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

Hello and welcome to the Lindab audiocast with teleconference Q3 2021. [Operator Instructions] Today, I am pleased to present CEO, Ola Ringdahl; and CFO, Jonas Arkestad. Please go ahead with your meeting.

Thank you very much. Hello, and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO for Lindab Group. Next to me, I have our CFO, Jonas Arkestad. We start on Slide #2. Lindab continued its strong development during the third quarter. Sales reached a new level driven by good demand for our products and also by high steel prices. Lindab has been a reliable partner to supply customers with demanded products despite a general imbalance of raw materials in the industry and throughout the world. From this quarter and onwards, we are reporting Lindab's numbers excluding business area Astron Building Systems that we are in the process of divesting. We will come back to that divestment later in the presentation. Sales in the remaining operations increased by 21% in the quarter, of which 19% was organic growth. The strong sales development enabled us to reach a record-high adjusted operating margin of 16.2% in the quarter compared to 11.9% previous year. The operating profit in quarter 3 amounted to SEK 403 million, an increase of 64% compared to last year. The strong profitability was mainly driven by high sales. In addition, we see positive efficiency gains from the ongoing investment program. So let's take a look on the business areas on the next slide. Both Ventilation Systems and Profile Systems showed strong growth and improved profitability. Ventilation Systems achieved 15% organic growth in quarter 3 and reported good growth in all geographic regions. Especially, Western Europe and Eastern Europe reported a clear sales recovery compared to the same quarter previous year, when the effects of the pandemic were noticeable in the construction industry. Ventilation Systems reached a record-high operating margin of 14.5% in quarter 3. The improved profitability was mainly explained by strong organic growth, strengthened gross margin and structural changes as a result of completed acquisitions and divestments. During the quarter, a new experience center and showroom was opened in Grevie in Sweden, where we will show our contribution to the indoor climate of the future. Profile Systems continued to grow sales and reported an impressive organic growth of 28%. In addition, the acquisition of KAMI contributed with 5% in the quarter. The Nordic region was our strongest region, where significant deliveries of industrial buildings in both Sweden and Norway contributed to the high sales numbers. Profile Systems also achieved a record-high operating margin of 20.8%. And this improved profitability was mainly explained by strong organic growth, strengthened gross margin and structural changes as a result of completed acquisitions. Now Jonas, I hand over to you, and we move to Slide #4.

Higher sales and increased raw material prices have led to a corresponding increase in working capital. Cash flow before change in working capital increased by SEK 141 million during the quarter and amounted to SEK 450 million. Free cash flow adjusted for M&A amounted to SEK 107 million during Q3 and continued to contribute to the strong balance sheet to finance future investments and acquisitions. Divestments of Astron building system is estimated to have a minor impact on cash flow, but we will come back to that when we talk about the divestments. The net debt-to-EBITDA ratio for the group equaled to 1.1 compared to 1.5 by end of September a year ago. That concludes the financials for the quarter. And Ola will, in the next section, talk about how we are building an even stronger Lindab.

Thank you, Jonas. We are now on Slide #6. One of the major events in the quarter was the agreement to divest business area Building Systems, which is still being sold under the brand Astron. The agreement was signed on the 23rd of September, and we are now waiting for antitrust clearance in Russia before we can finally close the deal. For Lindab, the divestment is an important milestone in our strategy. We believe that focus on the core business is vital for us to build an even stronger Lindab for the future. With the divestment, we are also exiting from or reducing exposure to some countries with uncertain political situations and fluctuating currencies. Lindab will now have 2/3 of its sales from business area Ventilation Systems, and 1/3 from Profile Systems. These business areas are well integrated with shared purchasing, production and distribution; and we include both businesses, business areas in what we consider our core business. With the divestments, there are some financial impacts to be aware of; and I ask you, Jonas, to take us through the next slide, #7.

Okay, thank you. And so now Astron businesses will be recognized as an asset held for sale and discontinued operation. In simplified terms, that means that Lindab will report sales and profitability for the continuing operations separately from the net profit of Astron. All balance sheet items related to Astron are disclosed separately in the consolidated statements of financial position for the group. Once the deal is finalized, the business area will be fully removed from the reported numbers going forward. And nonrecurring costs of SEK 432 million, mainly related to impairment of goodwill, have been recognized in the third quarter. The costs will not have any material impact on the cash flow. The sales consideration will largely be offset by Astron's cash and cash equivalent as well as advanced payment from customers and will that -- not have any major impact on Lindab's total cash flow. The final result and cash flow effects will be stated at closing. That was the financial effects in summary. And Ola will now talk about the updated financial targets on the next slide.

Thank you, Jonas. So on the same day as the divestment of Astron was announced, Lindab's Board of Directors also updated the financial targets for the group. Increased focus on the remaining business and the stability in our earnings capacity have improved the conditions for profitable growth. The new target says that annual growth should exceed 10% compared to the previous growth target of between 5% and 8%. We estimate that about 2/3 of the growth should come from acquisitions, and about 1/3 from organic growth. The operating margin target was also updated and now says that the operating margins should exceed 10%. The other financial targets and the dividend policy were left unchanged. Now we move to Slide #10 and an update about the investment program. So the large investment program that Lindab is currently implementing is laying a very good foundation for profitable growth. This program is the largest in Lindab's history, and we are planning to continue with investments on a higher-than-normal level until 2025. And after that, we expect a normalization. For the past 3 years, we have been purposefully investing in increased automation, production capacity and optimized logistics. We are expanding our production facilities for ventilation in strategic locations. We are installing highly automated production lines in our manufacturing facilities both in the countries and regions and also in Lindab's central ventilation factories in Sweden and the Czech Republic. We aim for short payback periods; and the first investments have already had positive effects for our business, our delivery performance and our profitability. And this can be especially noticed now when the demand is high and increased capacity has been needed. We still have a majority of the positive effects and efficiency gains ahead of us, and we expect this to be one important driver for improved profitability in the future. The second important area for profitable growth is acquisitions. So now we move to Slide #11. And in my opinion, we have an interesting acquisition pipeline. During the past months, we have seen 2 acquisitions. In the third quarter, we acquired KAMI, which is a Swedish roof specialist. KAMI has developed its own pressing technology that gives the sheet metal roofs a sand-coated surface. The roof has all the advantages of a sheet metal roof while having the appearance of a tile roof. KAMI's roof, which is marketed under the name PLEGEL, can withstand great stress and is developed for the Nordic climate. This complements our current range of sheet metal roofs very well. KAMI is established in the very northern parts of Sweden, in the town of Kalix. And about 70% of the sales are in Sweden, and 30% in Norway. Annual sales is about SEK 100 million and the operating margin is higher than Lindab's. KAMI has today 22 employees and we welcome them to the group. And just after the end of the third quarter, we acquired Tecnovent in Switzerland. Tecnovent is established in Lugano in the Italian-speaking parts of Switzerland. And they manufacture ventilation products such as roof hoods, grilles and dampers, which gives us access to local expertise and production capacity. Tecnovent is also a provider of rectangular ventilation ducts, which complements Lindab's local product range very well. Annual sales is SEK 20 million and the operating margin is a bit lower than Lindab's. Tecnovent has 15 employees, 1-5. Now let's move to Slide 13 and talk about our priorities. So priorities for the coming year. A lot is happening in the -- about the EU green deal. We are expecting the demand for ventilation products that improve the indoor climate and reduce energy consumption to develop very positively over the coming years, and we have today quite many products that are well suited for retrofit of current ventilation systems. And to have a good ventilation system, it's very important if Europe should be able to reach the high goals in the EU green deal. Now our latest product launch, which is called DCV ONE, has been very well received. DCV means demand-controlled ventilation, and we have launched it now in the -- only in the last few weeks. We are continuing to develop and launch new products in this area. And I think this is an important and growing area for Lindab in the future. Now if we continue through this list of priorities and challenges, we, of course, have to also mention the steel availability and the steel prices. We believe that the high steel prices and the shortage of raw materials will most likely continue into next year, and we are prioritizing high delivery performance. We see that as one of our important competitive advantages, so we are continuing to put high focus on securing enough raw materials and being able to deliver on time to our customers. I've already mentioned the investment program. That is continuing at a high pace and we see very good progress. And we are on time and on budget with the projects, and several projects ongoing at the same time. And the outcome in terms of efficiency improvements is on or above what we expect when we make our plans. Further on, acquisitions. We -- I have mentioned they are a key driver for our growth, and we have a good pipeline of attractive opportunities all over Europe. Furthermore, Lindab is putting a lot of effort into the sustainability work. And the next step for us on the sustainability agenda is to finalize the work with EU taxonomy. We have written now in our quarterly reports that we are estimating that 65% to 70% of our revenue is in line with taxonomy. The final text is still to be done and so on, so this should still be seen as preliminary information. And we are also in the process of adding more details to our sustainability targets, and we will come back to that during next year. Of course, we also continue to fine tune our decentralized organization, and that has helped us to adapt very quickly to the changing conditions in the last year. And I think this is one of the key success factors for Lindab, that we are reacting fast through decentralized organization where the local managing directors take a lot of responsibility. So to summarize, I will borrow some slogan or headline from Carl Ragnerstam at Nordea. I think he put it very well in one of his recent updates about Lindab: Lindab is becoming a leaner, greener and cleaner company for every [ quarter ]. Thanks for that, Carl. With that, we would like to thank you for listening. And we are opening up for questions.

[Operator Instructions] Our first question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

That's an interesting quote there, Ola. So to begin with, looking at gross margins, which were clearly impressive here in the quarter. I guess, going forward, if raw materials come down, do you see a risk of you sitting at high inventory levels -- or rather inventories at high price levels and clients demanding you to adjust downwards prices quickly and the potential for you to be squeezed on raw materials? That's my first question. And second question is on the investment program. You say that we have not seen the full benefits of that yet and indicating that the majority is -- of that is to come, but what can we say, so far? Have we seen 30% or maybe even less that? Any comments on that will be helpful.

Okay, thank you very much. Well, as you correctly point out, we have high stock of raw material. And we have to have that because we are consuming a lot of raw materials and we need to have a good safety stock. So yes, when -- if prices suddenly drop very quickly, that can be a short-term challenge for Lindab to -- because we will then sit with raw material in our inventory which has been bought at a higher price than the going market price, so to say. Luckily, we are not just a raw material trader, but we are doing a lot of work with that raw material. But short term, yes, there can be a hit. I'm not overly concerned about this. We -- as I have said, we prioritize delivery performance and we want to be the safe choice for any customer, yes. And we have long-lasting customer relationships, so I think that, together with our customers, we will be able to solve also that situation just as we are able to solve with a situation when the material prices are going up. So unless you are really only focusing on 1 quarter, then I don't see this as a major issue for us.

Yes, fair enough.

And where the raw material prices are going, I mean, that is extremely difficult to say. It depends on so many factors. The best thing for Lindab is when raw material prices are not changing at all; or they are changing gradually and slowly, either up or down. Then you asked about the investment program and how much of the effects we have seen, so far: And we have definitely seen less than half. It is difficult to quantify because lead time on these investments can be everything from 6 months up to 1.5 years. And we started with the first major decisions back in quarter 4 of 2018, so my best guess is probably around 1/3 maybe of the effects, we have seen, but it is a very rough estimate from that side.

And from now onwards -- I mean historically it's been a lot about automation, and that continues to be the theme, [ we should say ].

Yes. There it -- the majority is about automation and efficiency gains. Then there -- a lot is happening in the transports and logistics sector, and these have to do both with changing patterns in Europe in terms of where does it make sense to produce things for what markets. Salary and wages have gone up in the former low-cost countries. We are moving production back to some countries where we -- now when we are able to save money on transports and when wage levels have equalized more throughout Europe. So we are constantly redesigning of where should we produce what, how far should we transport the goods; and this has a clear sustainability aspect as well. We want to minimize transports and reduce carbon footprint. And this, of course, takes quite a lot of activity and optimization and also expansion of certain logistic centers and hubs.

Okay. And if I may, can I ask a few more? In that case, I'll -- on the organic growth 19%. Like is it possible to break that out how much is volume and pricing just to understand the sort of underlying organic growth? As in how far for...

I mean we -- to understand that, I should underline what I have said in previous calls. Lindab does not have -- in this raw material situation which we have where there has been a severe shortage of raw material, Lindab's priority #1 has been to deliver to our existing customers and be extremely sure that we can deliver to them. They put our faith -- their faith in us. So we have not been overly aggressive in trying to grow volume. Volume has grown, but that has not been our main priority. Our second priority has been to protect our gross margins. And gradually, steel prices have gone up during the year, and of course, the effects are more and more noticeable. So while in the first half of the year I would say that we grew more through volume than through pricing, I think that the scale is tipping over so that now it is more, more price effect than volume effect. I will not give -- try to give you exact relationship, but today in the quarter 3 numbers, more than half of the growth is coming from price rather than volume.

And that will sort of strengthen, I guess, as we go forward as well, that trend.

Depending on the material availability because, if it is easier to get raw material, we can push the -- push a bit on the accelerator [Technical Difficulty]

Okay, we have resumed the call. Douglas, you may continue with your question.

Yes. [indiscernible].

Okay. And so did you drop out, Douglas, there? Or did you hear my answer?

I'm not sure if I dropped out or if everyone dropped out, but I think you talked about making sure that you can deliver.

Right. We have prioritized that.

Yes -- no. That's super useful. And just a final one for me then, on now that we talk a lot about M&A and you've already done 3 this year. And would you like to sort of highlight some geographies or some products that you feel is extra relevant for your M&A pipeline?

We are focusing -- well, I mean, we have reduced our geographic footprint. We are now at -- if we exclude Astron Building Systems, we are roughly at about 20 countries today where we are focusing. And we are looking at acquisitions in most of those countries, with a special focus on our largest markets. That is Scandinavia, U.K., France, Germany.

Okay, fair. And...

And technologies and products, we mainly look at ventilation companies, but when there is an attractive opportunity within Profile Systems, we look at that too.

Our next question comes from the line of Sofia Sorling from Carnegie.

And congratulations on your great quarter. And regarding the price increases, can we expect this to continue in Q4 compared to Q3? That's my first question.

Yes, Sofia, we are continuing to adjust our pricing. You can see on the spot market that certain steel prices have stabilized at a high level, but of course, the -- if you have long-term contracts like we have, the cost is continuing to go up for quite a while after the spot prices have reached a plateau. So we need to continue to update our prices. And we have [sent our Q] -- price increases during September and also in October in some markets for some products. So it's an ongoing effort and we do not expect that trend to turn during quarter 4, so I would agree with your -- the statement in your question.

Okay, great. And regarding this divestment of Astron, of course, that is not in your hand, with antitrust approval, but how is that going? And do you believe we can assume that this [ division ] will be fully divested at our Q4 financials?

We have filed the application to the Russian authorities. It is difficult to say how long it will take. When we announced the divestment, we estimated between 2 and 4 months from that date, but I do not have more information today than I had back then. We can only confirm that the application has gone in. There is no guarantee that it will be completed in quarter 4. It can also be later, but that is up to the Russian authorities.

I see, okay. And sorry if I'm repeating a question here, but this is something -- one I didn't hear in the previous answer, of M&A. But can you say anything -- like given that societies are opened -- continuing to open in Europe and -- can you say that you have been able to travel more, meeting more new companies and making more due diligence compared to previous quarter in Q3 and in Q2?

There are better possibilities now to meet with possible acquisition targets in the different European countries. It was quite difficult for a while to do so. So there is a better chance to do cross-border transactions now than half a year ago or 1 year ago. However, Lindab -- I mean we have good, experienced management in the countries where we operate, so we can often take a -- local contacts and come quite far with that, but when I have to be involved, or if somebody else from the central functions, then of course it helps when we can travel.

Thank you. We currently have no further questions. I will hand back to the speakers for any further remarks.

That summarizes our quarter 3. Thank you for listening in and thank you for the questions, and see you later. Thank you.