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

Hello, and welcome to the Lindab Audiocast Teleconference Q2 2021. [Operator Instructions] Today, I'm pleased to present CEO, Ola Ringdahl; and Madeleine Hjelmberg, acting CFO. Please go ahead with your meeting.

Hello, and welcome to this call. My name is Ola Ring, and I'm the President and CEO of Linden Group. I'm sitting here together with our exiting CFO, Malin Genba. We go to Slide 2. I -- Some key highlights from the second quarter. Linda has had a very strong year so far in Q1 was strong, and Q2 was even better. We had record high sales in the quarter also compared with 2019. Billing activity in all parts of Europe is getting back to previous levels. Lindab is performing well in all business areas, all 3 of them showing good organic growth. Pentanation Systems and Perforce Systems have the highest sales ever for single quarter. Both of these business areas are also reporting the highest operating profit ever for a single quarter. The adjusted operating margin for the past 12 months was 11%, and that's higher than our long-term target of 10%. The strong performance is supporting the case for our investments and acquisitions. We are conducting the largest investment program in Lindab's history, and we are continuing at a high pace during the quarter. We've also completed two acquisitions, one in May and one in July, adding additional value to the Lindab Group. Now let's move to Slide 3 and the geographical development. In the second quarter, demand was high in all geographic regions. Western Europe took the lead with an impressive organic growth of 39%, followed by Eastern Europe with 37% and the Nordics our largest region with 15%. Sales was particularly high within Ventilation Systems and Profile Systems, driven by growth in all geographic regions. The smaller business area, Building Systems, also reported positive organic sales growth, thanks to good performance in the Eastern region. The comparison period, second quarter of the previous year, had the most extensive restrictions related to COVID-19. So that is, of course, impacting our growth numbers, but the actual revenue level is high also compared to earlier years. And now I would like to hand over to Madeleine Hjelmberg, who will take you through the financials.

Thank you, Ola [indiscernible] Net sales spending that amounted to SEK 2.47 billion. The organic growth was strong at 26%, while currency had a negative impact on growth by 4%. Structural changes related to Lindab's completed acquisitions and investment during the last 12 months contributed positively by 2%. Overall, the sales development was strong during the quarter, especially within Ventilation Systems and Profile Systems. Both these segments have been positively affected funding that continuing being a reliable business part. Lindab has, in fact, been able to manufacture and supply customers with demand of progress during the quarter, despite a general imbalance between supply and demand of raw materials. The adjusted EBIT increased by 60% to SEK 356 million, and the group recognized an adjusted EBIT margin of 13%. This is the highest adjusted EBIT and EBIT margin for an individual IT since 2008. The improvement was mainly driven by significant sales growth, structural changes, continued good cost control, and the strength in gross margin as a result of the cost efficiency measures from the ongoing investment program. The EBIT included to receive governmental grants of SEK 2 million compared to 30 in the corresponding period previous year. Net profit for the quarter amounted to SEK 278 million, an improvement of SEK 202 million compared to the same period previous year. It should be kept in mind that the net profit in Q2 last year was impacted by one-off items and restructuring costs equal to SEK 74 million related to the strategic decision to close down IMP Klima Group. Earnings this year in Q2 equaled 3.64 SEK. Now we will take a look at our different segments, and we start with ventilation systems at the next slide. Net sales for the ventilation systems amounted to SEK 1.628 billion, an increase of 26% compared to the second quarter previous year. Organically, sales increased by 26% and structural changes also contributed positively by 4%. Currency effects had a negative impact on sales growth by 4%. During the quarter, there has been a continued clear of sales recovery of the construction activity in most European markets. In terms of Lindab, this was particularly evident of Western Europe, which reported strong organic growth during the quarter. The sales development in Nordic remains solid, and this region also reports a fairly good organic growth. The adjusted EBIT of ventilation systems increased to SEK 213 million during the quarter, and the adjusted EBIT margin improved to the level of 13.1%. This is, as Ola mentioned earlier, the highest ever reported values for an individual quarter in terms of ventilation systems. The improvements were mainly explained by significant sales growth, structural changes and the strength in gross margin. Worth mentioning is that all sales and production units have been fully operational during the quarter in comparison to the period last year, where there were significant restrictions in some markets. Moving on to the next slide. In terms of Profile System, net sales increased by 27% and amounted to SEK 873 million. Organically, sales increased by 29%, while currency had a negative impact on growth by 2%. This organic growth was related to most of the markets of Profile Systems. The largest region of the segment, the Nordics, again growth during the period, with good growth in all product areas. It can also be mentioned that significant deliveries were made to two logistics terminals on the Swedish market, which also contributed to the total sales growth in the Nordics. Sales development in the Eastern Europe increased during the quarter due to strong demand in most of the market. During the second quarter, adjusted EBIT increased to SEK 149 million, and this is the all-time high for the segment in terms of profit. Improvement in adjusted EBIT high comparable figures was mainly related to strong organic sales growth and the strength in gross margin. The adjusted EBIT margin for the quarter improved to a level [indiscernible] Then we move on to the financial highlights of Building Systems on the next slide. For Building Systems, net sales amounted to SEK 246 million, an increase by 4% compared to the corresponding period previous year. Sales increased organically by [ 14% ] and currency effects had a negative impact of [ 10% ], mainly related to the weaker Russian. The increase in sales during this quarter is mainly explained by strong growth in both the CIS and CEE region, while sales in Western Europe declined. The market development within Building Systems remains uncertain, but there has been a clear pace recovery during the second quarter in relation to the first quarter of the year. In Q2, adjusted EBIT amounted to SEK 12 million and adjusted EBIT margin equal 4.9%. The slightly lower EBIT is mainly explained by some increased costs and the currency tailwind linked to the Russian ruble and the euro. However, these effects are partly been offset by strength in gross margin and organic sales rate. to be not be is that the government has granted cost reductions related to COVID-19. Reported EBIT was SEK 1 million compared to SEK 7 million in the corresponding period previous year. The net order intake decreased during the period of the total order backlog at the end of year Q2 was lower than a year ago. Moving on to the next slide and cash flow development for the group. Compared to the corresponding quarter previous year, mean that we reported a strong cash flow from operating activities before change in working capital. This development is primarily related to strong underlying performance and a strengthening operating profit. In terms of working capital, more cash was tied up in the statement of financial position and development was different compared to last year, much as a consequence of the different precise for the quarter. Last year, Lindab recognized cash flow effects but among other things COVID-19. Included to this year, the change in working capital is mainly related to increased capital tied up in stock and operating receivables as a result of Lindab's strategic focus of high delivery performance and a higher demand from customers. I think that concludes the financial highlights of the quarter, and I am giving word back to Ola.

Thank you, Madeleine. Now let's talk about the investment program, and we start on Slide 11. I increased profitability during the past couple of years has given us the financial muscles to implement the largest investment program in Lindab's history. For the past 2 years, we've been purposefully investing in increased automation, production capacity and optimized logistics. So we've already invested in dozens of important projects. And in the second quarter, we continue to invest this time, SEK 86 million in different parts of Europe. We are expanding our production facilities for ventilation in strategic locations. We are installing highly automated production lines in our manufacturing facilities, both regionally and in Lindab's Central ventilation factories in Sweden and the Czech Republic. The payback period is short, typically 3 years or less for machine equipment. And the first investments have already had positive effects for our business, especially now when demand is high and increased capacity is needed. This means that we -- when we grow, we don't need to add a lot of people, but we can instead run the machines in an automated way. Now let's talk about how we are building a stronger Lindab for the future on Slide 13. So acquisitions are a key part of the Indo strategy. And in May, we signed an agreement to acquire the Norwegian ventilation company, H.A. Helgesen. They are specialized in the production of rectangular ventilation ducts and that complements our ventilation business very well. [indiscernible] bulky and that's difficult to transport. -- but H.A. Helgesen have built up an efficient distribution network in Western Norway. As with the previous acquisitions that we've made, this is a well-managed business with high EBIT margins. H.A. Helgesen an annual sales of NOK 5 million, and there are 9 employees. This will be reported as part of ventilation systems numbers in the third quarter as the formal ownership is transferred to Lindab during that quarter. And then on Slide 14, we mentioned another acquisition. We signed this acquisition in July just after the closing of the quarter, the company Kami. They are Swedish roof specialist, and this is our first acquisition in a long time in the business area of Profile Systems. Kami are producing their own unique metal groups with the sand-coated surface, which make them look like tile roofs. And we think that we can contribute with a far wider distribution network and improve sales even further. Kami has an impressive revenue number per employee. So with only 22 employees, they run a SEK 100 million business with high profitability. Kami will also be part of the numbers for the third quarter and will be reported as part of Business Area Profile Systems. Now on Slide 15, let's talk about the steel price development. And as you can see on the graph, there has been quite a dramatic increase in steel prices. This graph is describing the development of hot-dip galvanized steel, one of the major steel categories used in the Lindab product range. We see an increase compared to 1 year ago of roughly 150%, so it is dramatic and historic. Lindab has managed a shortage of steel and the high steel prices well in the quarter. But it is, of course, challenging to keep up and adjust the prices both frequently and quickly when it's -- when the development is dramatic. As a large purchase of steel, however, Lindab can secure the deliveries for a long time period, and we have good visibility into the future. Right now, we are securing volumes for the first quarter next year, so we have a long planning horizon. We expect steel prices to continue to be at a high level for the coming quarters, and we plan our actions accordingly. Now let's move to the final slide and a summary. So on Slide 16, the second quarter was a good quarter for Lindab. We have set a number of new records for both sales, profit and profitability. We see a broad improvement across all business areas and all geographies, and we believe that this is a sign of strength. Furthermore, Lindab has a strong balance sheet, and we will continue to implement strategic investments and continue to nurture our acquisition pipeline. All in all, the second quarter was an important step in our long-term plan to build a high-quality company with good profitability. With that, we would like to thank you for listening, and we open up for questions.

[Operator Instructions] Our first question comes from the line of Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A couple of questions from my side. first, maybe it's hard to assess, but would you say that you might have any prebuying effects in the quarter sort of temporarily fueling the demand

Not to any significant extent, I would say. We, of course, see occasionally patterns of people sending quite many orders just before a price increase. But since we are updating our prices very frequently, I think this evens out over this time period that we are speaking of now. So the short answer is not any significant effect of that.

Perfect. And in terms of the demand, obviously, quite strong and you seem quite confident when listening to [indiscernible]. But have you seen any fluctuations during the quarter in the demand stronger in the beginning or stronger in the end?

We have seen a strengthening demand, say, from the beginning of this year. So stronger and stronger month by month, I would say. So it is -- there seems to be an increase in confidence in the industry and in the building sector.

Perfect. And also -- I mean, in general, we know that you have been very active when it comes to price increases. And I guess it's a fine line in -- we're working with price increases and have sort of maintained a good relationship with your customers. And would you say that that your customers have a good understanding of the unprecedented situation? Or do you fear that the pricing could, in the long-term, impact your relation -- your relationship with your customers when the sourcing or supply of material normalizes? Or do you see that your competitors are doing pretty much the same?

I think our customers have different kinds of concerns. The main priority is to be sure that they get the products that they need at the right time, at the right quantities. And that they can trust when they are dealing with Lindab. So that is really the first priority. Never run out of products, don't take your customers down. Then with good communication and also we're talking about people who are also reading the newspapers and can also read these types of graphs, then they have a good understanding. They understand why prices need to increase. However, it, of course, create difficulties for them because they might not have imagine that something like this could happen so quickly. So we, of course, work closely together with our customers to try to find solutions so that they don't suffer too much. We are doing business with people [indiscernible]. So we try to work in partnership with our customers. We want them to survive and thrive because we believe that they will be our customers for a very long time.

Okay. Perfect. And the final one from my side, if I may. I mean could you describe the impact on the margins sort of between the net split between your price increases and the raw material headwinds? And also what we could expect the coming quarters?

What we could expect. How do you mean, Carl, what we could expect in the coming quarters?

I mean obviously, the price increases will be tougher or the raw material situation will become tougher when you work through -- when it worked through your inventories in Q3 and I guess also Q4. So in Q2, I guess, you implemented price increases at a faster pace than the raw materials impacted you, I guess, or...

True. I mean it -- since we were very quick to increase prices, we realized this situation perhaps a few months before others did. So we started to act on this more than half a year ago, and we have been very quick in implementing our price increases. We sit on huge monetary values in stock. That is, of course, very costly. And we are selling that stock at new prices. So there can be some tailwind from that, but it is out of the improvement in the profitability within the group. It is a smaller amount. The main effects in our profitability improvement come from operational efficiencies. We are becoming a more and more efficient company through both working practices, structural changes and definitely through our investment program. So given the pace that these raw material increases came, I think that we are still working in our favor because of our large stock. In Q3, it can be a little bit tougher because we will see increasing effects in our own inventory from the steel price increases, and we are continuing to increase prices to compensate for that. [indiscernible] has the priority to safeguard our gross margins to continue to drive profitability improvements. And this has historically been something that Lindab has been quite good at, and this is how our business system is built up. So I have good confidence that we will handle this well also in Q3 and Q4.

And the next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

Coming back to organic growth and pricing to some degree, organic growth, obviously being very strong here in the quarter. Is it possible to give some sort of indication on how much of the organic growth came from volumes and how much came from pricing in this quarter? And I guess, going forward in Q3, more and more will be sort of pricing based on the logic that we just discussed. That's my first question.

Since we saw a sales recovery last year in Q3 compared to Q2, the comparison numbers are more difficult in the next quarter in terms of sales because at the -- in the third quarter, more and more countries were going back to at least being partly open. So yes, I think proportionately, more of the sales growth will come from price increases in the third quarter and fourth compared to the second quarter when most of the sales increase came from volume increase.

Okay. And no sort of indication on Q2 organic growth, how much came from volumes and pricing?

Significantly, more than half of the sales increase comes from volume. Significantly.

And on the gross margin, do you think it's reasonable to see gross margins at around 30% throughout 2021. I guess you all refer that you expect to handle the raw material issues quite successfully throughout the year.

When studying our gross margin development, I see -- well, there are two things to mention. When we describe in our reporting, what you read there is gross margin in those cost of goods sold, you have partly variable costs like direct material and direct labor, but you also have quite a lot of costs that you could say are fixed costs, the cost of the factories, the white collar workers in the factory and so on. So it's the cost of good service and mix of variable and fixed costs. And if we study how that -- how the variable part of our cost of good service developing, we see very good stability. And I think we have a business system in Lindab that is focusing on keeping stable gross margins, particularly on that variable cost side. And then we get a lot of efficiency improvements on the fixed part of the cost of goods sold and definitely also below cost of goods sold on the SG&A costs. So a large majority of the profitability improvement during the second quarter came from say, operational leverage and efficiency improvements and the smaller part came from the extra boost that you can get from price increases.

Perfect. Final one from my side on M&A [indiscernible] Can you talk a little bit about the pipeline and how you view the market? I guess multiples are quite high in a historic context. And also maybe any comments on the plan for building systems in the future? How are you seeing that?

I can try. I think it's true that the multiples have come up on acquisitions. However, we try not to focus too much on participating in bidding processes, but we prefer to find and contact the desired targets ourselves. And then we can avoid a little bit of this price inflation of multiple inflation that we see elsewhere. So we have a very healthy acquisition pipeline, very many interesting candidates. Now we can also start to travel a bit more. So it's easier to also do deals outside of Scandinavia. So I'm quite hopeful that we'll see good progress there, but it's, of course, very difficult to say with certainty, but we are aiming to make more acquisitions this year. When it comes to Building Systems, I think that they are showing a good performance given the sales level they have. They are showing a stable margin. And now we have seen, for the last 5 or 6 months in a row, increasing order intake, a lot of inquiries. So I'm a little bit optimistic that we have seen the worst, and we are moving in the right direction in terms of orders and sales volume. So as long as they can show this type of stability and performance, then I'm quite pleased. And then we have some upside going forward in that performance as sales will hopefully start to increase in the coming quarters.

And does that mean you feel more comfortable with being a long-term owner of that asset or should we see that?

Strategically, the fit is not perfect. So we will have to see about that. But at the minimum, they need to perform and contribute to the group total. And as long as they do that, then there's no panic about that situation. But as I've said in several calls before, the synergies are very limited between business systems and the rest of Lindab, and we run it as a separate parts of our group.

[Operator Instructions] We have a follow-up from Carl Ragnerstam from Nordea.

It's Carl here, again. Just a quick question here in Q2, other operations, I guess, central costs expanded to SEK 18 million versus historical piece of roughly [ 10 ]. So I wonder what what is behind that?

You can't see that, but I'm looking at Madeleine. I say historically [ 10 ]. I think that we had -- we had unusually low central cost previous year because we cut our salaries and we did short-term work, the group management, we cut our salaries -- So -- and we, of course, put a break on everything. So that is one explanation.

And then we also have, of course, some costs related to strategic work we do for the future in this

That is true also, strategic projects and acquisition-related costs and so on. IT costs also can be an explanation. We are now picking up the pace again in rolling out a new ERP system and so. So there's no extraordinary thing behind that number. I think the comparison number to last year is probably a bit skewed.

Okay. Perfect. And then one more, if I may. On Profile Systems, would you say that the primary growth driver behind obviously, very impressive organic growth is bread and butter business? Or would you say that you also see higher volumes for Lindab, for instance?

We did see high volumes for Lindab because of two large logistics centers being erected and invoiced, but the bread and butter business has developed really strong as well. So it is a combination all product categories within Profile Systems performed really, really well. Part of that is thanks to our own excellent performance, of course. And part of it, I think, is because our competitors have a very difficult time to supply. So we -- when we have the -- when we can and when we have enough material, we, of course, bring in new customers. When we feel that volumes or raw material stock is not on the safe side, then we decline new customers, but we, of course, help when we can. So there's an extra boost from that as well.

And we have also discussed before the yourself trend and the favorable situation due to that. Do you see it continuing still to do yourself trend or

Yes, we do. I think people have more time to look after their house and this this trend, I think, will continue for some time. So that trend is strong, but also renovation in public projects and upgrading of existing buildings all over, it's a very strong trend out there. So we benefit from several of those trends.

And for Lindab, is it the logistics side? Or is it -- I don't know what you call it the English other courts, I guess?

We supply this bet my money more on the great bread and butter business and the logistic terminals for commerce.

And we have one more question from Kenneth Toll from Carnegie.

Yes. The last question then is probably on the investment program that we see the success of now. How long do you think that you will keep this elevated investment level? Is it that the more you do, the more opportunities pop up so that you are prolonging the plan for higher investments? Or do you see that you have soon sort of done what you needed?

I think that in terms of value, we have peaked already. I think we peaked last year, but we will still remain on a high investment level for the coming around 3 years. That's my best estimate today. You are very correct that we -- as we are investing and upgrading, we continue to find new opportunities, and we are sometimes amazed by the enormous effect we have on both capacity and efficiency. So the more we do this, the better we become at doing it -- So I think that we will have at least for another 3 years, a high level, not perhaps as high as in 2020, but we will probably be -- instead of SEK 400 million, we will be at [ SEK 250 million, SEK 300 million, SEK 350 million ]. And this can vary quite a lot between quarters, whether we are activating a large investment during the quarter or not. So quarter-by-quarter, the numbers can swing quite a bit.

And as there are no further questions, I'll hand it back for any closing remarks.

So Madeleine and I would like to thank everybody for listening and for showing interest in Lindab. And we are looking forward to a couple of weeks holiday after this report. So we'll see you next time, and we wish you all a good summer.

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