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

Welcome to the Lindab Q2 Presentation for 2024. [Operator Instructions] Now I will hand the conference over to the 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 for Lindab Group. And next to me, I have our CFO Lars Ynner. We'll start with the Q2 summary. The second quarter was a good quarter for Lindab. We increased both sales and operating profit, and we managed to improve our operating margin despite tough market conditions. Business Area Ventilation Systems accounted for 75% of sales during the quarter. Sales increased thanks to acquisitions and the operating margin strengthened to 10.4%. Business Area Profile Systems turned the first quarter's loss into an operating margin of 8.7% in the second quarter, a very welcome improvement. In total, Lindab Group sales was the highest ever for a single quarter. Sales increased by 5%, and we reached an operating margin of 9.6%. Cash flow from operating activities developed according to our expectations and increased compared to the same period previous year. I now hand over to our CFO Lars Ynner for some more comments on the financial development.

Thank you, Ola. Let's first take a closer look at the revenue development. As you can see in the chart, both Lindab Group and Ventilation Systems had record sales in the quarter. Ventilation Systems increased sales by 7%. Organic sales growth was negative by 4%, while acquisitions contributed positively by 11%. The Nordics reported a sales recovery in the quarter, where organic growth was in line with the previous year. Particularly strong growth was reported in Denmark. Germany showed negative organic growth, but we saw positive organic growth in Ireland, Italy and the Netherlands. For Profile Systems, the reduced construction activity continues to impact demand. Despite that, net sales during the quarter only decreased by 2% compared to previous year, which is a clear trend improvement. The Nordic market, which accounts for approximately 80% of Profile Systems, total business reported sales in line with previous year. Let's now move on to operating profit. Profitability also improved across the board in the second quarter. Ventilation Systems operating profit was SEK 276 million, with an operating margin of 10.4%. The improved operating profit, which is the highest ever, is mainly explained by strengthened gross margin. Completed acquisitions have also made a positive contribution. Lindab has adjusted its cost in markets with a lower level of market activity. The group has also actively worked with the balance between volume and profitability, with a clear objective to prioritize profitability. In Profile Systems, the operating profit increased to SEK 75 million and the operating margin was 8.7%. This is the first time since the recession began 2 years ago that Profile Systems has improved its results year-on-year. This trend shift shows that the measures to strengthen profitability are effective. For the group, the operating profit for the quarter amounted to SEK 338 million and the operating margin was 9.6%. Let's now take a look at our financial position. Lindab had a continued strong cash flow during the second quarter as cash flow from operating activities amounted to SEK 342 million. In June, Lindab signed a new long-term credit agreement with a group of 4 Scandinavian banks. The total credit facility has increased by SEK 1 billion and EUR 50 million, respectively. And if we now look into our net debt situation, net debt to EBITDA increased slightly to 2.1x due to acquisitions. Financial net debt to EBITDA is at 1.5x end of June. I'm now giving the word back to Ola.

Thank you very much, Lars. We have, for a couple of quarters, included this slide to show our ambition to reach SEK 20 billion in sales in 2027. Growth will take place in Ventilation Systems in a combination of organic growth and acquisitions. The goal is for the operating margin to exceed 10%. And over time, I believe that an operating margin between 12% and 15% should be possible. Demand for energy-efficient solutions and the healthy indoor climate will be high for a long time to come. Our Ventilation business is developing in a very exciting way, adding smart products and new technologies. Acquisitions will continue to play an important role in Lindab's future development, and we estimate acquisitions to account for approximately 2/3 of our growth until 2027. One of our focus areas to achieve our 2027 plan is to continue with good profitability focus and cost control. The gross margin continued to improve during the quarter. We continuously analyze the market, our competitive position and our cost structure, and we implement measures to streamline the organization and adjust our pricing. We are also accelerating the synergies with the acquired companies as well as rationalizing our footprint. As an example, we are merging distribution centers where the Lindab organization and the acquired organization have branches located close to each other. We still put extra energy into Profile Systems to bring that business back to stable and predictable profitability levels, and we have seen some good signs of improvement in the second quarter. If there are parts of the Profile business that cannot perform at the right profitability, we are considering structural measures. Another focus area for us is investments and to ensure that we get the planned improvements in terms of efficiency from those investments. Lindab's investment program has been at the top of our agenda since 2019, and we see very good results in terms of higher production efficiency, higher capacity and a safer work environment. As planned, this accelerated investment program is coming to an end in 2024. And moving forward, we expect an annual investment level of approximately SEK 250 million, which is in line with the actual investments that we have seen in the last 12 months, which have been SEK 229 million. When the market picks up again, Lindab is in an excellent position to quickly take advantage of higher demand. The operating margin will increase with growing volumes, thanks to our investment program. Lindab is now shifting the investment focus to digital tools and services in order to further increase our service level to customers as well as to increase efficiencies even further. Acquisitions, we are continuing to add high-quality ventilation companies to the Lindab Group. In May, we acquired Venti in Denmark. Venti is a company manufacturing circular and rectangular ventilation ducts, and they are also a distributor of ventilation products, such as silencers, ventilation fittings and a wide range of technical products for air diffusion. Sales and distribution take place in 2 locations in Denmark, outside Aarhus and Copenhagen. Venti are not currently selling Lindab products, so there is good potential for increased sales via Venti's current sales channels. Venti has an annual turnover of approximately SEK 120 million and has 34 employees. The acquisition was closed on the 2nd of July, and Venti's numbers will be included in our Q3 report. In total, we have already added almost SEK 1 billion in revenue through acquisitions in 2024, and I'm convinced that several more will follow. Let's now conclude this presentation with some comments about the market situation and the outlook. Year-to-date, we estimate that the European ventilation market has declined by an average of approximately 5%. The Nordic region has had a more challenging market conditions than Western and Southern Europe so far. The market situation remains subdued with many projects on hold, but signs of recovery have been noted in the second quarter, especially for Profile Systems, but we also believe that in Ventilation Systems, the bottom has been reached and we are going to see improvements. Continued interest rate cuts will stimulate the construction industry. Lindab believes in gradually increasing volumes during the second half of 2024, however, from low volume -- from low levels. The long-term demand for energy-efficient ventilation will be strong. There are several factors working in our favor. Energy-efficient ventilation is an attractive investment in itself. And furthermore, stricter legislation and the sustainability agenda are creating strong forces to invest in energy-efficient buildings. We saw a recent example of this now in May of this year when the European Union adopted their revised energy performance of buildings directly. In short, new buildings must meet the requirements for net zero emissions by 2030. And for existing properties, residential buildings must reduce their average energy consumption by 16% by 2030 and by 20% to 25% by 2035. And since ventilation is one of the areas that offers the highest energy savings in the building, the directive is expected to have a positive impact on the demand for energy-efficient ventilation much to Lindab's benefit. Our assessment is that the ventilation market will enter a multiyear growth phase from 2025 and onwards, and we are excited to utilize this opportunity to grow our group even further. We now conclude this presentation, and we open up for questions.

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

It's Carl here from Nordea. A few questions. Firstly, you mentioned in the report that you continue to implement price increases in both segments that you have and will. Is it the same price increases that we discussed in, I think, Q4, Q1? Or is it new ones you're implementing?

Thank you, Carl. We are always looking at the average price level and the discount levels and try to optimize our pricing. However, I mean, we should not think that it's only about price increases when we strengthen our gross margins. We are working on efficiency measures throughout the organization, and we also benefit from the investments that we have made. But for every company in every market, we have a pricing action plan, and we have -- we are updating that so that it stretches at least 2 -- often 3 quarters ahead so that we can plan those actions in good time. This message today is not in any significant way different from what we talked about in the -- when we released the Q1 report.

Okay. So should I interpret that as it's included in the around mid-single-digit price increases you talked about before then? Or is it then plus maybe some further? Because I guess the ones you talked about in -- during Q1 were supposed to be implemented during Q1 and Q4 -- sorry, Q1 and Q2. So the ones you're talking about coming 3 quarters, 2, 3 quarters, that is new ones then?

Then if you interpret it in that way, then yes, we have a pricing plan for Q3 and for Q4. And when we come -- when we move a couple of months into the future, we will also have a pricing plan for Q1 next year. Some pricing agreements are valid for only 1 month, some are valid for 3 or even 6 months. So there is a need to always plan ahead 2 or 3 quarters.

And on an aggregate level, is it low single digits, we're talking about still or 1% to 3% or...

Yes, I think that would be fair to say.

Okay. Sounds fair. You also stated that you expect gradually increasing volumes during second half. Is it too early to turn into positive organic growth in Q3? Or is it that Q4 will be good enough, meaning that combined, it will lead to positive organic growth in the second half? Or how should we interpret that comment at all?

All markets are not moving in the same cycle. We saw the Nordic countries moving into negative organic growth early. And later, we have seen that happening in some other European countries. I guess it depends on how sensitive a country is to interest rate hikes. And we also have a difference between Ventilation Systems and Profile Systems, where Profile Systems is normally entering, say, a recession around 6 months before that happens to Ventilation because of how the sequence works on the construction side. So I expect the volumes for Profile Systems to pick up a little bit earlier than they will do for Ventilation Systems. And my best guesstimate is around 6 months earlier. So knowing what will happen in the future is, of course, extremely difficult. But there is some kind of likelihood that we will see volumes in Profile Systems starting to show organic growth during the second half of the year. However, I think small numbers. And for Ventilation Systems, I believe that we will have to wait until 2025 before we see organic growth. And I have earlier also tried to forecast that the volumes for Ventilation Systems full year 2024 will be approximately 5% below 2023. And I still believe that.

Okay. That's very helpful. And also what utilization rates are you currently running Ventilation and Profile on? And if we assume that volumes will pick up by a couple of percent in '25 or maybe for Profile in the second half. What sort of incremental margins could we expect, I guess, given the high automation levels you have in many parts of the operation today, I guess, they might be even better than historical?

We will have fantastic leverage on volume growth with the efficiencies that we have in our factories and the investments that have been made. We can, without any problem, increase output from our main Ventilation factories and Profile factories by 20%, 30% without adding much cost at all. So I believe that the volume increase when it comes will be very beneficial for Lindab for our gross margin and our operating margin.

Okay. That's obviously very good. And the final one from my side is a bit on Germany, one of the biggest markets for you, Ventilation. Is it weakening? Or is it -- has it flattened out on a low level or what do you see there? And secondly is on Denmark, as you're referring to as a good growing market in the quarter, is it 1, 2 bigger project? Or is it simply a more healthy underlying market as well?

Germany, we saw the decline starting in August last year. So we are -- if we look at organic growth, the -- it's still in decline, so to say. But in absolute terms, I think that Germany has stabilized in terms of volumes on, say, sequential month-by-month development. So that I don't see a big drama in that. We will enjoy when the volumes come back to a good level, but we are also able to handle the current situation with good profitability in the German market. We have a very adaptive organization and quite a lot of synergies between the acquisitions that we have made that protects our profitability in a good way. But yes, it has become one of our biggest markets for Lindab. So Germany is important for us. Denmark, a fantastic performance in the past 6 months, one of the strongest markets. And it's not only 1 or 2 projects. But overall, the Danish economy is relatively fine. And the sensitivity to interest rate is less than in neighboring Sweden, for example. So it's a sound market, and we have a very good team there.

The next question comes from Sofia Sörling from Carnegie.