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

Welcome to the Lindab Q1 presentation for 2023. [Operator Instructions] Now I will hand the conference over President and CEO, Ola Ringdahl; and CFO, Lars Ynner. Please go ahead.

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, Lars Ynner, and he joined Lindab on the 11th of April this year. I'm very pleased to have Lars in the Lindab team. Let's look at some quarter 1 highlights. Lindab started the year with strong sales growth in the first quarter. In fact, Lindab reported its highest first quarter ever in terms of sales. The increased sales was primarily driven by the acquisitions made during 2022. Structured growth was 20%. Organic growth was negative by 5%, and currency had a positive effect of 3%. Business area Ventilation Systems, which represents 70% of Lindab's annual sales, had a solid development with the highest sales and operating profit ever for a single quarter. Profile Systems was burdened by lower volumes and continued raw material price effects, which led to a lower operating margin than planned. The adjusted operating profit in the first quarter amounted to SEK 264 million compared to SEK 340 million 1 year ago, which was unusually strong comparison period. Ventilation Systems increased the result versus previous year. The result in Profile Systems decreased significantly compared to the very strong period previous year. Lindab had a strong cash flow during quarter 1 as cash flow from operating activities increased to SEK 355 million compared to a negative cash flow of minus SEK 213 million in the same period previous year. Now let's take a closer look on the revenue and margins on the next slides. Lindab's total revenue has shown strong growth for the past 2 years, mainly thanks to acquisitions but also thanks to price increases to compensate for higher raw material costs. Business area Ventilation Systems has continued to grow strongly as the demand for Lindab's ventilation products has been stable in all markets. Ventilation Systems reported its highest quarter ever in terms of sales, mainly driven by structural growth and the acquisitions made in 2022 of Felderer, R-Vent and Liftasud. All in all, sales growth for Ventilation Systems was 27%. Acquisitions contributed positively by 24%, and currency had a positive effect of 4%. Organic growth was negative by 1%. The price level was on the same level as in the first quarter of 2022. So there is a closing of that gap price-wise versus 1 year ago. Profile Systems is a more cyclical business and more volatile between the quarters with a larger exposure to new construction. For the first quarter, total sales growth for Profile Systems was negative with 4%. Acquisitions contributed positively by 10%, and the currency effect was slightly positive at 1%. Organic sales growth was negative by 15%, and this is mainly explained by the combination of exceptionally high comparison numbers and lower demand in the market. The price level for the Profile Systems product range was on the same level as in the first quarter of 2022. Now let's look at operating profit. Since the third quarter of last year, fluctuating raw material prices have put temporary pressure on our gross margin and consequently on our operating margin. We highlighted already during the autumn that we would have these adverse effects into the second quarter of 2023, and that statement is still valid. Ventilation Systems managed to compensate relatively well for the raw material effects and delivered its best quarter ever in terms of operating profit. The operating margin was 10.2%. Business area Profile Systems was affected by low demand in addition to the mentioned raw material effects. It should be also mentioned that the comparison numbers are exceptionally high but in, any case, Profile Systems did not meet our planned profitability level in the quarter. We are implementing price adjustments, cost savings and focus the different parts of the business for optimal profitability in line with our goals. I should also mention that both within Ventilation Systems and Profile Systems, we have at least defended and probably increased market shares during the period. I now hand over to our CFO, Lars Ynner, to guide us through our financial position.

Thank you, Ola. Lindab had a strong cash flow during the first quarter as cash flow from operating activities increased to SEK 355 million compared with a negative cash flow of SEK 213 million in the same period last year. The strength in cash flow during the period was primarily related to changes in working capital, which amounted to SEK 123 million compared to minus SEK 528 million in the first quarter last year. The improvement was mainly related to less capital tied in stock. Our free cash adjusted for M&A increased to SEK 261 million compared to minus SEK 319 million in the first quarter last year. Net debt has increased compared to previous year as a result of acquisitions and higher leasing liabilities. The net debt-EBITDA ratio is at 1.8 versus 1.0 1 year ago, and increase is mainly due to acquisitions we have finalized since then. This ratio gives Lindab continued good financial flexibility. The solid financial position are also a key factor to support our continued growth as we continue to pursue more acquisition targets. Dividend. Thanks to Lindab's strong profit development and considering Lindab's financial position, the Board of Directors proposes that Annual General Meeting in 11th of May approves a dividend of SEK 2.20 per share -- SEK 5.20 per share. This is an increase of 30% versus last year. This represents a dividend of net profit of 41%, which is in line with the dividend policy, which states that at least 40% of net profit should be distributed. The dividend is proposed to be split and paid out in 2 equal portions of SEK 2.60 per share allocation, 1 in May and 1 in November. Now let's focus from -- let's shift focus from the numbers to how we continue to build a stronger Lindab. I will give the word back to Ola. Thank you.

Thank you very much, Lars. So some words on acquisitions. Lindab's strategy is to acquire well-managed successful companies to 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. In February, we announced the acquisition of Raab. I will not pronounce the German -- full German name, but it's a German company. Raab is focusing on sales and production of rectangular ventilation ducts. The company has shown impressive growth and strong profitability over the several years. The acquisition has approximately SEK 160 million in revenue on an annual basis. I would like to highlight that the acquisition of Raab was possible thanks to Lindab's acquisition of Felderer exactly 1 year ago, and I'm very pleased with this development where the larger acquired companies, in their turn, are able to make acquisitions. In March, we acquired Irish Ventilation & Filtration. This is a leading distributor of ventilation products in Ireland. They mainly target maintenance departments of large international companies as well as mechanical contractors, and they have longer customer relationships with recurring revenues. Irish Ventilation & Filtration has sales of approximately SEK 100 million on an annual basis. After the end of the quarter, we have made 2 additional acquisitions. In April, we made our first acquisition in the Czech Republic. Ventilace sell and manufacture rectangular ventilation ducts in the Czech market. The business is known for its high level of service and fast deliveries. Lindab already has a collaboration where Ventilace has assisted at production peaks in Lindab's central production facility in the Czech Republic. They have sales of approximately SEK 42 million on an annual basis. In May, we acquired a slightly different type of ventilation company than our previous acquisitions. Firmac is the leading -- is the European leader in machines for manufacturing of rectangular ventilation ducts. Already today, Lindab has a very strong brand called Spiro, the leading producer of machines to manufacture circular ventilation ducts, also nicknamed Spiro tubes or Spiro ducts. With Firmac, we get the corresponding business for rectangular duct equipment. Firmac is based in the U.K. and has sales of approximately SEK 40 million on an annual basis. Now as you noticed, there's quite a lot of rectangular ventilation duct producers in the list here this time, and that is a trend in the market given the higher air volumes transported through ventilation ducts. There is a greater need and the market trend that rectangular ductwork within ventilation systems is increasing in importance. And this is an area where Lindab is already today the leader in Europe, but we aim to make our position even stronger. In total, we have made 21 acquisitions since 2020, adding SEK 2.7 billion in revenue. And as you can see on the graph on the top right-hand side, 90% has been ventilation business. Ventilation now accounts for 70% of our total annual revenue in Lindab, and that share will grow over the next quarters and years. We have also divested businesses with a turnover of SEK 1.3 billion since 2020. And the largest divestment was the business area Astron Building Systems. We continue with an update on our investment program. Investments is another building block in Lindab's strategy. 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. We see results in higher production efficiency, higher capacity and the safer work environment. These are very important areas for continuing to build a profitable and sustainable Lindab in the long term. In the first quarter, we invested SEK 97 million in our European operations compared to SEK 106 million in the first quarter 1 year ago. We will continue to invest on a high level until 2025, but this level will gradually come down, and the amounts will be reduced every year since we have completed a large part of the program already. The peak was reached in 2020. Let's move on to the next slide, Lindab for a better climate. Sustainability continues to be at the top of our 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 add ventilation products during the year. For Lindab and for our customers, sustainability is business critical. Lindab is and will be the leader in climate-efficient ventilation solutions. Let's go to our final slide and talk about the outlook and the priorities. So starting with market outlook. We are positive about the prospects for both the industry and Lindab, although there are challenges in the short term. Several indicators suggest that high inflation and rising interest rates lead to lower investments in new construction, especially in the residential segment. We have started to see that in the Swedish market, primarily affecting our business area Profile Systems. When the economy turns downward, the demand for ventilation systems is usually more stable due to a larger proportion of upgrading and renovation. In the medium and long term, we are optimistic about both the market, Lindab's prospects. The 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. 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 in Europe. With the new construction, the demand for sustainable and energy-efficient buildings will increase further also to the advantage of Lindab and our leading product range. So what are Lindab's near-term priorities? Well, naturally, in the current economic environment, we are working with proactive cost measures, especially in the business area Profile Systems, where the margins need to improve and where the market demand is showing more weakness. We are adjusting our pricing as well to strengthen gross margins and to mitigate high energy costs and transportation costs. Finally, with our strong balance sheet, we intend to continue to pursue attractive acquisition opportunities within ventilation. The European ventilation industry is still fragmented, and there are plenty of opportunities to create long-term value. We have a clear plan for how Lindab will continue to develop positively. After the transformation of our business in recent years, Lindab is in good shape. We now conclude the presentation, and we open up for questions.

[Operator Instructions] The next question comes from Douglas Lindahl from DNB Markets.

Congratulations on a strong report. A few questions from my side. Starting off with residential construction exposure, Ola, that you mentioned there. What is your best assessment of your current exposure towards this market right now, so Swedish residential, rough ballpark figure?

Within Ventilation Systems, it's small. And in ventilation, we also have a much broader geographical presence with a strong presence in 20 countries in Europe. In Profile Systems, there is a little bit higher ratio of residential in our portfolio. And we have a higher exposure to, say, fewer countries. 75% of the revenue in Profile Systems is in the Nordic countries, and the majority of that is in Sweden. And of course, the numbers for the Swedish construction industry and primarily for residential segment, they look a bit worrying. So I would say that, today, we are -- we see the negative impact of that mainly in Sweden and how -- exactly how much is connected to residential is difficult to say. We also see a declining project activity for larger projects like industrial halls, sandwich panel sales and so on. We have to say that the minus 15% organic growth in the first quarter for Profile Systems is quite a lot in a short period of time, so we are clearly aware of that situation and do the best we can to mediate it.

Okay. And moving on to profitability. You seem to remain firm in your double-digit target for 2023 if I understand you correctly. Can you just remind us of the sort of positive factors that you expected implicitly towards the second half of 2023 on the margin side that we'll see?

I will, of course, try. Well, I mean, one important factor is the adverse raw material effects that we have been struggling with since the third quarter of last year. They will be minimal by the end of the second quarter. So gradually, that situation is improving. So that's one positive. Then, of course, the unknown is how will the continued volume development be. We are also -- we've implemented price increases for selected product categories and geographies that should also help the gross margins. And proactive cost measures, I mean, there's no way to get around that when volumes organically are in decline. And this is, of course, mainly within Profile Systems, we have to adjust the cost base. Then we have -- I can perhaps also add the second and third quarters are normally the stronger quarters for Lindab, while the fourth and the first one are seasonally a bit weaker, mainly in Profile.

Yes, understood. And you mentioned Felderer there in your presentation. Can you give some sort of update on -- because I remember you said that you wanted to lift profitability for that business over time. Can you maybe give some sort of update on how that work is processing?

I'm very, very pleased with the -- how our acquisitions are performing. I would say, 80% of the cases, they are performing better than their history and at least as good as we planned when making the acquisition, so very, very strong track record for the acquired companies. If we talk about Felderer in particular, had an extra review with them last week to also compare it to the situation before the acquisition. And the profits of Felderer have increased, I think, around 80% versus the first quarter last year. However, at that time, we did not own them. But they are gradually improving profitability, and in addition to that, they have now fully implemented the duct system Lindab Safe. So before they were buying duct systems from an external supplier and now they are fully in Lindab's product assortment when it comes to ventilation ducts, of course, giving some additional synergies within our production and sourcing. So I'm very pleased with the performance so far and strong sales growth.

Okay. And a final one for me. On the transport costs, you've talked about this for some time now. Are you seeing any changes in this quarter relative to previous quarters?

The industry we are in, the suppliers over many years have been -- let me use the word, they have been spoiling the customer with a transport free of charge. I think that is not in line with modern sustainability that you think about transport as something which is for free. And when transport costs are then rapidly increasing with new cabotage rules, lack of drivers, increased cost of diesel, et cetera, I think that business model is coming to an end. So companies like Lindab and many others need to start to act in a sustainable way, where we put a clear price tag on transports. So we are doing this in many different ways, trying to recover the cost but also to stimulate the customer behavior to be more efficient. You can collect -- we can combine orders and transports and really get the carbon footprint down while, at the same time, saving costs that can be shared between 2 parties. So this is an area we are working very actively on in many different ways. But clearly, transport, it is a big cost for Lindab, and we are recovering a large part of it, but we can recover more.

Okay. So no -- I mean, no real changes in the short term then, I guess, sequentially.

Except for continuing to increase the price of transport, but that is quite helpful tool.

The next question comes from Carl Ragnerstam from Nordea.

It's Carl here from Nordea. A couple of questions from my side as well. First, looking on Profile System, to what extent did weather effect impact sales or margins during the quarter, would you say?

I think it has some effect in the month of March. I mean we are used to having winter weather in January and February. I think I also read from some other companies who are working on the outside of the buildings and on the roofs of buildings that the -- there was perhaps a little bit of a weather effect in Sweden and Norway during March, a negative one compared to previous year. But we also saw a clear impact of the increasing interest rates when several projects were delayed because of lack of decisions. We had in first quarter last year very strong project sales and this year, significantly weaker project sales, so I think it has to do with the increased cost of borrowing.

Okay. Very clear. And you mentioned that you will implement measures to bring back margins in profile. Is it possible to be a bit more granular on each of them? I mean what magnitude are we talking when you're mentioning price increases, also what -- in what parts of profile? And is it also related to ventilation now that steel prices are coming up a bit? The second part is also what the full year effect will be on the cost saving you're implementing.

Good and detailed questions as always, Carl. On pricing, I mean, I think we can see that in the reports, and we are also writing it, the profitability in Profile Systems did not live up to our plan. We should have performed 3 to 4 percentage points better on the gross margin, so the significant improvements needed on the gross margin. So how to reach that in a short time? Price increases, that is definitely one thing. We need to correct prices on -- in certain product areas without jeopardizing the market position. And I'm quite pleased to say that we are defending our market shares and also in several cases, increasing the market shares during the autumn and during the winter now. So that is positive. But in combination with price increases, we also need to work on our cost base. We have significantly reduced manning in the factory, in the central factory in Profile Systems to adjust to the volume level that we see now, you saw the negative 15% organic growth. So a combination primarily of lower number of staff during the high season that is coming now and a correction of prices plus the fact that our raw material stock is normalizing in value during the second quarter. Those 3 effects are the main ones. And then can you please repeat your second question?