Lindab International AB (publ)

Hello and welcome to this call. My name is Ola Ringdahl and I'm the president and CEO of Lindab Group. And next to me, I have our CFO Lars Inno. So some Q2 highlights. Lindab sales and adjusted operating profits developed well during the second quarter of the year, despite challenging market conditions. Lindab reported its highest quarter ever in terms of sales. The increased sales was primarily driven by ventilation systems and the acquisitions made during 2022 and 2023. Business Area Ventilation Systems, which represents around 75% of Lindab's total business, had a solid development with the highest sales and operating profit ever for a single quarter. Profile Systems was impacted by a weaker market, but also has very high comparison numbers from the same period previous year. Profile Systems has high exposure to the Swedish market and to new construction. which are areas where construction activity has slowed down significantly. The operating margin improved compared to Q1 this year, but it is still lower than desired for profile systems. The group's operating profit in the second quarter amounted to 302 million SEK, giving an operating margin of 9%. Ventilation systems increased the operating profit versus previous year, while the profit in profile systems decreased significantly compared to the very strong period previous year. Lindab had a strong cash flow in the second quarter. Cash flow from operating activities was 323 million SEK, which is twice as high as in the previous year. I will take a closer look on the sales and the margins on the next slides. Lindab's total revenue has shown strong growth for the past two years, mainly thanks to acquisitions, but also as a consequence of price increases to compensate for higher raw material costs and inflation. Business area ventilation systems has continued to grow strongly and reported its highest quarter ever in terms of sales. Sales for ventilation systems increased by 21% compared to the second quarter, 22%. Acquisitions contributed positively by 19% and currency had a positive effect of 7%. Organic growth was negative by 5% and there were no positive price effects versus previous year. We saw slow sales volumes in April, improving in May and further improving in June when we had positive organic growth within business area ventilation systems. The European construction activity has slowed down as a result of cost inflation, increased interest rates and continued turbulent global conditions. Lindav's largest region in terms of ventilation sales is now Western Europe. And they reported, despite this, a positive organic growth in the quarter, while the organic growth was negative in Central Europe and in the Nordic region. Business area profile systems has high exposure to the Swedish market where construction activity is slowing down significantly. The Swedish market represents roughly half of profile systems total business and therefore has a major impact on the business area as a whole. The second quarter, the total sales growth for profile systems was negative by 21%. Acquisitions contributed positively by 6% and the currency effects were positive by 2%. We see an organic sales decline by 29%, which is in line with what we communicated in the outlook during the release of the first quarter report this year. Let's now look at operating profit. Since the third quarter of 22, fluctuating raw material prices have put pressure on Lindab's gross margin. and consequently on our operating margin, especially for profile systems. We have previously communicated that we would have these adverse effects during several quarters and also into the second quarter of this year. From the month of June, we can see that the negative raw material effects are near zero for ventilation systems. In profile systems, there will still be some adverse effects on gross margins from raw material inventory during the third quarter, but on a limit level. Ventilation systems managed to compensate relatively well for the raw material effects and delivered its best quarter ever in operating profit. The operating margin was 10.2%. Business area profile systems was affected by significantly lower demand in addition to the mentioned raw material effects. And it should here also be mentioned that the comparison numbers are very high, but in any case, Perfa systems did not meet our planned profitability level in the quarter. The operating margin of 6.9% has, however, developed in a positive direction compared to the first quarter. During the second quarter, Lindab has initiated cost savings in all parts of the group to strengthen earnings. The activities will reduce costs by approximately 150 million SEK on an annual basis and will have full effect from October this year. In total, approximately 200 positions are affected with a particular focus on profile systems where the volumes have declined more than in ventilation. The redundancy cost was 4 million SEK in the second quarter and is expected to be slightly lower than that in the third quarter. These costs are taken on an ongoing basis and are not recognized as one of items. In addition to the cost-saving activities, we are reviewing if there is a need for further structural changes to improve Lindab's profitability margin and to reduce the cyclicality of sales and earnings. I now hand over to our CFO Lars Irno to guide us through our financial position.

Thank you, Ola. Linab had a strong cash flow during the second quarter, as cash flow from operating activities increased to 323 million SEK compared to 161 in the second quarter last year. The strength in cash flow from operating activities during the period was primarily related to less negative impact from changes in working capital compared to the same period last year. In the quarter, cash flow from changes in working capital amounted to minus 20 million SEK compared to minus 264 million in the second quarter last year. Our free cash adjusted for M&A increased to 216 million compared to 63 million in the Q2 last year. Net step has increased compared to previous year, which is mainly a result of acquisitions and increased leasing liabilities. The increased net debt EBITDA ratio from 1.1 end of Q2 last year to 2.0 this year is primarily related to increased liabilities impacted by acquisition activities the last 12 months. We continue to focus on activities to strengthen our cash flow for operating activities with a special attention to our stock and days in stock. And I'm giving back the word to Ola, continue presentation.

Thank you, Lars. and we will talk a little bit about how we are continuing to build a stronger Lindab. Lindab has gone through a major transformation in recent years and is developing from a diverse company serving the construction market to a focused European ventilation company. 2019 was my first full year as CEO of Lindab and since then ventilation sales has increased by 56% from 6 billion SEK to 9.4 billion SEK. In the first half of 2023 ventilation represented approximately 75% of the group revenue and I would say that it should soon be above 80%. Another change that is worth noticing is the geographical expansion that Lindab has made within ventilation, mainly driven by acquisitions, but of course also through organic growth. We are expanding in the major economies of Europe, such as Germany, France, UK, and the Netherlands, to mention some examples. Sales region Western Europe has increased ventilation sales by 58% in the first half of 2023 compared to 2022. So this is quite a rapid transformation of our company. It has increased the share of group ventilation sales from 43% to 55% in the Western Europe region during this same period. We are fundamentally changing the structure of our company and this journey continues. We are continuing to develop our position as the leading European ventilation company with focus on profitable growth. And I'm convinced that this will take us to our group targets of a turnover of 20 billion SEK in 2027 with at least 10% operating margin. One important building block, as you know, on this growth journey is the acquisitions. And Lindab's strategy is to acquire well-managed, successful companies who 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 Lindav's sourcing agreements, expertise and sales network. In April, we made our first acquisition in the Czech Republic. The company Ventilace sell and manufacture rectangular ventilation ducts in the Czech market. The business is known for its high level of service and fast deliveries. Lindav already has a collaboration where Ventilace has assisted at production peaks in Dindab's central production facility in the Czech Republic. The company has sales of approximately 42 million SEK on an annual basis. In May, we acquired a slightly different type of ventilation company than our previous acquisitions. Firmac is the European leader in the production of machine equipment to manufacture rectangular ventilation ducts. Dindab Group already has a very strong brand called Spiro, which is the leading producer of machines to manufacture circular ventilation ducts. So now we have also moved into the square duct business. So with Fermac, we get this corresponding market position and business for the rectangular duct equipment. Fermac is based in the UK and has sales of approximately 40 million sec on an annual basis. We have high growth ambitions for this very well-recognized brand when they now have Linda as the mother. In total, we have made 21 acquisitions since 2020, adding 2.7 billion SEK in revenue. And as you can see in the chart, around 90% of this acquisition turnover has been in the ventilation business. We have also divested businesses with a turnover of 1.3 billion SEK since 2020. The largest divestment was the business area, Astron Building Systems. Now we continue with an update on investments. Lindab's investment program has been at the top of our agenda since 2019, and it's very rewarding to see the benefits becoming more and more visible. We see results in higher production efficiency, higher capacity and a safer working environment. These are very important areas for continuing to build a profitable and sustainable Lindab in the long term. When the European market recovers and the volumes start to increase again, Linda will be very well prepared and positioned to accelerate the organic growth with strong efficiency and profitability. In the second quarter, we invested 108 million SEK in our European operations, and we are continuing to invest on a higher level until 2025, but will gradually reduce the amount every year since we have completed the largest part of the program. The peak in terms of monetary values was reached in 2020. And now to sustainability, which also is at the top of Lindab's agenda since quite many years. In early 2023, Lindab joined the science-based targets initiative. One of the most important activities to reach our goals in the science-based targets initiative is fossil-free steel. It is also important for our customers who wish to improve their sustainability work. With the long-term relationships we have with steel manufacturers, we have managed to secure a test delivery of fossil-free steel from SSAB in the autumn of 2023. This is a chance for selected customers to try out the first ventilation ducts in the world made from fossil-free steel. In the beginning of 2023, we launched products in decarbonized steel. This is steel produced with recycled steel and 70% percent lower emissions. Decarbonized steel is a good option for customers who would like to switch to a material with less emissions already today, since we will have to wait still some years before we have full production and more availability of the fossil-free steel. 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 priorities. So it's not easy to comment on the market outlook, but let's say like this. We are positive about the prospects for both the industry and Lindab. However, there are challenges in the short term, as we have already noted. Demand for ventilation systems has remained relatively stable in the quarter, and this is to a large extent thanks to our geographic footprint, where we have expanded in markets that have been less affected than the Swedish market. So in Western Europe, we've seen a strong development, while demand in the Nordic region has been weaker. Increased demand for energy efficient solutions has partly offset the negative effects of the high inflation and high interest rates and the lower new construction activity. We plan for a continued stable ventilation market overall in Europe at current levels for the rest of the year. New construction has fallen significantly, especially in the Nordic region and particularly in Sweden. And this has mainly a direct impact on the demand for profile systems products. We expect the new construction market in Sweden to remain low over the next 12 to 18 months. And we take measures to ensure that Lindab can perform at a satisfactory level despite the lower market demand. In the medium and long term, we are very optimistic about both the market and Lindab's prospects. The high energy prices and the sustainability agenda puts 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 throughout Europe. With the new construction, the demand for sustainable and energy efficient buildings will increase further, which is also to the advantage of Lindab and our leading product range. So that was some comments about the market outlook. Now, what are Lindab's near-term priorities? Naturally, in the current economic environment, we are working with proactive measures, especially in business area profile systems where the margins need to improve and where the market demand is weaker. But we, of course, also look at things to improve within ventilation systems. We focus on three areas in these types of activities. Number one, we are adjusting our pricing to strengthen gross margins and to mitigate the inflation effects. Number two, we are reducing our cost base. In comparable units, we were 6% fewer employees at the end of June compared to one year ago. We now have cost-saving activities implemented in May and June. They include the rationalization of 200 job positions. and cost savings equivalent to 150 million SEK annually with full effect from October. And number three, we evaluate possible structural changes to reduce the cyclicality of Lindev's business and to improve the average profitability. We intend to continue to pursue attractive acquisition opportunities within ventilation We believe that there is still a very interesting list of possible acquisition targets and the European ventilation industry is fragmented. So this gives a lot of opportunity for Lindab to create long-term value. And I will repeat that the acquired companies that have joined the Lindab group in the past two years have all really performed in an excellent way. We have a clear plan for how Lindab will continue to develop positively. After the transformation of our business in recent years, Lindab is a company in good shape. We now conclude the presentation and open up for questions.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Carl Ragnestam from Nordea. Please go ahead.

Good morning, it's Carl here from Nordea. A few questions from my side. Firstly, you mentioned that you're cutting 200 FTEs, reducing costs by 150 million. How much of that is related to profile? It sounded like the vast majority, but still it sounds also a bit like you're doing some measures in ventilation as well. And also you said that you expect full metering station in October, but I guess you have some ramp up effects there as well. So should we expect, what savings should we expect already in Q3?

So about the facing of the savings, you are correct, Carl, that there will be a ramp up of savings. We are commenting that the full effect will be in October and it will not be zero in September. So it will be, we will gradually see the positive effects of this cost saving program during the months in the third quarter. When it comes to The number of people divided by profile systems and ventilation systems. Well, there are rationalizations in both business areas, proportionally measured to the number of people in each business area and to sales in each business area. There are more effects in profile systems, but we also have made adjustments within ventilation systems.

Okay, that is very clear. And also, I think you said that you are planning to potentially at least make structural measures in sort of underperforming divisions or subdivisions. So which subsegments are you referring to? I presume it's in profile systems primarily. And also, have you started this process of divesting these assets already? Or is it at a very early stage still?

uh when it is exactly five years ago since since i presented my first uh quarterly report for linda and um during my first two three years at the end we we did quite a lot of structural changes you know closing down units divesting units we reduced the number of countries where we operate we reduced the number of product families, et cetera. And I think that when the economy and the demand situation changes, it is good to revisit and look at your business and try to do that with new fresh eyes and say, should all of the units belong in the future, Linda, or are there some units who cannot perform when demand is dropping like it has done now. So it's a good test. It's a good opportunity to review that. I'm not promising that there will be any closure or divestments, but I'm saying that we are assessing, analyzing if such measures would help Lindab to be less cyclical, have less seasonality, and to have an average higher profitability in the future. So there are some activities within profile systems that we are reviewing, but I'm not going to name any of them, and I'm not going to say that there is anything definite, and I'm not going to promise when we will come to a conclusion. But I think it's an important signal to say that if the units cannot perform according to the Lindab Group targets, both in good times and in bad times, then there is no space for them within Lindam Group. We want high-performing units who perform every year during the business cycle.

Are you still there, Carl? Carl, did you put yourself on mute? Are you still there? Okay, so I guess we will move on then. It seems like Carl lost the connection. Ola, can you hear me still? Yes, I can. Yes, perfect.

The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.

Hello, gentlemen. Douglas here from DMV. Thanks for taking my questions. Ola, did I hear you correctly in the beginning that you commented on the ventilation market within the quarter, meaning month over month, and that you said that last month, June, was sequentially better than the month going in within ventilation systems?

Yes, that is correct, Douglas. I said April was relatively weak. I don't know, Easter effects, et cetera. May was better. June was even better. And yes, we saw organic growth within ventilation systems in June. We did not in April and May, but we did in June. So let's not make that into a long-term trend, but it was positive to see a gradual improvement within the quarter.

market was driving that organic growth for June specifically, would you say? Western Europe?

Most strongly, it was what we call region Western Europe, where we had strong sales in France, in Italy, in Switzerland, Germany, Netherlands, Ireland. So we were quite pleased with the development in June.

Okay, that sounds very reassuring. I agree. And on the margin target, you still think that's attainable for this year? And I guess this cost savings is one key building block to potentially getting there. But do you think that is that enough?

We are doing everything we can to reach that. And we are determined to do that. With the current volume headwind, In profile systems, we admit that it is not easy, but we are not giving up so easily either. So we aim to reach those targets. We see a sequential improvement of margins. We see that gross margins have started to improve after a longer period of decline, but of course, Quite a lot depends on if there is that extra volume out there in the markets to grab or not for profile systems. Ventilation systems, there the development is not as dramatic, but I think we comment on it in a balanced way in the report. We see that ventilation systems, they are performing, profile systems, there is a gap We're trying to close it, but of course we have now six months to close the gap and we will do everything we can.

And just on pricing, where are we there? Can you give us an update on that?

So price effects versus one year ago are basically zero for ventilation systems and they are slightly negative for profile systems, a couple of percentage points. So we don't get any help this year from from the price level, the general price level. On the other hand raw material prices have gone down somewhat, so there is some help from that, especially from some stock effects that are now not to our disadvantage anymore. But the inflation effects in Europe are significant on salaries and wages, so they are counteracting We are implementing, you know, selectively, we're implementing price increases where needed to compensate for inflation effects, but also to compensate for quite dramatic currency fluctuations. We are based in Sweden with one of the softest currencies in the world. And we have to try to balance all of this so we have a decent profitability per currency market as well.

It seems like we are far away from a scenario where you will lower prices at least. Can you say that again? It seems like we are far away from a scenario where you will lower prices at least given inflation etc.

Yeah, I mean unfortunately the current inflationary economic situation makes it difficult to reduce prices. We are also keen also to have the right volume load in our factories. But the data we have indicates that Lindab has taken market share in the past two, three quarters. So I don't think that we are pricing our products unfairly. I do believe we're doing a good job in a somewhat shrinking market. taking market share in ventilation, we are also taking market share in the rapidly decreasing profile systems market. So I'm pleased with that, but of course I'm not pleased with the overall market demand. That is difficult to change, but I think we're doing what we can in that difficult market.

And a final question from my side for Lars. The tax in the quarter was quite low. How should we think about that going forward for this year?

It's a consequence of tax unity in Germany. We have commented that in the report as well. So it's an impact of that. So it's normalized? Yes. Going forward, I guess. Yes, please do that.

Okay. Thank you, gentlemen. That's it for me. Thank you, Douglas.

The next question comes from Sofia Soling from Carnegie. Please go ahead.

Hi, Ola and Lars. This is Sofia from Carnegie. I only have one question to follow up by the previous questioners. So there's strong sales in Western Europe. Could you give us some more details what has boosted these sales? Is any particular country, product, end market, etc. Could it be also that actually the phase was quite strong because they finalized a lot of new builds or is it different from for example the renovation market?

The renovation market is strong but we do not see the decline in new construction in those markets within commercial and industrial buildings. I mean, we are not so exposed to residential segments in most of the Lindab ventilation countries. So the underlying market demand and all the books, the inquiry levels, the quotation levels, everything indicates a continued strong market situation in countries such as Germany, France, Ireland. I think also even in UK, which they're also exposed to short interest rates and so on. But I was quite pleased to see the June numbers that the activity level is high also there. In some countries, I think we receive some boost from subsidies towards energy renovation, but it is not the one and only driver. On top of that, I think we are, from a sales point of view, we are performing well. We are hungry and we are taking market share and we have very many positive effects from the acquisitions where they have good confidence in the new environment. And I guess they want to show the new owner that they can really perform.

All right. Okay. Thank you. That was all from me.

Thank you, Sofia.

The next question comes from Anna Whitstrom from Handelsbanken. Please go ahead.

Hi, Ola. Hi, Lars. It's Anna from Handelsbanken. So my first question is you comment that you have a stable demand from the current levels for the ventilation. Is that due to stable now lower levels in Nordics, or is it rather that it's going to be offset from other markets? So basically, my question is, do you see a stable low level in the Nordics from now on, or should that decline further?

Yes, we do mean that we recognize that there has been a decline in the Nordic region, but we believe that it will not decline much further than that, but it will perform at a continued stable level on the current level. We also believe that the region of Western Europe will continue to show a good demand level. So you can say we are predicting more of a status quo levels seen in the second quarter and extrapolated for the rest of the year.

Okay, great. And if we go into some other sort of costs rather than the steel price effects, what has happened on energy and transportation costs for you in this quarter if we look sequentially?

Transportation costs are high. It's difficult for me to give exact data on that, but they continue to be high. Energy costs are somewhat lower than we had budgeted for or expected right now. What they will be next winter is a different question. So we are very cautious when it comes to calculating with low energy prices going forward. I think that we will have to include as a main scenario continued high energy costs and high transportation costs for the foreseeable future. That is what we have in our base scenario. If you are curious if there were any unexpected positive profitability effects from lower energy and transport costs, the answer is Probably no. That is not what has lifted our results in any major way.

Okay, good. That's very clear. You talked previously about having sort of a long-term strategy to try to move the transportation costs towards the customers rather than you handling them. Is that something that has been starting to pay off in what we're going to see in the upcoming year or so? Or is that a more difficult challenge?

Yeah, that's well spotted. It is correct. I do not like the habit in the industry that transportation is free of charge. It is definitely not free of charge. I think from a sustainability perspective, it should not be viewed as a free for all service. It creates inefficiency and higher costs for everybody and it's a burden on the environment. So yes, we have a clear strategy to have price transparency towards our customers. What is the price for the transportation component and how can we, together with our customers and suppliers, reduce the total cost of transportation by smarter planning, better routes, collecting more orders and products on the same truck, etc. So we are working very actively with that and there we are making some progress. We see that there is a much better understanding on the customer side that we want to split this out and charge that in a transparent way as a specific service. Customers want transparency because they want to do their sustainability reporting. We need to do ours. And they also know that we are working with the best and most transparent transportation companies who can give sustainability data, et cetera. So I think this is an important trend and Lindav is at the forefront to change the behavior in the industry.

Okay, great. My final question is regarding M&A. Given these slightly weakening markets, are there more or less interesting M&A opportunities for Lintab, would you say? And have you seen price tags being affected?

If anything, there are more opportunities. I think when, and we have seen that also when, you know, When COVID came, this created a nervousness in many family companies where they said, oh my God, if this can happen, we want to share the risk with somebody. This is too risky. And then we have had raw material shortage situation. We have a war in Europe. There are many uncertainties that have become very visible in the past three years I think that family companies who have been running two, three generations, they want to de-risk. So I would say, yes, there are many opportunities. We have many interesting discussions. Have the price tags come down? Possibly a little bit, but since we are buying premium quality companies, They are never sold at a significant discount. They have a value and we see that value. Lindab is trying to pay fairly and have a lifelong relationship with the families who are selling their companies to us.

Okay, great. That was all for me. Thank you.

Thank you, Anna.

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

Thank you very much for listening in to Lindab's Q2 report. From myself and Lars Ynder, we would like to say have a wonderful summer and see you on the other side of the summer. Thank you very much.