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

Welcome to the Lindab Q4 Presentation for 2022. [Operator Instructions] Now I will hand the conference over to the President and CEO, Ola Ringdahl. Please go ahead.

Hello, and welcome to this call. My name is Ola Ringdahl, I'm the President and CEO for Lindab Group. Next to me, I have our CFO, Jonas Arkestad, who will help me to answer questions. Some Q4 highlights. Lindab ended the year with a quarter of strong sales growth and improved cash flow. Margins were temporarily under pressure primarily due to changes in raw material prices. We will come back to that. In Q4, sales increased by 26%, of which 20% are related to acquisitions. Felderer in Germany and R-Vent in the Netherlands are the 2 largest acquisitions impacting this. They are part of the numbers from April and June 2022, respectively. Organic growth was 1% and currency had a positive effect of 5%. Both business areas had positive sales development. Ventilation Systems reported its highest quarterly sales ever in Lindab's history. Our adjusted operating profit in Q4 amounted to SEK 244 million compared to SEK 311 million last year, and the adjusted operating margin was 7.6%. The lower operating margin was mainly explained by lower gross margin from inventory effects and also from increased energy-related costs. It should be noted that the comparison numbers are high, and I will comment more on the margins later in the presentation. Let's move from quarter to full year results. Overall, 2022 was a strong year for Lindab, and we met all of our financial targets, which are listed on this slide. Sales growth for the year was 24%, significantly higher than our 10% target. Sales exceeded SEK 12 billion for the first time in Lindab's history. Adjusted operating margin for 2022 was 10.9% despite challenging market conditions, especially in the second half of the year. Our net debt-to-EBITDA ratio at 1.6x is well below 3. Let's take a closer look at how sales have developed on the next slide. Lindab's total revenue has shown strong growth in the past 2 years, mainly thanks to acquisitions, but also due to price increases to compensate for increasing raw material costs. Business area Ventilation Systems has continued to grow very strongly. The sales growth for the fourth quarter was 35%, mainly driven by acquisitions. Organic growth was 4%, and this is explained by higher prices. For the full year, Ventilation Systems sales increased by 32%, of which organic growth was 11%. The ventilation business is positively affected by increased focus on efficient ventilation due to higher energy prices. Lindab also benefits from new building regulations and higher demand for sustainable solutions. We have the right products to fulfill those requirements. Profile Systems is a more cyclical business with a larger exposure to new construction. Profile Systems had 8% growth in the fourth quarter, mainly driven by acquisitions. Organic growth was negative by 4%. For the full year, Profile Systems reported increased sales by 20%, of which organic growth was 10%. We now move over to the operating profit development. During the fourth quarter, Lindab's margin suffered from negative raw material stock effects in combination with high-cost inflation. In addition, we took proactive measures to rebalance our stock levels and to adjust our personnel resources to the current situation. Stock rebalancing and redundancies cost Lindab an extra SEK 25 million in the quarter. All in all, the mentioned effects and actions led to an operating margin in the fourth quarter that was lower than our plan. So what do we mean by negative raw material effects? Let me try to explain a bit on that topic. Lindab has a large safety stock in order to have the best availability and the best delivery capacity in the industry. In 2021, Lindab benefited from increasing material prices, which enhanced our margins. In the second half of 2022, as material prices come down, Lindab suffered from the opposite effect of 2021. Material we bought during the spring and summer of 2022 at high prices because of Russia's invasion of Ukraine that is now putting our gross margins under pressure temporarily. The effects are expected to remain in the first quarter of this year, and to some extent into the second quarter, and then it should be rebalanced. For 2023, our financial targets are unchanged, and I'm determined that we should deliver above 10% operating margin even if the market conditions are challenging. Now let's move to the next slide and the financial position. Lindab has a solid financial position that supports continued growth. Cash flow from operating activities increased to SEK 525 million, compared to SEK 215 million in the fourth quarter last year. This was due to less capital tied up in stock, resulting in favorable change in the working capital. Net debt has increased during 2022 as a result of completed acquisitions and increased capital tied up in stock of raw material versus 2021. We have not increased the stock levels as such, but the changes in raw material prices have affected the stock values. The net debt-to-EBITDA ratio is at 1.6, which gives us good financial flexibility. A solid financial position is also a prerequisite for a shareholder-friendly dividend policy. Now let's look at the next [indiscernible]. In light of the strong profit development and considering Lindab's financial position, the Board of Directors are proposing a dividend of SEK 5.20 per share. which is an increase of 30% versus last year. This represents a dividend of -- out of our net profit of 41%, which is in line with the dividend policy that we should have a dividend of at least 40% of the net profit. Now let's shift focus from the numbers to how we will continue to build an even stronger Lindab. We start to talk a bit about acquisitions. 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 2022, we have made 8 acquisitions totaling an annual pro forma sales of SEK 1.9 billion. And since 2020, we have made, all in all, 17 acquisitions. The acquired companies continue to develop very well within the group also during the fourth quarter. In the chart, the newest acquisitions are in dark blue and the circles represent their annual sales. As you can see, the more recent acquisitions have been larger in size. I think this is a natural development from 2020 when we started the acquisition journey and we started with smaller companies. And gradually, as our skills are increasing, the acquisitions tend to become a bit larger. We have a very strong M&A team and an organization who is eager to continue to consolidate the industry. Acquisitions form an essential part of our strategy, and we see good opportunities to make attractive future acquisitions also in a more turbulent market. And I emphasize that we are not holding back on acquisitions in 2023, but we are very actively pursuing opportunities also this year. Investments, that is another building block in Lindab's strategy. We have had the investment program at the top of our agenda since 2019. And it's very rewarding to see how the benefits become more and more visible. We see results in higher production efficiency, higher capacity and also a safer work environment. These are very important areas for continuing to build a profitable and sustainable Lindab in the long term. In 2022, we invested SEK 359 million in our European operations. and we will continue to invest on a relatively high level until 2025. However, we gradually reduce the amount every year since we have completed a large part of the program. The peak in terms of investment amounts was reached in 2020. Sustainability continues to be at the top of Lindab's agenda. In early 2023, Lindab joined the Science Based Targets initiative. This means that we will set science-based targets for our work to reduce greenhouse gas emissions. We are also launching products manufactured with low carbon emissions steel. We are starting with roofs and facades and will extend the product range with rectangular ventilation ducts and roof hoods later in the year. For Lindab and for our customers, sustainability is business-critical. Lindab is and will be the leader in climate-efficient ventilation solutions. So now we are at outlook and priorities. We are positive about the prospects for both the industry and Lindab, although there are challenges in the short term. The market trends during the second half of 2022 are estimated to continue during the beginning of 2023. And the market situation for the full year 2023 is, of course, difficult to predict. We see high inflation and rising interest rates that are likely to lead to lower investments in new construction. However, there is a possibility that the willingness to invest will increase when the interest rate situation stabilizes. High energy prices are putting focus on energy-efficient ventilation, which will benefit Lindab also in the short term and especially business area Ventilation Systems where we see high activity in renovation and upgrading of existing buildings. In the medium and long term, we are very optimistic about both the market and Lindab's prospects. High energy prices put even more focus on well-insulated buildings and energy-efficient ventilation to the benefit of Lindab. We expect a longer period of renovation of public and private properties in Europe. And as Lindab has more than half of its sales towards renovation and remodeling, we see good growth opportunities in this segment as necessary energy efficiency projects are started all over Europe. Within new construction, the demand for sustainable and energy-efficient buildings will increase further, and this is also to the advantage of Lindab and our leading product range. So what are Lindab's near-term priorities. Naturally, in the current economic environment, we are working with proactive cost measures. We are also slowing down certain new investments, and we are cautious with new recruitments. Compared to one year ago, we today have 3% fewer full-time employees in comparable units, and we are adjusting to the market situation. We are also adjusting our pricing to mitigate higher energy costs and transportation costs. Finally, with our strong balance sheet, we intend to continue to pursue attractive acquisition opportunities. The European ventilation industry is still fragmented, and there are plenty of opportunities to create long-term value for a strong player like Lindab. We have a clear plan for how Lindab and will continue to develop positively after the transformation of the business in recent years, Lindab is in very good shape. This concludes the presentation, and we'll now open up for questions.

[Operator Instructions] The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. Just a couple of questions from my side. I mean you mentioned, for instance, stock rebalancing of SEK 25 million in the quarter. Is it fair to assume that this continues in Q1 as well? Or would you say that you're sort of done with the sellout of inventory during Q4? And also on that, how should we -- or how should we -- what read should we do into cash flows in the first half? Will it also be boosted by these effects?

If we start with the stock rebalancing, we are not planning any other measures similar to what we did in the fourth quarter when we look at the first quarter, but we also have to see how the current prices of materials are developing in the first quarter. In the last 6 to 8 weeks, we have seen an uptick in raw material prices, again, since 1st of December, prices are up by roughly 20% again. So there is volatility in the raw material market that will impact the decisions. But no plans as of yet to make any other stock rebalancing. When it comes to cash flow, we did foresee and expect that cash flows would start to turn strongly positive in Q4 and that worked according to plan. I will say that the first quarter of the year is normally not the end of strongest cash flow period. But we believe that we have a good strong positive cash flows ahead of us and that we turned a corner in -- during the fourth quarter.

Okay. That's very good. And also on the demand side, you guided for a similar trend in H1 '23 as H2 '22. Is it the case for both segments? Would you say? Or is it fair to assume that, that ventilation with more late cyclicality and less cyclicality overall will see a sort of more stabilizing trend or while sort of profile with more high cyclicality and also consumer exposure, will maybe have a little bit tougher time in first half compared to maybe Q3, Q4?

Well, there is a difference in the volume development for Ventilation Systems and Profile Systems. As you correctly point out, Profile Systems is more cyclical and it also has bigger seasonal variation. The winter months being normally the weaker ones in terms of sales and then it starts to -- sales normally starts to increase in March, April and continues until November. I would say that as we see in the organic growth numbers, Profile Systems had negative organic growth in the fourth quarter that there is a price component. We are probably talking a volume decline overall for Profile Systems in the fourth quarter of around 10%. So we have a positive price component and a negative volume component. For Ventilation Systems, that is more stable development, not so cyclical, not any major seasonal variation. And I think they have held up very well. We have relatively flat sales development in terms of volumes compared to previous year, and we expect stability on those levels in the months ahead, helped by the renovation wave and we see our main customer category, the ventilation installers, they have -- they are pretty fully booked with all kinds of renovation upgrade projects and a lot of ventilation content in that.

And also on the order intake in Ventilation Systems, I mean, part of it is with the sort of longer lead times and project based. What can you see there in terms of orders? Is it a lot weaker, which might be a read into the second half of the year, I guess, because in first half, you are delivering partly at least on your backlog?

We are -- and we are relatively late in the building cycle. So we are not participating in the foundation works for a new building, but we come in a bit later in the project. We don't foresee any sudden changes, but we do see that in the customers business portfolios, there is a higher renovation content and upgrading content rather than new build projects. But the signals we have so far is that they are quite fully booked for the coming months.

Okay. That's very clear. And also on your cost initiatives, I mean, you're guiding for a 10% margin. I mean maybe next year or how you define it. But I mean, is it possible to quantify where you're doing cost initiatives or cost out measures relating to what segments or geographies? And also, if you could -- I mean you mentioned that you're doing some pricing initiatives as well. Is it broad-based or more related to any specific product area?

The pricing strategy, I think the main message to my organization is that we keep the current price level in general. But when it comes to certain costs that have really increased substantially in the past months, for example, electricity and heating and also transport charges. We need to -- we cannot absorb all of that ourselves, so we need to build that into our pricing. So I would say it's not a broad price increase initiative across all units and products, but it's rather a targeted pricing initiatives to cover the increased cost of energy-related inflation components. And then I forgot your second...

No, it was a little bit more on the cost out measures you're taking.

So it's focusing on the -- I mean, on average, we have a certain volume development. But of course, there are some units, some geographies, some product areas that can have a bigger negative impact when we look at volume development, and they have to take measures to get their costs down to a sustainable level. So we have taken out different types of costs, different variable costs, also personnel costs and we have strict cost control in all units.

The next question comes from Douglas Lindahl from DNB Markets.

Yes. Coming back to your organic growth there, it seems as if Western Europe is actually doing really well and sequentially organically, it looks like you're stepping up there and well into the double-digit region. Maybe if you could comment a bit on that market in general? You already mentioned the renovation wave. Is that mainly one of the reasons behind the strong growth of that?

Douglas, thank you for the question. Are you referring to total growth in the Western Europe region?

Well, total growth actually is obviously up 70-ish percent, but trying -- adjusting for the M&A you've done and also the FX impact, it seems like you're still into the 40-plus region based on the numbers you reported, at least organically?

Difficult question to answer, honestly. We have in Western Europe, of course -- since Lindab is built up of many different country organizations, the story can vary between the countries. But I think it comes down to that we have extremely strong motivated skilled sales leaders and sales teams who are very actively pursuing opportunities, both when it comes to energy renovation projects, but also in new construction. And we are defending our market position and sometimes also gaining market share in these times when a very stable and strong supplier like Lindab is appreciated by the customers. So I think it comes down to -- it's a very good job done by my colleagues.

And is there any sort of negative mix effects with Western Europe outgrowing other regions, would you say? Or should that not be exaggerated?

No, I don't think so. We have a good, relatively even profitability level across the geographies. So if Western Europe would grow a little bit faster than other regions, that is not negatively impacting our profitability.

Okay. And, Ola, you talked quite a lot about your M&A strategy remaining firm. I would assume that multiples of potential targets have come down in recent time, maybe if you could comment a bit on that and geographically where you would want to grow ideally?

I mean logically, the multiples and valuations should come down, shouldn't they? But we are often targeting family-owned businesses that have been around 30, 40, 50 years. They are well run, profitable, and those potential sellers are not so used to thinking in terms of multiples and valuations. They have a fine business and someday, they might look for somebody to take good care of it. And for a fair amount, they are willing to make a transaction. Lindab is not overpaying, never has. We are paying fairly, and we will continue to do that.