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

Hello and welcome to the Lindab Q1 2021 Report. [Operator Instructions] Today, I'm pleased to present CEO, Ola Ringdahl; and Interim CFO, Madeleine Hjelmberg. Please go ahead with your meeting.

Hello and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO for Lindab Group. I'm sitting here together with our acting CFO, Madeleine Hjelmberg. We'll start on Slide 2. Some key highlights from the first quarter. Lindab starts the year in a strong way, and the positive trends from the end of the previous year continued into the beginning of 2021. Both Ventilation Systems and Profile Systems delivered organic growth while Building Systems project sales continued to be impacted by the uncertainties related to COVID 19. Net sales came in at SEK 2.248 billion, and it's a reduction of 4% in comparison to previous year. There was a strong negative currency effect of minus 5%. However, there was a slight organic growth coming in at 0.3% positive. And we see this as a sign of strength considering that the first quarter of last year was relatively unaffected by the pandemic. Sales strengthened gradually during the first quarter. And the month of March was particularly strong. Lindab has continued to prioritize profitability over volume growth, and I will comment a bit more on that when we cover the topic of increasing steel prices later in the presentation. The adjusted EBIT during the quarter was a record high for the first quarter. EBIT increased to SEK 193 million and the adjusted operating margin to 8.6%. The adjusted EBIT margin for rolling 12 months was 10.2%, in line with our long-term targets. Lindab has a strong balance sheet and the cash flow improved during the first quarter. This enables us to continue with our strategic investment program and pursue acquisition opportunities. We move to Slide 3 and the geographical development. In the first quarter, Ventilation Systems had solid sales in all geographic regions. Growth was especially good in the U.K. and in France compared to previous year. But then we also know that previous year, we saw negative effects from lockdowns towards the end of the first quarter. Profile Systems continued to grow sales in the first quarter driven by high growth in both Eastern Europe and the Nordics. Building Systems sales decreased during the quarter due to the uncertainties related to COVID-19. This had a negative impact on the Eastern region and in Western Europe. Our Nordics region in terms of sales, the Nordics reported positive organic sales growth while Eastern Europe was in line with previous year. Western Europe decreased slightly organically, which was entirely driven by Building Systems since several major investment decisions have been postponed there. Overall, we are pleased with the geographical sales development given the market conditions. Now I would like to hand over to Madeleine, who will take you through the financials, starting on Slide 5.

Thank you, Ola. First, the group financial highlights. Net sales amounted to SEK 2.248 billion during the quarter. Organic growth was unchanged or slightly positive by 0.3% for the group while currency had a negative impact on growth by 5%. Structural changes related to Lindab's complete list acquisitions and divestment in previous year contributed positively by 1% in the quarter. Overall, sales have continued to be impacted by the uncertainties related to COVID-19, which has mainly affected the project-related sales of Building Systems in terms of Lindab. In general, the construction activity continued to recover in most in the European markets during the quarter as restrictions continued to ease. This gradual recovery contributed to organic growth in both Ventilation Systems and Profile Systems. It should be noted that the comparison period was affected to a lesser extent by COVID-19 and the restrictions related to it, restrictions that were implemented during the second half of Q1 previous year. Despite a bit lower sales for the group, the adjusted EBIT increased to SEK 193 million during the quarter and adjusted EBIT margin improved to 8.6%. For Lindab, this is at a record high level for the first quarter. The improvement in adjusted EBIT was mainly driven by structural changes, but also to organic growth in both 2 of the business segments. The EBIT included governmental grants of SEK 6.6 million. Net profit for the quarter amounted to SEK 140 million, an improvement of SEK 4 million compared to the same period previous year and the earnings per share equals SEK 1.83. Now we take a look at our different segments, and we start by Ventilation Systems at the next slide. Net sales for Ventilation Systems amounted to SEK 1.469 billion, a decrease of 3% compared to the first quarter previous year. However, organically, sales increased by 1% and structural changes related to Lindab's completed acquisitions and divestments in previous year also contributed positively by 1%. Currency effect had a negative impact on sales growth by 5%. During the quarter, there has been a continued sales recovery as COVID-19-related restrictions started to ease more in certain markets. This most particularly was more evident for Western Europe, which reported good organic growth during the period. The sales development in the Nordics remained solid and declined only slightly organically. It should also be kept in mind that Nordic countries, in general, were the countries to first announce price increases versus customers with aim to compensate for the historically high raw materials prices we have currently, and profitability have been prioritized before volume. In the CEE/CIS region, sales development continued to vary between the markets, and there were still uncertainties related to the ongoing pandemic, which continued to impact the construction activity. Despite this, sales only decreased slightly organically for the region as such. The adjusted EBITDA of Ventilation Systems increased to SEK 163 million during the quarter, and adjusted EBIT margin improved to the level of 11.1%. This is the highest ever reported for the first quarter. The improvement was mainly explained by structural changes and the made acquisitions of Thor Duct, Crenna, Ekovent and Aer Faber in the previous year and also the divestment of IMP Klima Group. However, adjusted EBIT was also positively impacted by the organic sales growth and the strength in gross margin. Moving on to the next slide. Net sales in Profile Systems increased by 7% and amounted to SEK 630 million. Organically, sales increased by 10% while currency had a negative impact on growth by 3%. The strong organic growth related to most of the markets within Profile Systems, with particularly strong organic growth within the Western Europe and the CEE/CIS region. The largest region for the segment, the Nordic, also reported good organic growth during the period. It can also be mentioned that significant deliveries were made to a large logistics terminal at the Swedish market, which contributed to that total sales in terms of major individual industrial projects were in line with previous year's high levels. During the quarter, adjusted EBIT increased to SEK 58 million and the adjusted EBIT margin improved to the level of 9.2%. The improved EBIT, despite high comparable figures, was mainly related to strong organic growth and lower operating costs. Then we move to the financial highlights of Building Systems on the next slide. For Building Systems, net sales amounted to 148 -- SEK 149 million, sorry, a decrease by 37% compared to the corresponding period previous year. Sales decreased organically by 28%, and currency effects had a negative impact of 9% mainly related to the weaker Russian ruble. The decrease faced during the quarter was mainly explained by the general slowdown in most markets related to COVID-19 when several major investment decisions have been postponed and larger investment project has been put on hold. Due to the clearly reduced sales volume, Building Systems reported a loss in the quarter, and adjusted EBIT was negative by SEK 15 million. The adjusted EBIT margin equal to minus 10.1%. The effects of low sales were partly offset by strength in gross margin, but this, in combination with taking cost-saving measures to adapt the business to a lower sales volume and also reduced utilization could, however, not compensate for the low volumes we had. Net order intake decreased during the period, and the total order backlog at the end of Q1 was lower than a year ago. Moving on to the next slide. Lindab reported a strength in cash flow from operating activities compared to the corresponding period previous year. This development was primarily related to the quarter's change in working capital and positive effect from accounts payable and cash advances from customers within Building Systems. The free cash flow of the group was negative by SEK 45 million, which actually is an improvement of SEK 62 million compared to Q1 last year. It should be kept in mind that the first quarter of the year normally have the weakest operating cash flow. The investing activities during the quarter amounted to a net of SEK 105 million compared to SEK 133 million the corresponding period last year. This was solid cash flow related to the ongoing investment program with aim to increase efficiency, capacity and safety within the group. There were no monetary transactions related to M&A activities during the quarter. Compared to the end of March last year, net debt has decreased by 16% and amounted to SEK 1.759 billion. The net debt-to-EBITDA ratio for the group equal to 1.3% compared to 1.5% by end of March a year ago. And that concludes the financial highlights of the first quarter 2021. And with that, I'm giving back the word to you, Ola.

Thank you, Madeleine. Now I'm moving to Slide 11 where we talk a bit about the strategic investment program that Lindab is currently implementing. So our increased profitability has given us the financial methods to implement a large and strategic investment program. This is the largest we've seen in Lindab's history. For the past 2 years, we've been purposefully investing in increased automation, production capacity and optimized logistics. In 2020, we invested SEK 425 million in dozens of important projects. And in the first quarter of this year, we continued to invest SEK 105 million. We are expanding our production facilities for ventilation in strategic locations, and we're installing highly automated production lines in our production facilities both on a regional level, but also in our central ventilation factories in Sweden and the Czech Republic. We continue to see a very attractive payback periods for the investment, and we see already now a positive effect for our business and our gross margins. And for those who are interested in finding out a bit more about some examples of these investment projects, we have today released a video addressed to the shareholders. Since we couldn't have a live annual general for our shareholders, we have released a video on our website where you can see a bit more examples from the ongoing investments throughout the Lindab Group. Now let's talk a bit about the strategy going forward and how we are building a stronger Lindab for the future. We move to Slide 13. So our vision is to become a leading ventilation company in Europe, specialized in air distribution and air diffusion. Those are the parts of the ventilation system where Lindab has its core strength. We focus our strategy on 5 areas. We aim to be the market leader in the markets where we operate, and we focus on selected countries where we can create really strong customer relationships. This means that we are now operating in fewer countries than we were some years ago. I remember when I joined Lindab about 3 years ago now, we were active in 32 countries. And today, we focus on a bit more than 20 countries. So it's quite a reduction. And in those countries where we do operate, we aim to create the strongest possible position, and we focus on profitable growth. We want to be and remain a company operating locally in a very decentralized way. We want to be close to our customers and offer what is demanded in each market. This means that we adapt our product range and our distribution model to the local markets. And on the theme of efficiency, a major focus area for Lindab, most of what we do is manufacturing and distributing standardized products. And by doing that, we can achieve a high degree of automation leading to high cost efficiency, high availability and a safe working environment. At the same time, we improve our digital channels to the market, and we design smart software to help our customers choose the right solutions. Quality should always be a trademark of Lindab, and we are known for the best quality in our industry. We have well-known brands that the customers know that they can trust. Our employees have the right skills to give the right advice and service to all our customers. And this all boils down to that we want to be a trusted partner for our customers. We deliver what we promise on time. And the trust that we have built through many years of entrepreneurial spirit and local presence is built upon the capabilities of our employees to take responsibility and solve problems when they arise. On top of these 5 themes, we, of course, add the important aspect of sustainability. So if we move to Slide 14. Lindab has been working with the -- within the sustainability area for a long time, but we haven't always called it sustainability. Now we are gathering all the efforts we are doing under the headline, Lindab for a better climate. And we have divided that into 3 different parts. First of all, we want to contribute to creating healthy buildings. We want to improve the indoor climate for everyone working or living in buildings. The indoor area is key for our health and for our productivity, and we spend an absolute majority of our time indoors. So this is an important area for us to continue to contribute to. Secondly, we aim to help our customers to reduce the environmental impact of constructing buildings, but also of running and heating these buildings. We do that by offering smart products that can reduce the energy usage. Buildings represent a large share of the total CO2 emissions in Europe, and Lindab can directly contribute to a better climate for our planet by supporting more energy-efficient buildings. And the third topic here, we, of course, ourselves, want to drive a sustainable business within Lindab's own operations. We work with reducing emissions and energy usage in our production facilities and when transporting our goods. We screen our suppliers very carefully to make sure that we have a sustainable sourcing pattern. And we're also improving safety and work on how to become a more attractive employer. In the local communities around our facilities, we try to act as a responsible company, taking part in the local communities. Then on the theme of the EU taxonomy, which many are paying attention to, we are currently working in detail with our analysis for the EU taxonomy. And our best estimate at this point in time is that 65% to 70% of our revenue will be aligned with the EU taxonomy. And on the theme of ESG, our current ESG rating according to MSCI is AA, and we are working on improving that further. So that's on the topic of sustainability. We move to the next slide, #15. And here, we have some comments on the market development and the rapidly increasing steel prices that I know that many are interested in. So in general, we believe that throughout 2021, we will see an increase in construction activity as society is reopened after the pandemic, and there is increasing investment conference out there. However, there are also some challenges with raw materials increasing in price. It is not only steel. It's also concrete and wood and many other raw materials. And we see that -- this as a challenge for the entire construction industry. For Lindab, it is, of course, the rapid increase in steel price that -- steel prices that are in focus. And we, as a large buyer of steel, pay extra attention to this. Lindab has long-term contracts, and this gives us a good visibility of future changes. And we are currently negotiating the steel prices for quarter 3 and quarter 4 2021. In the market today, there is currently a shortage of steel and the delivery times are long. But as a large buyer, one of the largest ones, we have an advantage. We can see quite far into the future and ensure that we get the right quantities delivered and that we have a good possibility to plan the increase in steel prices and adjust our prices to the customers at an early stage. Our aim is to protect our gross margins, and this is what we tried to do by giving notice early to our customers so that they can prepare for the increasing prices. Lindab made a strategic decision at an early stage to prioritize profitability over volume. There has been a lot of demand for our products during the first quarter, but we have chosen to prioritize our existing customers and not push fully to increase volume. We believe that it is very important that we safeguard our stock of steel so that we can be a reliable supplier to our customers in the long run. And we expect that steel prices will continue to rise during the rest of 2021. And we also foresee that there will be -- continue to be a quite difficult situation in the steel market for the months to come. So we need to make sure that we have enough steel so that our operations can run without interruption. We take a cautious approach. We focus on delivery, reliability and profitability while even going after short-term volume growth. With that, we go to the next slide and a short summary. So to summarize, quarter 1 was a good quarter for Lindab. We are satisfied with the sales level and especially so with the Profile Systems and Ventilation Systems. The EBIT margin was record high for the first quarter, and we continue to improve profitability on a rolling 12-month basis. We have a strong balance sheet, and we will continue to implement our strategic investment program, and we will continue to pursue acquisitions. All in all, a good start to the year, and we also see a good, long-term growth potential as the construction activity starts to increase again after the pandemic. With that, I would like to thank you for listening, and we open up for questions.

[Operator Instructions] Our first question comes from the line of Kenneth Toll from Carnegie.

So first, on the outlook for large projects in Profile Systems, you have talked about it for some quarters now. But is it a few very large projects that run out in the short term? Or should we see support from large projects also in Q2, Q3?

We don't have any reason to believe that we will have a shortage of projects within the project sales in Profile Systems. However, it is -- we usually make the comment that between the quarters, it can fluctuate. So it's -- that is the nature of the project sales. But we have a strong pipeline of projects. So I feel quite confident that the demand is there. So I'm not concerned about any sudden drop in volume when it comes to that project business.

Great. And the project business as part of the whole divisional sales, is it -- and it's probably hard to define what is a project and so on, but would you say that it's a quarter or around half or 2/3 or has a very rough...

In Profile Systems, I would say that this is less than 1/4 of the sales that can be seen as projects related to the rest, the more standard sales.

Okay. Great. Then also coming back to steel prices, of course. You -- when do you expect to see the biggest hit in the P&L? I would guess that steel prices would be higher in the second quarter than in the first quarter. Is that a correct assumption?

Steel prices will be higher in the second quarter than in the first, and they will be higher in the third quarter, and they will be even higher probably in the fourth quarter. So they will gradually increase throughout the year, and we are talking quite significant increases. Although now, we can see that the spot prices for the kind of steel that we are buying is at the level approximately 100% higher than it was during June, July last year. So we are talking significant increases. And we believe that this will continue to increase during the year due to the shortage of material in the market. That said, Lindab is in a good position to make sure that we have material, and that is more than most of our competitors can say.

So there is actually an opportunity for you to gain market shares here. Smaller competitors may find it more difficult to get material.

There can be an advantage for Lindab in this. However, it is a complicated market to act on today. The delivery times are long. Getting extra volume beyond your forecast is quite difficult. And it's a global game here where everybody is trying to look for more material. So I think we act in a prudent way. We follow our, let's say, budgeted sales targets, and we don't aim to do too much expansion and take too much market share because that can also bring you some travel. We prioritize our existing and loyal customers.

Then from a modeling point of view, these price increases will support organic sales growth. But what -- do you know what is sort of the average price increases you have made on your products, just very roughly, so we can put it into our models to get the organic growth?

You have to show me that model, Kenneth.

Yes.

Well, I mean you know -- you have seen our products. There is obviously quite a lot of steel in them. And while we -- I mean we are not selling steel, but of course, there is a high share of steel in the product. And we aim to protect our gross margins. So -- and -- but we don't aim to overcharge our customers. We are living in symbiosis with them, and we want them to survive as well. So we're trying to act very responsibly in this and give our customers an early warning and pre-notice that these things are happening because we see perhaps a little bit -- we have a longer perspective on this than most others might have because we are in direct dialogue with basically all steel mills throughout the world because we are such a large buyer of steel. So then the question is, can we adjust prices quick enough? How does that play out with our customer contracts and our sourcing contracts? And that will -- it is very difficult even for us to model that. But we aim to forward the price increases to the next player in the chain.

I heard another CEO in the building material space. He said that it has actually never been so easy to increase prices of these products than what it is right now. And he was pointing to the fact that it's not only one raw material that is increasing, but all raw material prices are up. So there's an understanding in the construction industry that input components need to be increased in prices. Is that something that you would agree with? Or...

Yes. I think that people are aware that these things are happening. However, if you have promised to build something and that takes 2 years, then of course, you might not have added it into your calculation. So there will be pain somewhere in this value chain. And that burden, of course, needs to be shared somehow. We are in this game for the long run, and we want to see our customers also succeed in their business. So somehow, you have to operate together here. But there is no single player that can take this complete burden. We have to share it.

Great. And then on the M&A side, your balance sheet is very strong. And as I read the report, you are happy with the acquisitions you've done in the last year or so and also with the divestment. So are you seeing more opportunities now when some countries are opening up their societies a bit more to travel and be more active on acquisitions going forward?

Yes. I think that when the travel restrictions are now relaxed a bit, we will be able to start to travel quite soon. It hasn't happened yet, but it's probably in the near term, and that will make it a bit easier to approach companies, especially outside Sweden where we are able to travel. We have a very interesting acquisition pipeline with companies at different stages, and we are hoping that we will be able to complete some acquisitions this year, but it's always difficult to foresee how many and how big and so on. But we are working very actively on it. And hopefully, the -- when these restrictions ease, we will be able to act even more on that.

[Operator Instructions] As there seems to be no further questions, I will hand it back for any closing remarks.

Well, then we say thank you, thank you for listening in, and we'll see you next time. Thank you very much from Madeleine and myself.

Thank you for your time.

Thank you. Bye.

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.