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

Good morning, and welcome to Lindab conference call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ola Ringdahl. Please go ahead.

Thank you very much. Hello, and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO of Lindab Group. Next to me, I have our CFO, Jonas Arkestad, who will help me to answer questions. We start on Slide #2, Q2 highlights. During the second quarter, net sales increased by 27%, and this is the first time in Lindab's history that sales exceeded SEK 3 billion for an individual quarter. High sales have been positively supported by acquisitions and strong organic growth. The acquired growth during the quarter was mainly related to the acquisition of the German ventilation distributor Felderer, which was completed at the end of April. Our excellent supply chain and high availability safeguard a high delivery performance, which is a competitive advantage, highly appreciated by our customers. Our strong sales development enabled us to reach a record high adjusted operating profit for the second quarter. Operating profit increased to SEK 402 million and the operating margin remained strong at 12.7%. Net profit increased to a record high of SEK 300 million for the second quarter. Let's take a closer look on the sales development on the next slide. During the quarter, Lindab reported strong growth despite high comparison numbers and despite the turbulent geopolitical situation. Sales have been positively affected by implemented price increases and also by completed acquisitions. Both Ventilation Systems and Profile Systems had strong sales growth, and it is the first time in Lindab's history that Ventilation Systems sales exceeded SEK 2 billion and the net Profile Systems sales exceeded SEK 1 billion for an individual quarter. Ventilation Systems reported organic growth of 12% with strong sales in all geographic regions. Profile Systems reported organic growth of 18%, primarily due to strong sales in the Nordic region. Let's take a look at the EBIT development on the next slide. Lindab has had a strong margin development during the past years despite challenges such as COVID-19 and global material shortages. Lindab has despite these challenges, managed to increase the operating margin from 6.8% in 2018 to 13.3% rolling 12 months at the end of Q2 this year. Ventilation Systems reported an operating profit of SEK 240 million and adjusted operating margin of 11.7%. Profile Systems reported an operating profit of SEK 178 million and adjusted operating margin of 16%. I'm very pleased with these results. The improved operating profit in both business areas is explained by significant sales growth and positive contribution from structural changes. The strong operating margin was slightly lower than previous year due to slightly lower gross margins. However, we should keep in mind that the margins in the second and third quarters of 2021, where unusually strong for Lindab. Now let's move to the next slide. Cash flow from operating activities has been impacted negatively by changes in working capital, primarily an effect from higher raw material prices and strong sales growth. For Lindab, it is a priority to have the highest delivery performance in the industry, and we keep a good supply of raw materials. Net debt has increased as a result of completed acquisitions and increased capital tied up in stock due to higher raw material prices. During the second quarter, Lindab signed a new credit facility of SEK 1 billion, and we have also extended the already existing credit facilities until 2025. Our financial position remains strong and supports continued growth, both organically and through acquisitions. With that, I would like to move to the next part of the presentation, building a stronger Lindab. And we start on Slide #7 and talk about the latest acquisitions. And we've been quite active in this area recently, as you've probably seen. 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, they benefit from Lindab's sourcing agreements, expertise and sales network at their chosen pace. In March, we announced our largest acquisition in many years. Felderer is the company, and it is one of the largest ventilation distributors in Germany. They complement our current business in Germany very well. Felderer has an annual sales of SEK 700 million, and sales and distribution take place at 7 locations in Southern and Western Germany. With the acquisition, Lindab's sales in Germany will more than double, and Lindab gains a strong position throughout the country. The acquisition was finalized at the end of April. In June, we announced the acquisition of Muncholm. With Muncholm, Lindab gains established relationships with architects, builders and tinsmiths in Denmark. The acquisition was closed in July and will add approximately SEK 250 million in revenue on an annual basis. Muncholm will belong to our business area of Profile Systems. In June, we also announced the acquisition of R-Vent, the leading company in the Netherlands within ventilation. They have annual sales of SEK 500 million, and they have an extensive in-house production of circular and rectangular ventilation types. Sales and distribution take place at 4 locations in the country. And with this acquisition, Lindab establishes its own operations in the Netherlands and will thus be present in 21 countries. We have known R-Vent for many years since they have been one of our major distributors in Europe, and we have made business with them for over 40 years. R-Vent sales is not part of the second quarter, but will start to be included from July and onwards. And finally, after the end of the quarter, in the month of July, we acquired Ekovent in Sweden, and they manufacture rectangular ventilation ducts in the Stockholm area. Ekovent will be part of Crenna that we acquired in 2020. And this is quite interesting, I think, because this is the first time that we see that one of the companies that we have acquired are in their term acquiring a company. So it adds interesting aspects of this acquisition journey. Both Ekovent and Crenna produce rectangular ventilation ducts and we see good synergies between these 2 companies. Ekovent has sales of approximately SEK 55 million on an annual basis. We move to the next slide, and try to summarize what we have done in the past 2 years when it comes to acquisitions and divestments. In the last 2 years, Lindab has acquired 15 companies with an annualized turnover of approximately SEK 2.1 billion. And during this same period, we have divested non-core businesses representing SEK 1.2 billion in sales. If we look ahead, we have an interesting long list of acquisition targets, and we plan to execute more acquisitions during the remainder of this year. Now we go to the next slide and talk about the investment program. Lindab's investment program has been at the top of our agenda since 2019, and it's rewarding to see how the benefits become more and more visible within our organization. In the second quarter, we invested SEK 99 million in our European operations, and we will continue to invest on a higher level than usual until 2025, but we will gradually reduce the amount every year now. We believe that the peak was reached in 2020 in terms of monetary value. The payback periods are short. The investments are already contributing substantially to our improvements in efficiency and profitability. Now to try to give a rough idea of the progress, I estimate that we have come about 2/3 of the way when it comes to investment decisions and about half way when it comes to actual implementation. Another important area for our future growth is sustainability. So let's move to Slide #10. Sustainability has been a topic on the rise during the last years, and we see that it is starting to affect Lindab's business in a positive way. The larger and more demanding customers are now clearly stating that they choose suppliers with a strong sustainability profile. And this benefits Lindab in general because we have a good sustainability profile, but also because we have ventilation products that are not only sustainable but also score very high on energy efficiency. We believe that the high energy prices will help to speed up the renovation wave in Europe, and this will benefit Lindab. Another positive milestone was reached when one of our partners, H2 Green Steel came one step closer to building its first production unit for decarbonized steel in the north of Sweden. As a strategic volume partner for both SSAB and H2 Green Steel in their fossil-free steel plant, we are supporting this important development. We believe that there will be a market demand for a green product line based on low carbon steel or fossil-free steel, one it is available in larger volumes, and Lindab plans to be an early implementer of this important step. We move to Slide #11. I'll try to summarize regarding outlook and priorities. This year has started out well for Lindab, and we haven't seen any signs of slower business. The pace of operations has been high throughout the period, and we expect continued stable demand for the rest of the year. There are reasons to be optimistic about the future demand for Lindab's products as the interest in energy savings and healthy indoor climate is growing. And this will be supported by stricter legislation and the EU Green deal. Lindab is working with the following priorities in 2022. We continue to secure high delivery performance and make sure to maintain a healthy stock of raw materials. With the EU Green deal, we expect the demand to increase for ventilation products that improve the indoor climate and reduce the energy consumption, and we continue to develop and launch new products in this area. Our investment program is proceeding according to plan, and we continue to implement it at a high pace. We believe that acquisitions will continue to be a key growth driver for Lindab, and we have a good pipeline of opportunities all over Europe. And finally, Lindab is putting a lot of effort into the sustainability work, and we are soon finalizing a pre-study on science-based targets that will form the base for our continued work to lower our direct and indirect emissions. Decarbonized or fossil-free steel is one important activity in that plan. This concludes my presentation, and we'll now open up for questions.

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

It's Carl here from Nordea. A few questions. Firstly, you seem quite fairly cautiously optimistic for second half. You mentioned stable demand. Could you perhaps be a bit more granular what you defined as stable demand? Is it positive or negative volumes? And also, if you could give some flavor on sort of the order intake quotation development by market during the quarter, or preferably in July as well?

Thank you, Carl. When I say stable demand, I mean that I think that the current pace of operations and volumes that we see now in the first half of the year will continue during the second half of the year. So no dramatic developments regarding volumes. We see a stable demand in terms of volume, and we believe that that will continue during the second half of the year. We don't see any signs of reduced interest or activity from our customers. On the contrary, the installers in our key markets have a busy schedule.

Okay. Very good. And also, I mean, with sort of a weakening construction market, at least what we can read in the newspapers, have you sort of started to adapt your organization or be prepared for a potential slowdown? Or is it sort of too early as you continue to see a good demand?

I think all CEOs of industrial companies are used to handling these types of scenarios. And we are doing that as well. Of course, we are preparing for tougher times. It might be tougher times next year, who knows. We, of course, also read the newspapers about the risk that there will be fewer apartment buildings built, et cetera. However, Lindab has a relatively balanced exposure to new construction and upgrading and renovation. And we normally see that the renovation part of our business grows, if the new construction is dropping. I think that we risk seeing slightly lower construction activity for new buildings during 2023, at least that is the estimates that we read about. Lindab will execute plans to prepare for that if we see that coming. And we are, of course, not adding any unnecessary costs at the moment, we keep -- we are on the alert. But as long as the volumes are on the current levels, there is no reason to make any deep cuts.

Okay. Very good. And also on the steel price, at least the spot is coming down a bit. I know that you're buying on contract prices. But could you perhaps give a guidance on how much lower your contract that steel prices are in or for Q3 versus Q2 and also whether you plan to sort of reduce your prices in the near term?

There has really been a dramatic development in steel prices. If we look at hot-dip galvanized prices on the spot market, I looked at the graph the other day, and we see in 2 years, the price has increased by 100%. On the other hand, in the last 12 months, we have seen the prices come down by about 20%, and there's been a lot of volatility in the past 12 months. We see prices coming down after a very high spike after Russia's invasion of Ukraine, but the steel prices are still on a much higher level than they used to be. We are not buying so much on the spot market. We are mainly buying contracted volumes, 3 to 6 months validity. So first, the price movements are slower. We prioritize delivery reliability. We believe that the customers appreciate that we can deliver at all times, and we have seen that we have gained quite many new customers during the period where there was material shortages and our competitors could not supply. So pricing is not the first priority to adjust. First, we make sure we have material. We are a good supplier. If we can adjust prices down because of steel price reductions, we will do so. But we should remember that there are also many other cost categories that are still very, very high. Energy prices, transport prices, electricity, packaging material, et cetera, are on a historically very high level. So we will take a total look at it and see if we can adjust our prices, but we prioritize delivery reliability.

Okay. Very good. And the final one from my side. I guess a portion of the margin drop in ventilation is driven by the consolidation Felderer. I mean you're the owner for 3 months, I guess. So it's a very short period of time. But have you implemented any operational changes in order to not to restore, but increase profitability in that business?

The management of Felderer know what our goals are. They know where we would like to be, but this is not a quick fix to lift profitability by several percentage points. So I'm pleased with their performance so far. They have an agreed plan for the year. And there are also many other priorities in Germany now to get to know each other and make sure that the acquisition is a success. So over time, we will get there with the margins of Felderer, but we are not in a rush. You are correct that part of the margin dilution comes from acquisitions and in particular, Felderer. But the main, say, deviation in ventilation system when it comes to margin is that we had slightly lower gross margins in this quarter versus a year ago because 1 year ago, they were unusually strong. I would say that the level we are performing at now in terms of gross margin and EBIT level for Ventilation Systems is a very good and healthy level that we are proud of, and it is a more normalized level, not so much influenced by sudden price movements of raw materials as it was a year ago.

The next question comes from the line of Douglas Lindahl from DNB Markets.

Most of them have already been answered, Ola. Very interesting to hear you talk about the market heading into next year. My question then is more on inventory levels. You talked about availability being a priority for you. Inventory levels continue at high levels. Are you able to give some sort of -- any sort of comments or guidance on how we should think about that going forward? Will they remain at these high levels? Or are you expecting to adjust some downwards somewhat in absolute and relative terms, however you like to look at it? I'm trying to think about the cash flow impact going forward.

Doug, it's a good question about cash flow and inventory levels. Of course, 2 years ago, we didn't really foresee that there could be such a big increase in material prices in such a short time. And as I mentioned, prices today on most frequent raw materials are around 100% higher than they were 2 years ago. So of course, this has a big impact on our inventory level when it comes to raw materials. We have, in monetary terms, high values in our stock in terms of, say, finished goods, the increase is not so big. So there is no risk that any articles will become old and sit on the shelf. We have the money in raw material that we use every day. So that -- at least this should be a comforting message. I believe that towards the end of the third quarter, we will start to meet this high material prices from a year ago. So we should not see the inventory levels in monetary terms increasing much more. Now I have to, of course, say that we don't exactly know what the prices will be at the end of the third quarter. But if our forecast is correct, then we should start to see a reduction of inventory values towards the end of the third quarter, and it should gradually ease from that point. It has been a strain on our cash flow and also on our balance sheet. And this is one reason why we've had to take up a new loan facility. It is not the main reason, but it is one reason. We have continued to acquire companies and make investments. So it's a combination of these factors, plus, of course, paying dividend, et cetera. I'm not concerned about the balance sheet or the cash flow. We handle it well, and we have a strong financial position, and we still have quite a lot of headroom to continue to make acquisitions. So it is not a limiting factor on what we do today. But we, of course, monitor it carefully.

The next question comes from the line of Anna Lindholm-Widstrom from Handelsbanken.

It's Anna here from Handelsbanken. I have a question regarding the exposure to construction. As your customers is Bravida and such players, what sort of delay are you expecting if you were to see construction in residential going down? Is it like 1 year or...

So Lindab's products, they come in relatively late in the building process. So we are not the first ones to be impacted by these types of -- if there would be a reduction in construction activity of apartment buildings. We, of course, monitor the different KPIs such as building permit applications, start-up constructions, et cetera, and we work very closely together with our customers who -- and have a dialogue about their order intake, et cetera. I think that we have -- we will have a relatively good and long prewarning period where we will start to see the signals before we actually would see any effects in our own sales. That gives us time to adjust capacity and resources well in advance. We don't see any signs in our own operations yet, but we read about some projects that are being delayed or canceled. We read about that in the business press, of course. But so far, nothing material that is impacting Lindab.

And if we look at the operating expenses volumes, I mean, you had some savings during the pandemic and now you have higher activity in going around looking for M&A and such. Do you see that there will be higher absolute numbers ahead deferring from sales increases? Or do you think that you've reached sort of a comfortable level right now?

I think after the -- I mean there was a period during the pandemic when Lindab and of course, many other companies, we saved on everything. It was quite a dramatic period only 2 years ago. Now when the pandemic -- well, it hasn't ended yet, but when the worst restrictions were eased, we restarted to travel and to implement our different kinds of projects. And then you start to spend a bit more money. I hope that we will not have the same sudden effects again. But if we do, we are ready to shrink the cost costume, again, of course. We have some additional costs in the second quarter and in the first half of the year related specifically to acquisitions, where the transaction costs are taken as a cost. We do spend more money on product development following in some more resources in specifically into developing more products for the renovation and upgrading to achieve better energy efficiency in buildings. We believe this is an important area. But -- and I should add also there is, of course, as we all see if we go shopping in the supermarket, there is a cost inflation in Europe for all types of goods and services at the moment. We don't have to buy steel to increase prices, also consultants and all types of services, they take the chance to increase prices as well. So fighting against this cost inflation and working on efficiency, not only in factories but also in sales penetration is a priority.

Okay. Perfect. I have one last question.

Sorry for the long answer.

No, it's great. And regarding the M&A pipeline that you're describing, you see a lot of potential companies. But could you maybe describe how sort of -- how do they move it in the pipeline? I mean how are the company owners thinking about making deals right now given the market environment and so on? And also maybe on if you've experienced some changes on the price tags of the companies?

I think something interesting happened during the start of the COVID pandemic. Quite many family companies started to think through what they wanted to do in the future and the risks and the responsibilities of having a family company. And they started discussions in those families, is there anyone who wanted to take over, what should we do? And we could see that some of the discussions we had with companies were, say, helped by this uncertainty in the market. And a new possibility or the risk of a recession 2023 or 2024, I think it can have similar effects that people make up their mind that, okay, we will find a new owner, a financially strong owner that can take care of this company in the future. Now of course, the numbers they show from 2021, they could be quite strong. So they will expect a nice price tag on that. And I think the price tag, they are only now starting to come down a bit. Whether we will be able to meet the wishes or not, we will have to see. But I believe that valuations, yes, they should and they will come down in the next 6 to 12 months. However, I'm sorry for another long answer, Lindab is not a company paying very high prices or multiples. We try to be the preferred buyer and be the, say, only partner they negotiate with, and we offer more and different kinds of benefits and values if they would decide to sell their company to us.

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

I only have a few follow-up questions. So first, just the split between price and volume growth, if you can give us what's in the organic growth of 14% during the quarter?

Yes, I estimate that around 3/4 of that growth comes from pricing versus a year ago and about 1/4 from volume. That is my best estimate.

Okay. That's good. And just a follow-up question on the -- or comment on stable demand in H2. So if we -- I select volume and compare year-over-year. Would you say that it's stable, and -- so the volume effect is almost around 0% in the second half, or it would be even lower if it's more in line with the volume from the first half of 2022?

In a company with tens of thousands of different article numbers, it is not an easy question to answer. But we believe that the current volume trend from the first half year will continue into the second half of the year. I'm the first to admit that we also have some seasonal effects, especially for Profile Systems. So one would also probably have to look a bit on second half of last year. I don't dare to give you an exact percentage numbers. But when I talk about stable volume development, I'm thinking that the current volume development will continue into the second quarter, but I cannot give you a like-for-like exact comparison, how many percent it is. But we are aiming for a positive but small volume increase during the second half, but it's low single digits in terms of volume.

All right. And then just a quick question on this. You mentioned this increase in net debt due to capital tied up in stock and operating receivables. And are you expecting this to be temporary and coming down already in the next quarter then, that you mentioned the inventory is now at high level, and it will probably come down or stabilize a little bit by the end of Q3?

We saw increasing material prices last year, and they were increasing throughout the year. So they were higher in Q3 than in Q2, and they were higher in Q4 than in Q3. So we are meeting an increasing price of the purchased steel. And if the current steel pricing trend continues or if the steel prices have reached a plateau right now, on this level, then we should meet last year's steel pricing around end of Q3. So I don't think that you will see big effects in our balance sheet already in Q3, but we will start to see positive effects towards the end of Q3. That is my try to look into the future here. But that is how the mathematics should play out. And then what happens in Q4, well, that remains to be seen because we don't know steel prices for Q4 yet.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Ola Ringdahl for any closing remarks.

On behalf of Lindab and our management team, we would like to thank you for listening in and asking questions, and we wish everybody a wonderful and sunny summer. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.