Lindab International AB (publ)

Hello and welcome to this call. My name is Ola Ringdahl and I'm the president and CEO for Lindab Group. Next to me, I have our CFO Lars Lindahl. Lindab ended the year reporting its highest fourth quarter sales ever. Net sales increased by 2%, but organic growth was minus 5% due to the current market situation. The operating margin improved compared to the same quarter the previous year. The operating margin reached 8% for Q4 and the operating profit increased to 261 million versus 244 million SEK the previous year. Business area ventilation systems, which represents around three quarters of Lindab's total business, had a solid development and also reported its highest sales ever for a fourth quarter, driven by structural growth and currency effects. Business area profile systems has high exposure to the Swedish markets where construction activity is still slow. Profile systems has adjusted the business to changing market conditions and reported a satisfactory quarter given the circumstances. Tindab has had a strong cash flow for five quarters in a row now and cash flow from operating activities was a record high 589 million in the quarter. Now let's move on to the full year highlights on the next slide. Full-year sales surpassed 13 billion SEK for the first time, which is 6% higher than the previous year. Organic growth was minus 9%. Our successful acquisition journey continues, and the acquired companies contributed with 10%. We reached 9% in operating margin for the full year, slightly lower than our financial target of 10%. Demand within profile systems particularly in the Swedish market, declined faster than we could react and compensate for. And this explains the deviation versus our group target. Operating profit was 1,178,000,000 SEK and we didn't report any one-time costs during the year. Business area ventilation systems has adapted very well throughout the year and reported an operating margin of 10.1% for the full year, and that we are very pleased with. Proper systems, despite the very tough market, reached 7.2% in operating margin, which is lower than the previous year, but still on a solid level considering the volume decline of almost 20%. Cash flow from operating activities was record strong in 2023. It more than doubled to 1,711,000,000 SEK compared to 691,000,000 in 2022. Thanks to the strong cash flow, the board of directors proposes to increase the dividend to 5.4 SEK per share. Overall, 2023 was a satisfactory year for Lindab given the very challenging market conditions. We managed to defend our gross margins and our market shares despite the lower market demand. Lindab is in good shape. We move on to a little long-term view on the revenue development. Lindab's total revenue has been growing every year, with the exception of the COVID year in 2020. And the main growth driver is ventilation systems, where sales has more than doubled since 2015. In 2023, sales for ventilation systems increased by 15%. and acquisitions contributed positively by 13%. Organic growth was negative by 4%, and currency was positive by 6%. Pricing effects, we've had that during the years, but for 2023, there were no positive price effects versus previous year. European construction activity has slowed down as a result of high inflation, increased interest rates, and continued turbulent global conditions. The market in Western Europe, which is Lindab's largest ventilation market, was relatively stable with growth in important markets such as France and Italy. But we did notice a weaker market in Germany during the second half of 2023. If we look at profile systems, roughly half of the business is in Sweden, where the market has contracted significantly. For 2023, the organic sales growth for profile systems was 19%. But it would be fair to point out that the comparison numbers in 2022 were on a historically high level. Our assessment is that the demand has somewhat stabilized for purpose systems on this lower level. Now, let's look at the operating profit development. The operating margin follows a seasonal pattern over the quarters. And Q4 is normally our weakest quarter from an EBIT and EBIT margin perspective due to the fewer business days. For profile systems, we can add that the months with winter weather also leads to a natural decline in sales during the period February to March. I recognize that the seasonal patterns have become a bit blurred in the past year since the COVID pandemic in 2020. and the following turbulence macroeconomic situations in them. But it would be fair to point out that especially for profile systems, Q4 and Q1 are low season months with lower sales and consequently lower profitability. Since the third quarter of 2022, fluctuating raw material prices have put pressure on our gross margin and consequently on our operating margin. Especially so for profile systems. We have previously communicated that we would have these adverse effects during several quarters. From the third quarter of 23, we can see that the negative raw material effects have been near zero for ventilation systems. In profile systems, some adverse effects were noticeable also in Q3 and Q4 of 2023, but should from now on be near zero from Q1 2024. Despite weaker market conditions in Europe, ventilation systems have had a healthy development of both EBIT and operating margins in 2023, reaching the 10 percent operating margin targets for the full year. The demand for energy efficient ventilation systems has partly offset the downturn in construction activity. Business area profile systems was affected by significantly lower demand in addition to the mentioned raw material effects. Profile systems has now stabilized its margins during 2023 and we are very pleased to see that. We are not satisfied with the profitability level though, and we will continue our efforts to increase profitability for profile systems. During the second quarter of 2023, Lind have initiated a cost savings program in all parts of the group to strengthen earnings. The actions had full effect from October of 2020, and the annual cost saving rate is 150 million SEK. 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, Ola Yrnö, to guide us through our financial position.

Thank you, Ola. strong cash flow during the fourth quarter as cash flow from operating activities increased to 589 million compared to 527 million SEK in the same quarter last year. Linda has delivered a strong operating cash flow for all quarters of the year, which has resulted in a record high cash flow for 2023. As cash flow from operating activities increased to 1,711,000,000 SEK for the full year, compared to 691 million in 2022. The strength in cash flow from operating activities was primarily related to changes in working capital due to less capital tied in stock. Our free cash adjusted for M&A activities increased in the quarter to 570 million versus 446 million in Q4 last year. And for the full year, an increase to 1 billion, 424 million, versus 346 million in 2022. If you now look into our net debt situation, net debt has decreased compared to previous year and amounted to 3,264,000,000 of which 1,370,000,000 is relating to leasing liabilities. The net debt EBTA ratio was, at the end of the year, 1.9 versus 1.6 end of 2022. The increase is the result of a low EBTA the last 12 months. Last quarter, we introduced a new supplementary definition in KPI, financial net debt and financial net debt EBTA, to clarify our financial position and our net debt. EBITDA is the average financial net debt in relation to EBITDA, excluding IFRS 16, excluding leasing liabilities and pension-related items. This ratio is at 1.4 end of December and gives us the possibility to active and focus our continued growth, acquired growth. We also continue to focus on activities to strengthen our cash flow from operating activities with a special attention to our stock management. I'm now giving back to Ola to take us through the next presentation.

Thank you Lars. We are reviewing the financial targets that we have for the group. We had renewed and updated the target set by the board of directors in September of 2021. And the financial targets for the ambition level was raised. Increased focus on the core business better efficiency and higher margins have improved the conditions for profitable growth. And Lindab and Lindab's board of directors wanted to aim higher. In 2021, the new growth target was set to exceed 10 percent sales growth annually, and about one third of the growth is expected to come from organic growth and two thirds from acquisitions. Now, as you can see, in 2023, we did not fully meet that financial targets. We did add 10% sales growth for acquisitions, but the organic growth was negative during the year, which led to that we missed that target. In 2021 and 2022, however, we see very strong numbers. Further acquisitions going forward in combination with the market that will improve over time will bring us back to higher than 10% annual growth again. The operating margin target was also raised during the autumn of 2021. The adjusted operating margin should now exceed 10% every year as a floor and not a target. We believe that Lindab should be able to reach this 10% operating margin also in a weaker market and we were quite close to achieving the target in 2023, despite very tough market circumstances. The outcome of 9%, we are still proud to have achieved it. And the main reason that we did not reach the whole way is that the market declined for profile systems, especially in the Swedish market, was larger than we could compensate for in time. Several improvements have been made during the year to strengthen LINDAB and our possibilities to reach the target, and I'm convinced that this is a possibility to reach the target in 2024. The net debt to EBITDA has already been covered by Lars, and as you can see on the slide, we are on the right side of the target of not exceeding three times EBITDA. Then we'll switch over to dividend and dividend development. It is facing management and the board and I believe also for our shareholders to see the development of the dividend from Lindab over the past years. And in light of the strong cash flow in 2023 and considering Lindab's financial position, the board of directors proposes a dividend of 5.4 per share. This is an increase by 4% versus last year. The dividend will be split and paid out on two occasions, in May and November, just like in previous years. The dividend represents 49% of net profit. This exceeds the dividend policy of at least 40% of Lindab's net profit. Lindab is and should be a shareholder friendly company that both invests in the future development of Lindab as well as rewarding its owners. Now let's shift focus from the numbers to how we continue to build a stronger Lindab. We take a little long-term perspective first, how Lindab has developed through different phases and where we are heading now. Looking back at the period starting in 2008, we can see that after the financial crisis in 2008, Lindab had to focus on reducing debt. It was a tough period for the company. Few investments were made in the business and the generated profits were used to get Lindab's balance sheet back on track. Revenue around 7 billion SEK, EBIT margin around 6%. And slightly more than half of our revenue came from the ventilation business. I joined the CEO of Lindab Group in 2018, and the company was in better shape and the balance sheet as well, but still suffered from underinvestments and had several loss making units that had not found their way yet. We managed to increase profitability by focusing on fewer markets and product areas. presence in 32 countries was reduced to a stronger presence in 20 countries. One business area was divested and we grew the share of the ventilation business to around 70% or today 74%. The increased profitability allowed us to launch the largest investment program in Lindab's history with the objective to strengthen Lindab's efficiency, capacity and possibilities for profitability. In 2020, we started to acquire high quality companies to strengthen our offering and market share in the core markets in Europe focused on ventilation. Now we're at the end of the investment program, and the company has grown to 13 billion second sales. With a continued focus on profitability, we can redirect or generate the profits and cash flow to increase the growth speed. The target for 2027 is to reach 20 billion SEK in revenue with at least 10% operating margin. And this will be achieved through a combination of organic and acquired growth with M&A as the main driver. We are building the leading ventilation company in Europe. In the short term, we have a number of areas that we will focus on to drive Lindab's profitable growth. We will continue to implement actions to reduce our sensitivity to market fluctuations and build an even more robust campaign. Product areas and geographies that do not meet our high standards of organic growth possibilities and stable profitability will be evaluated. We will also continue with cost control and continuous improvement to strengthen our profitability. We see that in markets where we have a strong market market position, we managed to find synergies and increase our profitability. That is why it's important to continue to develop our product offering, as many markets have local preferences and building standards. We also see the potential of improving our current product offering, sharpening the functionality and production efficiency. In early 2024, we added a new product area for decentralized ventilation to Lindab, which is yet another way of increasing our product competitiveness. I will talk more about that a little bit later. The investment program has been ongoing since 2019, and it's essential to follow up that the initial plan is is followed and that necessary actions are taken to get the full potential in terms of efficiency improvements from each investment. And sustainability, a focus area for Lindab where we are at the forefront. Both legislation and customer demands are developing very quickly and we are making sure through a multitude of actions that we stay at the forefront. And some examples, including products made out of recycled steel and even out of fossil-free steel, are proving that Lindab is the leader in this green development. Finally, the first acquisitions have now been part of Lindab Group for more than three years, and we are fine tuning our support to the acquired companies to ensure that we capture the attractive synergies that we identified. Now let's take a closer look at some of the areas of this slide, starting with the investments. Lindab's investment program has been at the top of our agenda since 2019. It is very rewarding to see how the benefits become more and more visible. We see results in higher production efficiency, higher capacity, and a safer working environment. We are approaching the end of the accelerated investment program now, and the investment level is gradually declining and is expected to be around 250 million SEK annually as from 2025. From 2019 until now, we have invested around 1.7 billion SEK. This is an impressive number and it's really future-proofing, Linda, for many years to come. And on the picture on the slide here, you can see one of the latest activities where we are making sure that we will have enough capacity to supply Northern Europe with ducts and ventilation fittings for the next 20 to 30 years when we are building what we call press hall number two. It's a major expansion of our facility. in Grevia where Lindab was founded in 1959. In 2023, the investments amounted to 294 million SEK compared to the year before when it was 359 million SEK. So this is a reduction of approximately 20%. Another important focus area is acquisitions. Lindab's strategy is to acquire well-managed 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 DINDAB's expertise, sales network, sourcing agreements, etc. In 2023, we did five acquisitions, and in the beginning of 2024, we have signed two more acquisitions. If we look at these latest three ones, in October 2023 we acquired the British ventilation company Husvent, one of the leading manufacturers and distributors of ventilation products in the UK. The company has its own production of ventilation ducts and they're also a distributor of a wide range of ventilation products. They operate through 10 branches in the UK and have around 105 employees and an annual turnover of approximately 280 million SEK. The operating margin is higher than Lindab's average operating margin. In January, we took a step across the Atlantic Ocean and signed an agreement to acquire Vicon in the US. We already today manufacture and sell different types of solutions to automate ventilation production. As a ventilation installer, you can buy certain products from Lindav, but many installers would like the option to manufacture ducts, ventilation ducts, on their own, close to the customer, as ducts are bulky and expensive to transport. Vicon has approximately 280 million SEK in revenue, and with that, we are doubling the global sales from these types of automation solutions. With the acquisition, we are also establishing a stronger position in the US, where we can explore and learn about the market for future growth. And in January, a hectic month for our M&A team, we also signed an agreement to acquire AirMaster. This is Europe's leading manufacturer of decentralized ventilation for non-residential buildings. With the increased focus on energy efficiency and renovation of buildings, There is a need for solutions causing minimal impact on the building. Airmaster offers decentralized ventilation, which is especially suitable for renovation projects. By installing fresh air ventilation in each room, there is no need for ventilation ducts or a central system. The technology is particularly suitable in properties where ducting can be difficult, such as in older buildings or where only part of the building is being renovated. Airmaster's newest product, the AMX, is also equipped with an integrated heat pump that enables both cooling and heating for optimal indoor comfort. A very exciting product innovation. Airmaster had a revenue of approximately 540 million than 10% annually since 2015. Their operating margin is higher than Lindab's average operating margin. With Airmaster, we are laying the foundation for a new product area and additional acquisitions are likely to follow. The aim within this new product area in Lindab Group, the aim is to reach 2 billion tech in sales from decentralized ventilation by 2027. In total, we have added approximately 3.5 billion SEK in revenue through acquisitions since 2020, including the latest ones that are still yet to be closed. More than 90% of this 3.5 billion SEK is coming from 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 passed from building systems. So an active M&A agenda and an interesting pipeline ahead of us as well. Let's conclude this presentation with some comments about the market situation. Not an easy topic, but I will try to make some comments. So during 2023, we estimate that the European ventilation market has declined by approximately 5%, different in different regions. The Nordic region, particularly Sweden, has contracted by more than 5%, but we've seen better stability in Western Europe and in the southern parts of Europe, we've actually seen continued growth in 2023. So the landscape looks a bit different depending on where you are. And the ventilation market overall, I think, has shown relative stability due to the increased renovation activities and demand for energy efficient ventilation systems. Our assessment is that the European installation market will remain weak at least during the first half year of 2024. More difficult to judge what will happen after the summer. If interest rates are lowered early, this could trigger increased demand during the second half of 2024, but it is still unknown. We are prepared in Lindab for a continued weak market. And we have adapted our resources to the current demand level. If we look at the total reduction of personnel within Lindab and measure that against October of 2022, we have reduced the workforce by approximately 8%. So we have taken quite many steps when adjusting to the new market demand situation. They have a high exposure to the Swedish market and the construction activity really slowed down, starting in the autumn of 22 and the decline accelerated during the month of March and onwards in 2023. Yesterday, 2023, that was the full year, we estimate that the market for Lindab's profile systems product have declined by around 20%. But now we see that the situation is beginning to stabilize on this new lower level. We have adjusted our capacity to the current market situation and the cost reduction program is showing the desired results. And finally, maybe a repetition of our near-term priorities. Naturally, in this economic environment. We are working very actively with proactive measures, cost measures, pricing, et cetera, especially within profile systems, but also in ventilation. We are continuing to reduce our working capital. We have released a lot of cash flow from our working capital, but there's still more to be done to fine tune the inventory, et cetera. We expect continued good cash flows during the coming quarters. And on the acquisition topic, we continue to pursue attractive acquisition opportunities within ventilation. It is still a fragmented industry in Europe, and there are plenty of very attractive opportunities to pursue for Linda when we have a very interesting pipeline. So all in all, we have a clear plan for how Linda will continue to develop in a positive direction. And after the transformation of the business in recent years, we believe that Linda is in good shape and we are now ready to enter the next phase of growth towards our targets for 2027. We now conclude the presentation and we open up for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Sophia Sawling from Carnegie. Please go ahead.

Thank you Sophia Sawling here from Carnegie. Can you hear me?

Yes, we can hear you.

Great, thank you. And thank you for your presentation. So my first question is about price increases expectations for 2024. In general, how easy or difficult would you say it will be to increase prices towards customers? And if you can give your view on competitors' behavior within this space.

Thank you, Sofia, for the question. Pricing is always important and you can always do more in fine-tuning your pricing. However, in a low-volume market where we have many competitors fighting for the lower volumes, it is of course more difficult to implement more general price increases. Lindab's position right now is that we aim to have stability in the market, give our customers and the contractors, et cetera, stable conditions. So we are trying to leave prices unchanged as much as we can, and we believe that improved internal efficiency can improve our profitability with constant prices. Of course, if external factors like raw material prices, transports, etc., start to increase again, we will of course have to compensate by increasing the prices.

All right. Thank you. I noticed the declining demand of ventilation in Germany. Could you give us some more details on the main reason for this decline, particularly in Germany, since you had quite strong sales in Germany in the previous quarters?

Absolutely. We have had a very good development in Germany in the past years. We are comparing to high sales numbers when we say that we see I think there are two main reasons for less market confidence in Germany. The first one is that many of the subsidy programs that were implemented in Germany after the COVID pandemic to make sure that people have cleaner air indoors, they have ended. The politicians cannot agree on the way forward. So there are some types of programs that have ended and that have been funded because of this new volume in Germany. And the second reason is that just like in Sweden, the higher interest rates have led to a lower activity in residential construction is not so exposed to the residential segment it's not hurting us so much but of course higher interest rates that they are affecting the general construction industry also in germany

All right. Okay. And some questions on your most recent acquisition. So first, maybe if you can give us some more details on why decentralized ventilation is a good fit to Lindab Group.

I mean, if you ask people who have been in Lindab for a long time, it's always better to have a duct system in the building. there are many advantages to a central system in a large building but if we look at the number of buildings in Europe from the 1960s 70s 80s you know schools hospitals office buildings elderly care homes and so on it can sometimes be impossible or very expensive to evacuate those places really refurbished and put in central ventilation sometimes you need a product that is more tailor-made for renovation purposes and you can also you don't have to evacuate the building you can actually install and keep the tenants or the people in the building So most of them have come up with a very smart product range addressing exactly this. You can take one room at a time or one floor at a time and install these very smart and energy efficient ventilation products. They bring in fresh air, make sure that we don't release hot air, and save energy for you. And you really get a good indoor climate at the fair cost and short installation time. Sometimes one system is the optimal solution, sometimes the other system is better. I think the credibility for Linda Hughes when we say that we can actually offer the total range of suitable solutions is great.

All right. Okay. But it seems like the R&D spend is higher at Armaster. then given this product segment, how do you compare to Lindab's traditional ventilation offering? How often do you need to re-innovate products in order to be competitive within this decentralization ventilation? And how would you describe the competitive landscape within decentralized ventilation compared to the traditional product offering by Lindab Ventilation?

I think the centralized ventilation has been around for a longer time. with more permanently established technologies, and that means that the R&D spend is on a lower level versus sales than in these younger and fast-developing, fast-growing technologies like . It is very true that they have a relatively high R&D spend. The two owners and founders have been and are extremely passionate about technical development and taking technology to the market. This is not something that we will stop doing. We encourage our market to continue to build and improve advanced R&D and new products. have shown impressive profitability despite quite heavy R&D costs and we aim to continue in their spirit and one of the founders slash owners will remain as CEO of Airmoster and continue to lead that as he has successfully done up until now. So I'm quite excited to bring in this technology in the group. And I'm sure we can also have very interesting R&D exchange between the different R&D centers we have throughout the group.

All right. And perhaps my final question, then. It's on divestment, actually. And if you can give us some more details on how this process is going in evaluating potential divestments within Linde Group and if you see any potential buyers.

There is no formal process if you're referring to any discussion with somebody. It's still in the evaluation stage. Right now, the market conditions are not perhaps the absolute best to try to divest assets. But we are looking at reducing the difficulty both in sales and earnings. And what we have seen now in the past 18 months is that we have, in some parts of our businesses, we have fluctuations in results and sales that are too big. And we would like to bring down that volatility. So, yes, we are reviewing some, whether we should keep them or not. But I don't have anything to communicate at this moment.

All right. Okay. Thank you for all your answers.

Thank you, Sofia, for all your questions.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.

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