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

Welcome to the Lindab Pre-Quarter 3 Update. [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. I'm the President and CEO for Lindab Group. And next to me, I have our CFO, Lars Ynner. Earlier this year, the Swedish Financial Supervisory Authority and ESMA published recommendations for how listed companies should handle information disclosure ahead of upcoming interim reports. As a result, Lindab, we are arranging this meeting today before entering our silent period. The purpose of the meeting is to summarize information already communicated by Lindab and, if appropriate, refer to other public information that is relevant to assess Lindab's development. We will present a few slides and then open up for questions. The meeting will be recorded and published on Lindab Group's website. So we go to the first slide in this presentation called market outlook. And we summarize it like this. The European ventilation market is estimated to have declined by around 5% in volume during 2023. And in the first 6 months of 2024, we have seen a similar negative volume development on average in the European ventilation market by approximately minus 5%. I already before commented on that and also previously communicated that Lindab expects this volume trend, negative, around minus 5%, to also be valid for the full year in 2024, and hence, also in the second half of 2024. For Profile Systems, Lindab sales declined by 20% in 2023. And during the first 6 months of 2024, the organic growth was negative by 11%. We have seen some signs of market recovery in Scandinavia in the second quarter and into the third quarter. And this can -- and we have communicated this before, this can lead for Profile Systems to a stabilization of sales during the second half of the year, as they are earlier in the building cycle than Ventilation. For Ventilation Systems, the positive effects should be seen gradually during 2025. Now to evaluate the impact on sales of acquisitions, we have made this summary of the acquisitions made in 2023 and 2024. So the following acquisitions will be part of the structural growth in the Q3 report, namely Venti, TGA KlimaPartner, Airmaster, Vicon and HAS-Vent. And the most recent announcement we made that we have signed an agreement to acquire the French company, ATIB. They will be part of our numbers in Q4 as that deal has not yet been closed. I also should make a comment around the acquisition of HAS-Vent that was consolidated from October 2023. The HAS-Vent acquisition is reviewed by the British Competition Market Authority and we expect the final report by mid-October of this year. The remedies listed in the preliminary findings from the CMA will only have a minor impact on Lindab Group revenues. So now we have talked about some factors influencing Lindab's revenues and we now talk a little bit about what comes further down in the P&L. Lindab continues the focus on actions to improve profitability. And one very important area is, of course, to continue to strengthen the gross margins. As I have communicated previously and when I released the Q2 report, we are on the right track. We have managed to increase gross margins during some quarters. And we have also communicated that we believe there's a good chance that we can continue to have stability or slightly improving gross margins during the second half of 2024. Contributing factors are, for example, steel prices that continue to be a little bit lower today than they were 6 months ago or 12 months ago. On the other hand, with lower volumes and with continued inflation effects from 2023, of course, the cost levels are higher and the efficiency is lower, counteracting some of the efficiency gains and lower cost of raw materials. We also work actively with pricing activities. We try to extract synergies from the acquisitions that we have made. We review our footprint continuously and are merging branches and finding different kinds of more structural savings. And I should add that there is a continued special focus on Profile Systems, the business area that has shown most volatility in earnings, where we do extraordinary pricing activities and we have other efforts to shrink into shape or to take structural measures to improve overall profitability. If we then comment a little bit about our historic EBIT margin development, then we have made this slide. Perhaps it can help, perhaps not. In the middle graph, you see Ventilation Systems adjusted EBIT margin per quarter in '22, '23 and first half of '24. And you can see that it has shown stability even in tough times when volumes in the market are down, and also through times when we have made quite many acquisitions. But I see stability here, and our aim is to continue to show stability. On the right-hand side, you see the graph for Profile Systems, where there's a lot more volatility in earnings. They came from record years. '21 was extremely strong. '22 started with very high margins. And then the significant drop in market volumes has affected Profile Systems and their profitability in quite a sizable way. I should mention that there is some kind of Easter effect as well in 2024, where I believe that the first quarter profitability was a little bit unfairly low, and we gained some advantages from an early Easter and made a strong result in Q2, but perhaps a little bit boosted by the Easter effect. But for Profile Systems, we are on the way to recovery, and I believe we will see a positive development going forward. All right. That's about operating margins. Lars Ynner, I hand over to you for some comments on Lindab cash flow.

Thank you, Ola. Lindab have delivered strong cash flow from operating activities during the period, 2022 to 2024. Main explanation and drivers for this development, besides a stable underlying operational result, has been a favorable starting position end of 2022 with high stock levels and high steel prices. Since then, steel prices have step-by-step fallen. And in combination with negative organic growth, we have been able to reduce our working capital significantly. In addition, targeted activities have reduced our working capital even further. When looking into the second half of the year, from a cash flow perspective, we have entered our strongest period from a seasonal perspective, and then especially the last quarter of the year. Also worth mentioning in the context of cash flow is that our accelerated investment program is coming to its end and will be completed in 2024. And as we have internally commented, cash flow is not easy to forecast. There are many factors contributing to it, and we are not making any predictions really in the meeting here.

All right. That was an attempt. This is the first time that we have this type of meeting pre-quarter closing orientation. So we are at the end of this presentation, and we open up for questions.

[Operator Instructions] The next question comes from Anders Akerblom from Nordea.

I'm calling in here on behalf of Carl. So I have a few questions. Firstly, on Profile Systems and kind of the consumer renovation trend, especially in Sweden. On an anecdotal basis, we have heard a slightly better trend here. Have you experienced something similar? Or have you seen any signs of this recently that you could kind of specify a bit?

I can confirm, Anders, that we are seeing some early signs that the consumers are more active. So our, say, bread and butter sales going to smaller projects and do-it-yourself activities and home renovations, that is starting to show some positive signs. However, on the larger projects, it is still rather quiet. But I can confirm what you said about early signs of an increased consumer confidence.

All right. Also looking at kind of Profile Systems, I mean, previously, you have guided for a mid-single-digit drop in '25. So I mean, with this in mind then and what you've seen in the market, do you see any rationale to change that statement?

Could you repeat what you believe that I have said? You said something about 2025.

Yes, based on what I've heard here, or read, you've guided for a mid-single-digit drop in 2025 in Profile Systems.

I'm not giving any -- I do not recall if I might have done that. I'm not really familiar with that. I think it's too difficult at the moment to give any indication on 2025. I don't dare to do that. I think Profile Systems, typically, they are earlier in the cycle. They come quite early in the building project since it has to do with roof and walls of the building. With interest rate cuts now coming at a rather quick pace, I believe that the market for the products in Profile Systems should recover within the next 6 to 12 months. If that means growth or not, let's see. But I do believe we see a stabilization and some early signs of market recovery. I'm hopeful that we will be able to actually see organic growth coming back in 2025 for Profile Systems.

All right. Good to hear. Kind of lastly just from my end on the M&A pipeline. I mean, of course, as you mentioned, you have had a good pace year-to-date. How do you view your balance sheet at the moment and the pipeline going forward? I thought I heard something about the accelerated investment program coming to an end in '24. So could you specify a bit on kind of what you're seeing here?

So in the past 5 years, we have invested quite a lot in automation equipment in our factories, in our logistic centers and so on. We've held a pace of annual investments around SEK 350 million to SEK 400 million. And now when we are concluding the accelerated phase of that investment program, we will come down to numbers that are more like SEK 200 million to SEK 250 million in investments in physical assets.

All right. Okay. I misunderstood, sorry. So that was related to the physical investments. But on the M&A pipeline then, could you elaborate a bit there?

So provided we can continue to generate strong cash flows and now when the annual CapEx in equipment, et cetera, is coming down, that is giving us quite a lot of space to continue to acquire companies. We have secured good financing. We have a consortium of 4 banks, Nordic banks, and we have only utilized a part of that possibility for financing. Then of course, you have to keep an eye on all the net debt to EBITDA ratios and so on to make sure that your leverage is not too high. I think we are in a comfortable zone there. So I believe we have all the possibilities to continue to keep a high pace in our acquisitions.

Okay. So no risk of suitable targets running out either? In general, I should interpret that as you're seeing good ability?

We have a good attractive pipeline. Acquiring companies is not only about finding them. It's, of course, about a lot of other things. But I believe that we are starting to build some kind of track record that we -- we are able to find good companies and take good care of them. We have done now 25, 26 acquisitions in the last 4 years. And I can assure you that the pipeline is not dry.

The next question comes from Douglas Lindahl from DNB Markets.

Just briefly, you mentioned pricing there, Ola. If you could just give us a bit of comment on what have you done with regards to pricing in the short term? And what have you seen in the market on pricing? That's my first question.

Thank you, Douglas. In a market where volumes are declining and they have been declining now for 12 to 18 months, it is, of course, not easy to just increase prices all the time. You have to also consider the environment where you are working and, of course, how your competitors are acting. And maybe most important, you need to have some reasonable volume going through your factories and logistics centers and so on. So it's a fine balance, quite a difficult one. We are trying to at least maintain prices, and when possible, increase them to compensate for all the costs that have been increasing rapidly in the past 2 years due to extraordinary high inflation, salaries, rent for facilities, interest rates increases and so on. I think, so far we have managed relatively well, but it requires continued focus on every product family, every geography, to make sure that we have the right profitability. So that is the best answer I can give.

Yes. Okay. But no -- I guess it's an answer I've thought about before. It doesn't really seem to deviate a lot from Q2 then, your thinking around pricing here in more recent time.

I think, when evaluating Lindab's future revenues or at least in the next 6 months, I don't believe that there will be a big price component. That is not...

Yes, maybe I'm thinking about potential negative price implications with steel prices rather than positive ones. But I hear your answer. Maybe then moving onwards, you mentioned HAS-Vent and U.K. regulator. Can you maybe just give a bit more color on that? There's a time frame for mid-October for them to make a decision, and we know that the regulator in the U.K. has been a bit nervous with regards to M&A historically. But what are the potential remedies? And where is the business sitting as it is right now in terms of ownership?

What was the last thing you said, Douglas, where is the...

HAS-Vent, the business right now, are you fully owners of it? Or what's the status of that just to...

Okay. Well, yes, we are 100% owners of HAS-Vent, the company. But during the time that the CMA is conducting an investigation, we are not allowed to have any deeper insights into what is going on there. So we only have extremely limited data, only what is required to do our necessary financial reporting. So I do not have any insight into the company today, and I should not have either. That will only happen after the final report has been released by CMA. In terms of remedies, they have come to a conclusion that in 2 cities in the U.K., we have too much market power, if you combine Lindab and HAS-Vent. And we might not agree with all their conclusions, but we, of course, respect that. That is their job to make such investigations. So it is in Nottingham and in Stoke where Lindab and HAS-Vent have one, you can say, professional shop each in those 2 cities. And the CMA would like us to have only one in each city. So there is a possibility that they will ask us to divest one shop in Nottingham and one shop in Stoke. If they say that we have to, then we will, of course, do that. One should say that in combination, Lindab and HAS-Vent, we have somewhere between 30 and 35 shops in the U.K. So it is, in our opinion, not material, either for the U.K. or for Lindab's group revenues.

Okay. And the final one for me then on -- you mentioned, Ola, that Profile Systems obviously had Easter impact in Q1, Q2. And you sort of alluded to the fact that maybe Q2 was a bit boosted or maybe that was my interpretation at least. So how should we think about profitability levels really for Profile Systems when the market is improving slightly. Yes, any sort of directional thinking or anything on that would be interesting to hear without obviously talking about numbers specifically.

Yes, yes. And it's difficult. Well, when looking at the effects of Easter, I mean, if you combine Q1 and Q2 together, they show a fair profitability, you can say. But maybe because of the extra working days in Q2 and the fewer in Q1, maybe the -- that is why I made that comment that maybe it looks a little bit too bad in Q1 and a little bit better in Q2. I cannot guide on performance, but we, of course, really need to improve profitability in Profile Systems by quite a lot. They are far under our 10% target for the group, and we need to see improvements very quickly. In the current market environment and the low volumes, that is, of course, challenging. I cannot guide more on any results.

[Operator Instructions] The next question comes from Anna Widström from Carnegie.

I have a follow-up question on the pricing situation. If you maybe could give us some details if the pricing situation differs between Profile Systems and Ventilation? Or is your comment is very general on the whole group?

I will say that the comment is valid for both business areas when looking at volume development and sales development, measuring how much the increase or decrease, those numbers will look very similar. There is no big pricing effect positive or negative so far this year, and I don't expect there to be any big differences for the remainder of the year. We have price stability.

And maybe you can give us some comments on specifically the German market, because that's been kind of a worse situation in Europe. And just thinking for Airmaster, for example, that has some footprint in Germany.

Yes. The German economy is struggling, definitely. The headlines we read in the newspapers are quite often about the residential market, where it's a similar development like in Sweden or Finland that it's really a much lower activity in residential construction in Germany. But within public investments and in industrial investments, we see continued good activity in Germany. So it's a mixed picture. Many of our salespeople are quite busy in Germany, while others have had to refocus a bit. I think in total, Lindab is doing rather well in Germany despite lower business activity. We have good possibilities to combine different units and save costs in Germany. So what shall I say? Germany sales is down, but we keep a healthy and stable profitability in that market. Specifically regarding Airmaster, activity for Airmaster in Germany is clearly lower than it was 2 years ago or even 1 year ago. We knew that when we acquired Airmaster that, that was going to be the case. So it's no surprise. We factor that in when evaluating the company. They enjoyed a couple of very strong years in Germany because of subsidies paid to renovate schools and other types of buildings where the Airmaster products are very good. We knew that those subsidies were coming to an end in 2023. So no surprises. But yes, Airmaster could welcome some more sales in Germany.

And you haven't heard any talks on any renewables of these subsidies that they previously had?

Germany has many other things to think about at the moment, unfortunately. We would really welcome restarting such programs, but I have not heard that there's anything in the pipeline right now. We know, however, that in France, there are programs that have started during 2024. We hope that they will have a positive effect. And also in other countries, such programs are considered. And that is favorable for ventilation in general, but maybe specifically for products like Airmaster's products, because they are very focused on the energy renovation segment.

Okay. Great. And then my final question is regarding M&A ahead. Could you maybe tell us how much focus there will be to increase the strength in the decentralized ventilation, for example, within the Airmaster segment? And if you had any new products that would be interesting?

I don't think I should comment too much on that here, but maybe a little bit in general. We have not changed our M&A strategy. I have communicated when I have felt that there is a need to do so. It's correct that we aim to do more acquisitions within decentralized ventilation. We continue to do complementary acquisitions within technical products, within air duct systems. No change of strategy in any way. And we have a pipeline of potential acquisitions within different product groups and different geographies. I shouldn't say more not to spoil anything or to give somebody else some ideas.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you all for listening into our pre-quarter update. As I mentioned, it was the first time. We will, I'm sure, improve as we go. Your feedback is, of course, appreciated when you have done this. The first time, you want feedback. So thank you all for your patience and for your questions. Thank you.

Thank you.