries who have come back to 100%, will actually stay there or if they will fall down a bit again. That is [ indiscernible ] to answer.

Okay. Perfect. And in Profile Systems, you yet again reported quite impressive organic growth numbers. I guess, a combination of do-it-yourself trend and Lindab LM. But by focusing on the latter one, I mean, what can you see there in terms of project pipeline and demand for Lindab LM?

Lindab LM referred to the very economic steel buildings. They are becoming more and more popular. And I think we have a winning concept there, and it is it is very suitable for, for example, e-commerce buildings, warehouses that you see popping up everywhere. So I think that we have a competitive edge in that niche. And I think we are seeing growth, thanks to that. That said, we still believe -- it fluctuates between the quarters how many we have. A few of them ending up in 1 quarter instead of another one can swing the numbers for Profile Systems quite a lot. So we tend to be a bit cautious when we talk about it because we know that there can be effects between the quarters, and there's also a relatively strong seasonality because this is some of the work related to Profile Systems is better done in the summer period rather than in the winter period. So I think we have to get used to the fact that there is fluctuation in Profile Systems and instead look at a little bit longer trends.

Okay. Perfect. And the final one for me. Now that you have closed 2 acquisitions year-to-date, you have a strong balance sheet as well. Can you give us some flavors on your current M&A pipeline?

We have worked more actively on that pipeline during the past 6 to 9 months, I would say. Now, of course, when the COVID-19 crisis comes, things are changing a bit in how you have to prioritize and so on. But we are working actively to develop a pipeline. This takes time to do. And we want to find good well-run companies, and look at those. We are not interested so much in turnarounds or in major transformational acquisitions. We're interested in add-on, bolt-on acquisitions that -- things we understand and where we can quickly do a very soft integration and get up to speed. And I think these 2 examples are that we have just done, they are representative. We hope to do more acquisitions, but when or if that is for the future to tell.

The next participants will be from Marcela Klang, Handelsbanken.

A couple of more questions regarding your strong performance in the Profile division. You mentioned a lot of large industrial orders. Do you expect this momentum to continue? And do you also have better profitability on these orders? Basically, what I'm wondering about this operating margin above 13%, how sustainable is it? Or is it something special in the second quarter?

Profile Systems, as I said, they have seasonality. Normally, for Profile Systems, quarter 3 is the strongest quarter. Quarter 2 is the second strongest quarter. And the winter months are a bit weaker because we -- one of the concepts in Profile Systems that is roofing systems and roofs, you normally work more on the roof during the warmer period of the year. Is the margin sustainable or not? Well, I think during the second and the third quarter, this kind of margin for Profile Systems is what we aim for. It is much more difficult to reach during the part of the year. Seen over a 12-month period, Profile Systems should absolutely make more than 10% EBIT margin.

Sounds good. Then a follow-up question. You mentioned growth in June. Is that compared to June a year ago? Or is it compared to May?

It is compared to 1 year ago. So June 2020 versus June 2019, we had organic growth.

Do you want to say something about the momentum so far in July?

No, not really.

Next question, the tax rate has been so high this quarter. Can you explain this a little bit more?

I think it's better to invite Malin to answer that question. I might try, but I might fail. So Malin?

But we have a withholding tax that is connected to a dividend payment. So that is the main explanation.

Now we can say that well, we can even quantify that.

Yes. It's...