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

Dear ladies and gentlemen, hello, and welcome to the Lindab Audiocast with Teleconference Q4 2021. [Operator Instructions] Today, I'm pleased to present President and CEO, Ola Ringdahl; and CFO, Jonas Arkestad. Please go ahead with your meeting.

Hello, and welcome to this call. My name is Ola Ringdahl, I'm the President and CEO of Lindab Group. Next to me, I have our CFO, Jonas Arkestad. We start on Slide 2. Lindab continued its strong development during the fourth quarter and sales remained on a high level. Lindab sales for the full year reached a new record level, driven by good demand for our products and high steel prices. Lindab has been a reliable partner to our customers, and our robust supply chain and high availability is very appreciated. The numbers in this presentation refer to Lindab's continued business without Astron Building Systems that was divested in December 2021. Net sales increased in fourth quarter by 23%. And for the year, it reached a record level of SEK 9.6 billion. The strong sales development enabled us to reach a record high adjusted operating margin of 12.1% for the fourth quarter and 13.1% for the full year. The strong profit growth was mainly driven by higher sales with good leverage. We see many positive effects from the ongoing investment program, and the acquisitions we have made have also contributed to the profit development. So let's take a look on the 2 business areas on the next slide. Both Ventilation Systems and Profile Systems showed strong growth and profitability, and I'm very satisfied with the performance of both business areas in the fourth quarter and also for the full year 2021. Ventilation Systems achieved 14% organic growth in the fourth quarter and reported strong sales in all geographic regions. The strong sales were positively affected by the implemented price increases during the year to compensate for historically high raw material prices. Ventilation Systems reached a record high operating profit of SEK 210 million in the quarter, which is a profit growth of 38%. The increased profit was mainly explained by a strong organic growth, strengthened gross margin and acquisitions. Sales continued to develop well for Profile Systems during the quarter, and the business area reported an organic growth of 34%. In addition, acquisitions contributed 5% in the quarter. Nordic was the 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 profit of SEK 118 million, a profit growth of 41%. Now we have noticed that some analysts expected an even stronger operating margin from Profile Systems. So let me also comment on that. A significant part of the sales growth in the quarter came from industrial building projects in Sweden and Norway. And this is typically a segment with lower gross margin. Compared to the fourth quarter of previous year, the mix effect explains the margin development. If we look at the full year, Profile Systems have delivered sales growth of 27% and earnings growth of 59% and the operating margin has gone from 12.4% to 15.5%. And I must say that I'm very satisfied with that performance. I'm now handing over to Jonas, who will take you through some more financials on the next slide.

Thank you, Ola. Cash flow before change in working capital increased by SEK 22 million during the quarter, and amounted to SEK 325 million. The improvement was mainly explained by an increase in the underlying operating profit, which amounted to SEK 311 million. The quarter's change in working capital was mostly related to increased capital tied up in stock primarily due to higher raw material prices, but also to assure high delivery performance. Free cash flow adjusted for M&A amounted to SEK 110 million. The net debt-to-EBITDA ratio for the group equaled to 1.0 compared to 1.4 by end of December a year ago. With that, we move to the next slide and the divestment of Astron Building Systems. During the autumn, we made the strategic decision to divest business area Building Systems, which is steel buildings sold under the brand Astron. The agreement to divest the business area was signed in September, conditioned by antitrust approval in Russia. The Russian authority gave their clearance in Q4, and the divestment was finalized before year-end. Divestment of Building Systems has resulted in a negative impact on net profit for the group by SEK 455 million. Of this value was [ SEK 432 million ] recognized during the third quarter and the remaining [ SEK 32 million ] in Q4. Most part of the recognized one-time costs have no cash flow impact and SEK 380 million derived from impairment of goodwill. At time of transaction, the divestments of Building Systems resulted in a positive cash flow effect of SEK 159 million. For Lindab, the divestments of Building Systems is an important milestone. Lindab will now have 2/3 of its sales from Ventilation Systems and 1/3 from Profile Systems. The businesses areas -- the business areas are well integrated with shared purchasing, shared production and shared distribution, and we include both business areas in what we consider our core business. That concludes the financials for the quarter, and I give the word back to Ola, who will talk about the financial targets on the next slide.

Thank you, Jonas. We are now on Slide 6, the financial targets. Back in September 2021, Lindab's financial targets were raised by our Board of Directors. Increased focus on the core business, better efficiency and higher margins have improved the conditions for profitable growth. The new growth rate target is to exceed 10% annually compared to the previous level of between 5% and 8% per year. About 1/3 of the growth is expected to come from organic growth and 2/3 from acquisitions. The operating margin target was also raised. The adjusted operating margin should now exceed 10% every year. The previous target was to reach 10% operating margin over a business cycle. And as you can see in the graph on the right-hand side, Lindab has doubled the operating margin in the past 3 years and reached a new level. The other financial targets were left unchanged. Now we go to the next slide and comment on the dividend proposal. So in light of the strong profit development in the continuing business, and also considering Lindab's financial strength, the Board of Directors is proposing that the dividend is increased to SEK 4 per share compared to SEK 3.4 previous year. Now with that, let's talk about how we continue to build a stronger Lindab on Slide 9. Lindab has now completed a 3-year strategic transformation program according to the plan. Lindab is in a good shape, and we have a solid platform to grow from. We are a leading ventilation company in Europe with a clear focus on our core business. We are present in the countries where we have a strong market position. We have a leading product offering and an efficient manufacturing and distribution network. And with our sustainability profile, we benefit from the market with a lot more focus on reduced energy consumption and healthy indoor environments. Lindab can now accelerate the growth activities from this platform. Acquisitions strengthen our product offering and our geographical presence. And our investment program plays an important role in the efforts to grow organically with healthy profitability. Let's have a closer look on the next slide. Investments. So in 2021, we invested a total of SEK 395 million in our European operations. We will continue to invest on a relatively high level until 2025, but will gradually reduce the amount every year, and we believe that the peak was reached in 2020. We estimate that we have come about halfway through the program when it comes to decision-making and about 1/3 of the way when it comes to implementation and the results that can be expected from the program. The payback period on our investments is short and the investments are already contributing substantially to our improvements in both efficiency and profitability. Another important area for profitable growth is acquisitions. So let's move to Slide 11. Lindab's strategy is to acquire well-managed successful companies that complement our offering in selected regions and product areas. The acquired companies continue to operate independently under their own brands, while, at the same time, benefiting from Lindab's sourcing agreements, expertise and sales network at their chosen pace. In October last year, we acquired Tecnovent in Switzerland. Tecnovent was previously a distributor of Lindab's ventilation products in Switzerland, and they also have manufacturing capabilities. In November, Klimatek in Denmark was acquired. Klimatek manufacturers, both standardized and customized components for ventilation systems, such as ventilation grills, air valves, air dampers and covers. In November, we also acquired Profilplåt in Sweden, they mainly manufacture and sell sheet metal roofs and walls. With Profilplåt, Lindab gets a well-established pro-shop and distribution point in a geographically important location. If we look back at the last 2 years, we see that, in 2020, Lindab acquired 4 companies, in 2021, that's up to 5 companies. And all these companies are well managed with good profitability and local management continues to run them. They have all developed in a very positive way after the acquisitions were completed. We have started 2022 with 2 acquisitions so far, both in Sweden. In January, we acquired Alig Ventilation. And also in January, we acquired Nord Trade. Now let's move to Slide 12 and talk about the promising product collaboration with Ecophon. Ecophon is a leading supplier of acoustic ceiling panels. And Lindab is a leading supplier of ventilation and also heating and cooling panels that can be mounted in the ceiling. Ecophon and Lindab have now established a partnership where we combine the need for silent indoor environments with good air quality and the right temperature. The solution is called Solo Matrix Celsius, and it combines acoustic ceiling panels from Ecophon with Lindab's indoor climate solutions. The ceiling panels are designed to hide the ventilation equipment so that you get a completely integrated climate solution into your ceiling. The product is now launched in Germany, with very positive feedback, and we are looking forward to where this partnership will take us going forward. We go to the next slide and look at some other product launches. It is estimated that the buildings in Europe represent 40% of all energy consumption, and this is leading to stricter legislation and norms accelerated by the current energy crisis with high energy prices. New buildings in Europe must be close to zero energy buildings and existing buildings are getting increased requirements on energy efficiency. In the fourth quarter, Lindab launched 2 new products focusing on these needs. What we call DCV ONE is suitable for new construction, and what we call Ultra BT is meant for renovation of buildings. Both solutions are based on the principles of demand control ventilation, which means that you can control the air flow and the indoor climate based on how each room is utilized. That can save up to 70% of the energy consumption compared to traditional systems. We believe that the market demand for energy saving solutions will increase significantly and Lindab will continue to expand the product offering in this area. Let's move to Slide 14 and talk about another aspect of sustainability. To be an early adopter of fossil-free steel is key in Lindab's sustainability plan. We are collaborating with both SSAB and H2 Green Steel to ensure that we will be one of the first in Europe to provide products made of fossil-free steel to our customers. The first deliveries on a commercial scale will most likely take place in 2026. So that is still quite far out in time, but we are preparing ourselves. We will offer selected products in the green product line and gradually expand the offering over time. Now let's conclude this presentation by looking at the market outlook and our priorities for 2022 on the next slide. Our market outlook remains positive. The year has started at a good pace, and the short-term demand is expected to be strong as restrictions start to be rolled back and people return to work after the pandemic. Medium and long term, we expect a strong demand for Lindab's products as the interest in energy savings and healthy indoor climate is growing. This will also be supported by stricter legislation and the EU Green Deal. For Lindab, in 2022, we are working with the following priorities: we continue to secure high delivery performance. High availability is a key competitive factor for us, and we have managed to deliver on our promises during the entire COVID pandemic and also when there has been a shortage of raw material. With the EU Green Deal, we expect the demand to increase for ventilation price that can improve the indoor climate and reduce energy consumption. We will continue to develop and launch new products in this area. As I mentioned, the investment program is key for us and it's proceeding according to plan, and we keep a high pace. And acquisitions, that is a key growth driver for us, and we have a very good pipeline of opportunities all over Europe. Lindab is putting a lot of effort into the sustainability work. And next, on the sustainability agenda for us is to communicate our updated sustainability targets. We are also doing a pre-study on the science-based targets that will form the base for our continued work to lower our total emissions. Fossil-free steel is one important activity in that plan. So with that, we would like to thank you for listening, and we are opening up for questions.

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

It's Carl here from Nordea. A few questions from my side. Firstly, on Profile Systems, of course, I definitely acknowledge that it's a very good margin historical context, but still you mentioned down a bit sequentially here. You mentioned mix effect as 1 thing. Could you firstly give some flavor on sort of the organic growth you had for Lindabhallen as well as sort of the roofing products in the quarter? And also, if you -- is it really the case that you had no negative impact from raw material pricing or other price pressure in the quarter?

There's lot of questions at once, Carl. Let's talk about material prices first. We have been very proactive in our pricing approach. And we have forwarded the price increases that we have received from the steel suppliers to the next part of the chain. Now of course, when it comes to project pricing, it can always be debated if you manage to take exactly the same margin every time. But we have good price discipline throughout the Lindab Group, I would say. When it comes to the additional business and the strong growth we've seen for Lindabhallen, this -- it can typically be logistic warehouses that spring up everywhere around us. That is more of a project pricing methodology, not -- they are not both from a price list. And of course, there is competition. And we provide the customers with a total package, some of the goods produced by Lindab and other materials can also be sourced from a third party. And those projects are typically done with a -- in total, a lower gross margin than the bread-and-butter business of Profile Systems. That is not something new. But as we often write in our reports, there is seasonality and the percentage of these projects, as part of our revenue, can differ from 1 quarter to the next. So the majority of what you see and what you could have maybe expected to be a larger drop-through from higher sales down to the bottom line is explained by the mix effect. The share of industrial buildings versus the bread-and-butter business is higher in the fourth quarter than it is in a typical quarter. And perhaps a second factor that explains why this mix is changing quite a lot in the fourth quarter is that the winter came quite early in Scandinavia. So the bread-and-butter business was slowing down a little bit earlier than it did a year before when the winter was a bit milder in the beginning.

Perfect. [indiscernible]

We see good forecastability and stability in the earnings, and there were no negative surprises to us.

Okay. Perfect. And should we, with less visibility at least, expect a more normalized mix effect when entering 2022?

Well, part of the journey that Lindab has been on now to really strengthen profitability, that we have completed. So we have to now find the right balance between profitability and growth. When we are focused very much on the profitability side in the past 3 years, we will gradually shift a little bit more focus over to growth. That doesn't mean that we want to see margins declining, absolutely not. But it means that we are ready to push for a little bit more volume and aim for profit growth. I'm quite pleased if we can find good top line growth with maintained margins. Hopefully, the margins will even be strengthened. But as we can see, during the full year 2021, we have increased revenue in Profile Systems by 27% and operating profit by 59%. I kind of like that.

Yes, for sure. I can only agree. So in terms of organic growth here, you're, as you said, pushing for more growth. You also have sort of the drivers, market drivers, the renovation wave, the focus on indoor air quality, et cetera. So what would you say could be the underlying market growth for you in the coming few years here, given -- yes, what we discussed recently here?

We should say that it is very positive with the EU Green Deal and then the national programs and subsidies and so on. We also know that they tend to deliver on those programs relatively slowly. So it will not revolutionize everything overnight. But medium term and long term, this is very favorable. I would say the increasing energy prices have probably done more in the short term to stimulate improvements in your heating and ventilation systems in buildings. I am quite optimistic about the long-term growth. And in Europe, which is not an extremely growing environment, but I still think that there will be a healthy possibility to grow organically. Our best estimate, not to be too optimistic or too aggressive, I would say, a growth between 3% and 5% organically would be a good target for us to have. But this is, of course, depending on the overall building activity in Europe.

And also in terms of M&A, you have clearly ramped up the pace, but maybe not just enough to reach your financial targets, which is 2/3 of 10%. So in order to meet this, do you need to make bigger acquisitions? Or do you plan to make more in numbers or maybe a combination or...?

I think it's a combination. And it's a good observation. The acquisitions we've made so far, they have been smaller in size, and I would very much like to continue to do relatively many small acquisitions, but we would also like to add to that mix 1 or 2, say, medium-sized acquisitions every year. And I think that, in total, will satisfy the financial goals. So we probably need both, but I'm not so keen on stopping to make the smaller ones because they fit in very well locally and nationally, and they are easy to add on to the existing operation without taking up too much time from our central organization. We have a very decentralized approach in this.

And in your pipeline currently, you see that you could materialize this?

Yes.

Okay. Perfect. And the final one from my side here is that you obviously said that you have 1/3 of the investment program implemented and the majority is thereby ahead of us. What would you say is that the potential gross margin uplift from these investments here until 2025?

Yes. That depends on many factors, Carl. We will, for sure, become more and more competitive every month, every year going forward, as we have been in the past 2 years as well. And I wish I could say that all of these benefits will be translated into basis points on the gross margin. But of course, there will also be competitors who are making improvements, and there will be a willingness from us to probably move forward a bit and take some market share. So yes, there will be a positive effect on gross margin. But let's not assume that all the benefits will arrive directly down on the bottom line. We are making Lindab a much better and more competitive company. That is for sure.

The next question is from Sofia Sörling, Carnegie.

So I will continue with a question on this Profile Systems. Could you give more details on the share of industrial sales if total sales in Profile Systems during this quarter compared to the same quarter last year?

We -- it is an interesting question, Sofia, but we are not disclosing that information.

All right. But could you give a split between the price increase and the volume increase in organic sales in the -- in each of the additions?

For both Profile Systems and Ventilation Systems, more than half of the revenue growth comes from pricing if you relate it to quarter 4 of 2020.

Yes. Okay. And have you done any necessary price increases in the beginning of 2022 as well or expect to do it in the short term?

We are continuously looking at our pricing. And yes, we have implemented price increases also now in January for certain markets, certain products and certain customers.

All right. And during 2022, do you see any risk with significantly higher OpEx compared to 2021, in addition to the material costs, for example, salaries?

I think it is clear that you can -- in certain countries in Europe, you can observe a salary and wage inflation that is higher than usual. We have seen this trend already before the pandemic in some Eastern European countries. I think it is spreading a little bit now to more countries. We are used to handling that situation and that is partly why we see a benefit in implementing the automation part of our investment program at a rapid pace. And we are also investing quite heavily in IT to also reduce the administrative and sales costs. I think that many industrial companies in Europe will see salary and wage inflation, and we'll need to address that partly by efficiency improvements, partly also by adjusting the pricing.

All right. And so post the pandemic there has been quite a lot of focus on cleaner air indoors, et cetera. Is that something that you have seen spurring demand during the beginning of 2022 compared to '21?

There is a great interest in the types of products where you can control the air flow and filter the air. And I notice when I enter an airplane today, they're saying -- before they even greet you and say hi, they say, "We exchange all the air in the cabin in 2 minutes, we filter everything." So I think it is more, say, on the top of people's mind today than it used to be. People are buying air filtration units, even for their private houses. It is not something that has revolutionized our sales in January, per se, but it is good for Lindab, that this is more top of mind than it used to be.

All right. And the taxonomy share, is that still between 65% to 70%? Or has that changed now at the end of the full year '21?

No, it has not changed. So the answer to your question is yes. It is still between 65% and 70%. We are calculating the exact outcomes, and when we publish the annual report, it will contain the final calculations.

All right. And my final question is, so given now the divestment of Building Systems, what will be the -- would you still be exposed to revenue to Russia? Or will that be -- what will be the revenue share in Russia given the divestment of Building Systems?

I understand the question. We still have 1 small operation in Russia. It is called Lindab Russia. They are selling ventilation equipment. It is a small unit, it is less than 1% of our group sales, far less than 1% actually. So it is a well-run profitable unit, with good management, but it is a very small part of the Lindab Group today that has exposure to Russia or the Russian ruble.

The next question is from Douglas Lindahl, DNB Markets.

I have 1. I hate to come back on pricing again, but steel prices are down quite significantly since the peak of last year. Are clients starting to think about price adjustments on the downside instead or are they continuously accepting your price hikes? When would you sort of see a point where that discussion might change from price hikes to price adjustments on the downside instead?

Thank you, Douglas, for that question. Well, there are 2 things here. The spot prices on the type of steel that we are using, it is true that, that peaked somewhere in August and has since then gone down a bit. I think until the end of the year, it went down by 15% to 20%. However, we -- as a very large player in the industry, we are not buying so much from the spot market. We are buying on longer contracts. Otherwise it would be impossible to get enough material. So for us, the development of the steel prices has not been swinging back and forth too much. We see maybe a slightly lower prices today than we did 3 to 6 months ago. But at the same time, we have now, in the past 3 weeks, seen an upturn in steel prices again by between 5% and 7%. So this depends on many factors out there. We see a lot of the underlying raw materials to produce steel that they are increasing sharply again. So we are not raw material traders or speculators. What we do is we make sure that we have enough steel of the right quality and the right quantity, and we guarantee that we can supply and deliver at all times. I think our customers are prepared to pay for that, but of course, not an exaggerated amount. Right now, I think we experience price stability. If the prices come down on steel by many more percent then, yes, prices will start to drop a bit on our products, but we haven't seen that yet.

Okay. No, I understand that. Obviously, you're not buying on spot, but there is obviously a correlation between the spot price where it heads and where your prices eventually end up as well. But -- so you're not -- basically you're saying you're not hearing those discussions for clients yet? They are understanding that there's...

There are always discussions on pricing with customers, but as long as we are truly delivering excellent quality, excellent service, everything on time. The discussions are not at the top of the agenda. But we try to be fair in our pricing.

There are no further questions at this time. I hand back to you.

Then we want to thank everybody who called in and listened. From myself and Jonas, we wish you a nice weekend. Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.