Lindab International AB (publ)

Hello and welcome to this call. My name is Ola Ringdahl and I'm the President and CEO for Linneb Group. Next to me I have our CFO Lars Ilner. Let me start with a summary of the quarter. Business area ventilation systems, which accounted for 80% of sales during the quarter, reported 4% growth thanks to acquisitions. We achieved an operating margin of 9.6% despite the challenging market. Business area profile systems have had a noticeable impact from reduced market activity. Sales declined by 21% in line with the weak market. The significant sales drop in operating margin of negative 0.5%. In total, in the group, sales declined by 2% in the first quarter and the operating margin was 7.1%. Cash flow developed according to our expectations and came in at the healthy level. Let's take a closer look at the revenue development. Ventilation systems increased sales by 4% during the quarter and reached the highest quarterly sales ever in Lindab's history. Organic sales growth was negative by 6%, partly due to fewer invoicing days and developing in line with the market. Acquisitions contributed positively by 9%. The construction activity in the European markets where Lindab operates has been generally weaker during the first quarter compared to the same period previous year. Lower demand is especially noticeable in the Nordic region. Several countries in Southern and Western Europe have shown relatively good market development, countries such as France, Italy, Switzerland, and Ireland. For profile systems, the reduced construction activity in the Nordic region has a direct impact on demand. Net sales during the quarter dropped 21% compared to previous year. We estimate that this was in line with the negative market development. The first quarter is the seasonally weakest period for profile systems, and this year it was also a quarter with fewer working days due to public holidays. I can add that the second quarter has started at a higher pace for profile systems, and we recorded organic growth in April. However, it should be mentioned that the comparison numbers are easier from April and onwards. Let's move on to the operating profit. Ventilation systems operating profit was 241 million SEK with an operating margin of 9.6%. If we adjust for acquisition costs of around 9 million SEK, the operating margin was 10%. Selective price increases are being implemented and the cost basis reviewed to strengthen profitability further. In profit systems, the low sales led to an operating loss of 3 million SEK and an operating margin of negative 0.5%. Cross-margin development was positive but could not compensate for low volumes and inflation. We have implemented price increases during March and April and more price increases as well as cost reductions are planned to immediately return to acceptable profitability. Structural measures are also being evaluated for low-performing units. For the group, the operating profit for the quarter amounted to 225 million SEK, and the operating margin was 7.1%. Now, Lars Unna, our CFO, I hand over to you to guide us through our financial position. Thank you, Ola.

Lindab had a continued strong cash flow during the first quarter as cash flow from operating activities amounted to 208 million SEK. The main reason for the change cash flow in relation to the first quarter previous year was related to working capital as our stock value continued to decrease, but at a slower pace than last year. Our free cash flow adjusted for M&A amounted to 147 million SEK. All in all, Lindab has a continued strong financial position which supports the group to do additional acquisitions. If we now look deeper into our net debt situation, net debt has increased compared to previous year and amounted to 4 billion, 447 million SEK, of which 1 billion, 501 million SEK is related to leasing liabilities. The change in net debt is mainly related to increased borrowings as a consequence of completed acquisitions. The net debt EBITDA ratio amounted at the end of the quarter to 2.0 versus 1.8 one year ago. The increase this year is mainly affected by our acquisitions activities the last 12 months. Financial net debt EBITDA is average financial net debt in relation to EBITDA excluding IFRS 16 leasing liabilities and pension related items. This ratio is at 1.4 at the end of March. I'm now giving the word back to Ola to take us through the next part of the presentation.

Thank you, Lars. So let's look at the longer term plans for Lindab. For a couple of quarters, we have included A slide describing our ambition to reach 20 billion SEC in sales in 2027 with the goal to have an operating margin well exceeding 10%. And over time, I think that 12 to 15% operating margin should be possible. These are ambitious goals, but we have a clear plan how to achieve them. Demand for energy efficient solutions and a 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. The rate of building renovation needs to increase in Europe, and we will be there with flexible solutions that make it easy to upgrade existing ventilation systems. We also have a strong position in new construction of energy efficient buildings, which we will leverage and develop further. Europe is our home market, but in the longer term, we aim to be more active in North America as well. The acquisition of US-based Vicon in early 2024 is one small step on that journey. Acquisitions will continue to play an important role in Lindab's future developments. In 2023, we added another five companies to the group. And since 2020, we have added 25 companies and around 3.5 billion SEK in annual sales. The development of the acquired companies has been strong thanks to careful integration in line with Lindab's decentralized model. Lindab's strong brand gives us opportunities to also grow organically. As the renovation market takes off, there are good opportunities to grow faster than the general market. We expect that about two thirds of Lindab's growth will come from acquisitions and about one third from organic growth, seen as an average over a business cycle. Now, what do we do right now to achieve these ambitious targets? Well, in the short term, we have a number of focus areas to accelerate our profitable growth. And on the next slides, I will touch on the five areas that you see here on this slide. Let me start with something that is an immediate focus area, profitability. To improve profitability, we are implementing price increases across the group to compensate for inflationary effects and the lower volumes that we see in the market. We are also accelerating the synergies with the acquired companies, as well as rationalizing our footprint. Finally, due to the tough time for profile systems, extra focus is required to bring that business back to acceptable profitability levels. And if there are parts of the business that cannot perform at the right profitability, we will consider structural measures. To continue to develop competitive products is another of our important focus areas. linda has a strong market market position in our five main ventilation product areas our heritage is within air distribution where we are the european market leader in circular as well as rectangular ventilation ducts we also have a strong market position within air diffusion and fire and smoke protection where there is a high technical content And with our recent acquisition of Airmaster, we are aiming to take a leading position also in decentralized ventilation, which is a very interesting growth area. We invest in R&D to develop these product technologies further. But as you know, we have also talked a lot about our investment program in factories and logistic centers, et cetera. And that has been at the top of our agenda since 2019. You need to be extremely competitive and cost efficient in our type of business. We see results from the program in terms of higher production efficiency, higher capacity and the safer work environment. And as planned, the accelerated investment program is coming to an end in 2024. Moving forward, we expect an annual investment level of approximately 250 million SEK And that should be seen in relation to the peak of around 400 million SEK per year. 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 investments. Lindab is now shifting the investment focus to digital tools and services. in order to increase our service level to customers as well as to increase efficiency even further. Then we have the focus area of sustainability. We are experiencing increased demand for sustainable and energy efficient products, which benefits Lindab's ventilation business in both the short and long term. Products in recycled steel have been part of Lindab's standard range since 2023. last autumn we also received the pilot delivery of fossil free steel during the quarter we announced the collaboration with property owner castellum that will use fossil free ventilation ducts and fittings in a swedish renovation project making it the first renovation project in the world with fossil free ventilation in our internal work to reduce emissions we have during the first quarter signed the contract for renewable energy for linden group test the potential to reduce Lindab's emissions from operations by more than 50% when all subsidiaries are on board. And then on to the area of acquisitions. We are continuing to add high quality ventilation companies to Lindab Group. In the beginning of 2024, we acquired Vicon in the US as part of our product area for duct automation. Vicon has approximately 280 million second revenue, and with that, we are doubling the global sales from duct automation solutions. In the U.S., where we can explore and learn about the market and enable future growth. Another important acquisition is AirMaster, part of Lindahl Group since 1st of March. Airmaster had a revenue of approximately 540 million SEK in 2022 and has a strong growth track record with a profitability that is higher than Lindab's average. With Airmaster, we lay the foundation for the new product area decentralized ventilation and additional acquisitions are likely to follow. Our aim is to reach 2 billion SEK in sales within decentralized ventilation by the year 2027. In March, we also signed the contract to acquire TGA Klima Partner, a German ventilation distributor. They are based in the northern part of Germany, where we wanted to improve our geographical coverage. TGA Klima Partner had a revenue of approximately 50 million SEK. In total, we have added approximately 3.5 billion SEK in revenue through this acquisition since 2020. But we have also divested businesses with a turnover of 1.3 billion since 2020. And the largest divestment was the business area of strong building system. So we're building a new Lindab, very much focused on ventilation, and we have an interesting pipeline and more acquisitions will follow. So let's 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 approximately 5%. The Nordic region has had more challenging market conditions than Western and Southern Europe. The ventilation market has shown relative stability thanks to increased renovation and demand for energy efficient ventilation systems. The market for profile systems in the Nordic is estimated to have declined by 20% to 25% versus Q1 2023. I should mention that we saw a steep decline from approximately the middle of March in 2023. So the comparison numbers are less challenging going forward. And we anticipate sequentially improved sales in Q2 and Q3 versus the first quarter of 2024. We believe in gradually increasing volumes in general during the second half of 24, but from a low level. Interest rate cuts will be an important trigger, especially in Sweden. From 2025, we believe that the ventilation market will enter a multi-year growth phase. Despite the challenging market situation, I am determined that Linda will reach its financial targets in 2024. 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 Hannah Grimborg from Handelsbanken. Please go ahead.

Hi, Ola and Lars. Thanks for the presentation. So you just mentioned this in the end, but I was just wondering, taking into consideration the tougher markets and the negative earnings in profile systems, how confident do you feel when it comes to reaching your 10% margin target? Will you achieve it only through price increases and cost savings, even if the market remains weaker, or do we need to see a bit of a pickup in the market?

Thank you, Hanna, for the question. Yes, I remain confident that we will reach our financial targets, but I also am confident that we will see gradually improving market conditions, especially within profile systems going Obviously, if we have four quarters which are the same as the first quarter for profile assistance, reaching financial targets will be tough. However, we have to also consider that the first quarter for profile assistance is the weakest quarter due to seasonality and weather conditions. So we should see a clear improvement in the results for profile systems in Q2 and Q3. And the demand out there in the market, there is demand and people are waiting to see the first signals from the interest rate cuts, but I'm convinced that the market climate will improve gradually during the year.

All right, and regarding the interest rates, just to be clear, do you think that the market will pick up even if the interest rates don't come down, or do you think that that would be very important for the volumes?

There is a demand waiting for a trigger, and of course if there are no interest rate reductions Demand will come back, but it will be a slower development. I think I'm not working for the Central Bank of Sweden, but I think if you look at this country in particular, that signal would be extremely welcome for a construction industry that is under severe pressure.

All right, clear. Okay, thanks. That was all my questions.

Thank you, Hanna.

The next question comes from Carl Ragnestam from Nordea. Please go ahead.

Good morning. It's Carl here from Nordea. A couple of questions. Firstly, on the operational performance in profile systems. I mean, looking into Q1, obviously a bit surprised by the slightly more negative organic growth. Would you say that accelerating negative organic growth is mainly due to the sort of long and cold winter as well as working days? And also, you mentioned that you recognized positive organic growth in April in this month. What magnitude are we talking about in the positive organic growth in April? And is it driven by sort of a, I mean, is it just due to comps or is it driven by a slight catch-up, I guess? You got tax refunds in April here, if that helped. Yeah.

I'm not sure if the tax refunds helped. Maybe they did, but let me try to answer your question, Carl. I mentioned in my presentation that if we look back at 2023, we could see a clear worsening demand situation and then the clear decline in sales for profile systems from mid-March of 23. And April, May were very soft. And then the volumes stayed on a clearly lower level than they had before. So we have been seeing a strongly negative organic growth if we now include our Q1 report, for purpose systems for the last four quarters. That means that from April and onwards, we are seeing the easier comps, as you correctly indicate. And yes, compared to those weaker numbers from last year, we are recording organic growth in profile systems in April. Now, then we come to different types of effects. And yes, you're correct. If you live in the Nordic region, you did notice that the winter was long and terrible up here. But I think that can be one effect that sometimes affects profile systems more or less. But I would say also that the Easter effect, the Easter being in March instead of in April, plays its role. That will help us in April. It didn't help us in March. But I don't want to use all these explanations to explain why the market is down so much. I think we see that the market in the Nordics for these types of products, it is down by 20 to 25%. We defend market shares. We don't lose market shares. And we are developing in line with the market. And at the same time, which I'm a little bit proud of, we have managed to improve our gross margins within proper systems, even in this very difficult demand situation. So people who have a long experience, they know that the market will come back. It can look very tough for one year, one and a half year. The need is out there for these types of products, and people want to get started on the projects again, perhaps waiting for a trigger. I have good expectations that we will see healthy margins in profile systems in the second and the third quarters, which should be the high season for profile systems.

That sounds fair. And so far in April, or perhaps May as well, for ventilation, is it... Is it same as we saw during the quarter?

We see the same underlying market situation in April for ventilation systems as we did in Q1, meaning underlying demand is approximately 5% lower than previous year. And then we might have, you know, particularly in April, a slightly positive calendar effect this year. But underlying demand and the order situation and requests for quotations, etc., it indicates approximately 5% down in average in the European countries where we are active.

Very good. And you talked about the pricing measures as well. Is it possible to give any flavor of the magnitude of these price increases in by segment, when were they announced, and when they expected the yield effects into the numbers. And also on that note, I guess in a tougher market, it might be more difficult to implement price increases. So do you think that customers could stomach more price increases from here? And what has the feedback been so far?

You are absolutely correct, Carl. It is more difficult to increase prices in a declining market, definitely. But what choice do you have? You have lower margins to cover the factories and the distribution centers, etc. that are a prerequisite to serve the customers in a good way. And we have seen high inflation effects and way higher rental costs and so on in the past couple of years. And we have to compensate for that. And if that means that sometimes we have to shrink the business a bit, but have healthy margins, that's okay. The urgency to get price increases through is the highest in profile systems, actually. And during March and April, we've implemented price increases of somewhere between 3% and 5%. And there are more price increases to come. And most important is to implement these increases in the Scandinavian countries where most of our profile business is. But then there are different windows to do that. One window is now in March, April. And the next one after that is in September, October. So we will not be shy. We need to have the right pricing so that we can generate decent margins. But we are also implementing price increases in ventilation systems where we also have a volume drop, but not as severe as in profile systems. But it needs to be compensated for. We can do a lot of things on the efficiency side, but it is not enough. The ventilation system, we also have improved gross margins in Q1, but I would like to see a little bit better so that we can be safely above 10% earnings. So there's more to be done and price increases are implemented and more will come.

And the final one, if I may here as well, you mentioned cost savings, also mentioned footprint rationalization in the latter year, footprint rationalization. Could you give some insights into the magnitude of this? Is it focused on just, I mean, maybe discontinuing on performing branches, or is the scope bigger that we're talking about whole subsegments or verticals as well, or?

We are not talking any major structural actions right now that will also be costly. We're not talking about that. We're talking minor steps. For example, if we have made acquisitions, including many depots and sales branches, we might find an optimal footprint where we look at the combined units together, we will still be able to serve the customers in a good way, but we might not need as many pro shops and warehouses as we have today. So there is room for merging certain entities, closing down certain ones that are less profitable today and combining them and making the footprint a bit lighter, but we're not talking Big measures, but rather small steps and several small steps.

That's all for me. Thank you.

Thank you, Carl.

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

Hello. My first question is about your acquisitions during the quarter, and perhaps in particular Airmaster. Would you say that it has performed as expected, or even better, or if you can give some more details on the development of Airmaster during Q1? Thank you.

Thank you, Sofia. Airmaster joined the Lindau Group 1st of March, so we have one month of history, so not too much to evaluate their performance on. But I will say that we were very pleased with the performance in March. They came in at the expected invoicing, and they came in slightly above the expected profitability. A good start, but as I said, it's only one month and they are also affected by the tougher market climate. So we should not think that they will have a fantastic year of growth this year, but hopefully we will see stability. The cooperation between Airmaster and the rest of Lindak Group is working in an excellent way. And we are finding several interesting positive synergies as well. I'm very pleased with the start, but you know, short period to evaluate.

Yeah, all right, thank you. And a follow-up question there. Would you say that decentralized ventilation is, you mentioned they're also exposed to a tougher market situation, but would you say that it's less tougher than the other decentralized ventilation? Or it's on par with the other ventilation?

I think they have a slightly different exposure. They have quite a different exposure to the renovation segment. I would say 80-90% of sales from Airmaster is retrofit and upgraded renovation projects. That should make them less sensitive to the current low activity in new construction. Then again, they have rather high exposure to schools and kindergartens and other public buildings. And that can mean that when municipalities etc have less money and they are under financial pressure, they might be less willing to spend as much as they should need to. So there are factors in working in favor for Airmaster, but of course everybody is affected by the general business climate and holding on to their cash. Hopefully the effect in total will be on an okay level.

All right. Okay, and then actually I only have one last question. It's about the additional purchase considerations for AirMaster. Is it correct to believe that it could be as high as 750 million, but your best assessment now based on the current performance is that additional earners is around 499 million. Is that correct? And just to double check, it's included in other debts and not net debt calculation.

You don't see me here, but I'm sitting here looking at my CFO.

Yeah, I understand that.

That's correct. It's not included in the net debt. And the amount you mentioned is... We have this amount in Danish krona, and that's also variable. But what number did you mention, Sofia?

499 million, so about 500 million.

Yeah, that's correct.

And that is only derived from the AirMaster transaction, right?

That is correct.

Yeah. OK, great. Thank you. That's all my questions.

Thank you, Sofia. Thank you.

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

Hello, Ola and Lars. A few questions from my side as well. Starting off on the Easter effect, I wanted to see if you tried to quantify how that's impacted you here in Q1. Maybe not only for you, but also for the industry.

Yeah. Well, if we start with that question, the number of invoicing days that we lost with the Easter effect, three days in March. I think if we look at the whole Q1, maybe that's a day effect of two days. So it is there, it's probably reducing sales by two or 3% or something, but it's not a very large effect. I wish we should not blame that too much. For the month of March, it was noticeable, but for Q1, yes, by a couple of percent on invoicing. And that can of course play a role, but again, we will have maybe one or two more invoicing days in April.

Yeah, that's what I wanted to sort of understand how that should play out.

So the market is behind us and we're glad about that. We are looking forward to April and onwards.

Yeah. And Udo, you mentioned there that you want to grow more in North America. I was just curious to hear a bit more about that. How come? What sort of product categories are you interested in acquiring?

That's a relevant question, Douglas. We are getting to know the North American market and we have great respect that that market works differently than the European or the Northern European market. So in our 2027 plan, there is no substantial part of that revenue from North America. I think Beyond that, it will be an important geographic growth area for Lindab Group. But we are not rushing into North America. When we enter, we will do so with higher technical content in the products than we have in our average portfolio today. We are not intending to build 25 factories there and many distribution centers, but we rather do have a lighter model to operate from. And hopefully we can bring together the best technologies available within ventilation in North America and in Europe and find a very attractive portfolio product. But there are no very concrete plans yet. And I think the acquisition we did is a perfect way to get to know the entire ventilation business in North America because all of them are customers of the acquisition we made.

Would you say so far, knowing the markets to the extent that you do, is there any sort of significant margin difference in North America versus Europe in the products that you would be interested in?

I'm thinking that the types of products we would be interested in working with in North America should have quite attractive margin if they are on average higher in the technical content. So the ambition, of course, is to be safely above a 10% operating margin on activities in North America. We also today, but I think If they should grow and contribute to the group, we should aim for 12 to 15% margin on the business we do in North America. That should be possible.

Okay, great. Thanks. One final one from my side. I recently read that your half event acquisition there in the UK had the government is raising some questions around that. Can you maybe give your view on that situation and what we're missing?

That is correct. We did an acquisition in 2023 and the competition and market authority in the UK started an investigation that is now entering into its second phase. We are disappointed with that decision but we are not concerned that we will not able to settle this in a positive way at the end so they are looking at our market shares for circular ventilation ducts in England and Wales and we believe that we are safely below any limits okay and the house event business as it stands right now So during the time that the authorities are looking at that transaction, HouseVent is run completely independently and separately. For obvious reasons, there's no business contact allowed. So it is working as a holding for us.

Okay, that's clear. And do you know time wise on this? or the ilk will be sold?

These authorities, they work in a diligent way, meaning that it also takes time. So it will probably take a few more months before they are done with their investigation. I'm guessing four or five months from now, I would say.

Okay, thank you very much. Appreciate the cover on that.

That's it from me.

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.