Lindab International AB (publ)

Hello and welcome to this call. My name is Olle Ringdahl and I'm the President and CEO for Lindab Group. Next to me I have our CFO Lars Ylner. We start with a Q2 summary. The second quarter was a good quarter for Lindab. We increased both sales and operating profit and we managed to improve our operating margin despite tough market conditions. Business area ventilation systems accounted for 75% of sales during the quarter. Sales increased thanks to acquisitions and the operating margin strengthened to 10.4%. Business area profile systems turned the first quarter's loss into an operating margin of 8.7% in the second quarter, a very welcome improvement. In total, Lindab Group sales was the highest ever for a single quarter. Sales increased by 5% and we reached an operating margin of 9.6%. Cash flow from operating activities developed according to our expectations and increased compared to the same period previous year. I now hand over to our CFO Lars Ynner for some more comments on the financial development.

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

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

We now conclude this presentation and we open up for questions.

If you wish to ask a question please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question please dial pound key 6 on your telephone keypad. The next question comes from Carl Ragnarstam from Nordea. Please go ahead.

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

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

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

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

And on an aggregator level is it those single digits we're talking about still or one to three percent?

Yes I think that would be fair to say.

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

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

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

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

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

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

Okay, very clear. Thank you so much. Thank you Carl.

The next question comes from Sofia Soling from Carnegie. Please go ahead. Yes, thank you.

Sofia here from Carnegie. I will continue on Germany as a big and important market for you. Given weaker demand from this market ahead, although you see it maybe sequentially stabilizing a bit, But how should we view the impact on your margin profile since it's quite a good market for your decentralized ventilation? If you could give us some more color on that. That's my first question.

Thank you, Sofia. Well, we acquired Airmaster earlier this year and they had that 12-month period during 2022 and 2023, where they were selling quite a lot to the German markets, where there were subsidy programs ongoing to renovate schools. And we knew that that subsidy program would end around summertime 2023. So when looking at that company and that acquisition, we kind of discounted that unusual growth they had for a period of time. And now the market activity, because the subsidies are gone, is much lower in the German market for the Airmaster products. And they knew that, and we also could foresee that. So there's no big drama in that. Airmaster's sales to All the other countries where they are active is actually developing quite well with organic growth and healthy margins and everything. So I'm also doing fine. Then when it comes to more the general German market, well, everything connected to housing, apartment blocks and so on, that is on a really low level. We are not so exposed to that. We see public investments, industry investments, etc. There the pace is quite okay. So yes, our sales in Germany overall is down, but with intact profitability and quite a lot of good cost savings from structural work when we coordinate the different companies we have in Germany. So given the market circumstances, I'm quite pleased with how we are doing in Germany.

Yeah, all right. So then I could actually interpret as the current margin profile would be expected ahead as well. No declining margin profile given a weaker market in Germany for you.

That would be a fair assumption, yes.

All right, great. And what do you expect or see needs to happen in order for the German market activity to increase again?

Yeah, that's almost a question for the German politicians. Germany is under a bit of pressure politically and economically, but it's a huge market. It's Europe's biggest ventilation market. We have a strong position there, but we definitely have a lot of possibilities to grow market share and to advance our position. We just recently added one small acquisition that strengthens our position in the northwestern part of Germany, and there are several more add-on acquisition opportunities that we can do. I think Linda will continue to both increase market share and find add-on acquisitions and continue to strengthen our position in the very important German market.

Okay. And just to ask you a little bit about this quote about you see the ventilation market will have multi-year growth phase in 2022. Sorry, 2025 and onwards. Could you give us more details on how you view this growth pace? Do you expect more closer to 5% growth per year or if you can give some more details on what you see and maybe what you base that on?

I base it on several factors. One thing overall is that in any new building today with the demands for zero emissions and high energy efficiency, the demands on the ventilation system is way higher than it was 10 years ago. So more more spend per square meter building is needed on the technical installations. Not only valid for ventilation, but definitely valid for ventilation. And their Lindabs products are the absolute highest quality. So if you want to have a really energy efficient building, you're going to have to use Lindabs products to a large extent. So we are very well positioned, quality-wise, specification-wise, for those needs. Then we have the whole renovation side. We need to catch up. And that is a huge debt that has to be paid if we're going to reach all the targets that have been set up. So a lot of legislation and directives are working in our favor. Then, of course, the question is, who's going to pay for this? How will it be financed? And it's difficult to know how quickly will it happen, but the deadlines are quite soon. The year 2030 is not far away and a lot of things have to be fulfilled until then. So we are very well positioned to take advantage of that. If you want to translate that into a percentage growth, that's of course very difficult. It's GDP growth plus something. but plus how many percent? Is it possible that it can be five percent growth per year until 2030? Yeah, I believe it is possible, yes. But you know, who knows? But I would not say that it's completely unlikely that it can be those numbers.

Okay. And yeah, two more questions. And it's about profile systems divisions. So you mentioned in the report about these macro factors, rate cuts, for example, that it will have a positive impact for your business. Do you refer to like a more faster recovery within the renovation market here? Or do you more referring to that maybe the new build market will start increasing again and that might impact your business well into 2025 or if you can give some more elaborate on that.

Profile systems we saw like if we take the most important market for us in profile systems that's Sweden with around 50% of sales for that business area and we could see immediately when the first interest rate cut was done in May that discussions restarted on delayed or postponed projects. So I believe that the next rate cut is already anticipated and we see increasing quotation activity and increasing traffic in our stores, etc. So yes, I am optimistic that we will see a strengthened demand for profile systems during the second half of the year, both for new build and for renovation.

Yeah. Okay. And final question here. If necessary, what more cost saving measures can you implement for the profile system division?

There are always things to do. Right now we are trying to handle the summer period without taking in any extra summer labor, trying to manage it with the people we have. But normally we take in temporary labor during the summer months. So there are always things you can do. And I think we have now, after two years of declining sales and profitability under pressure. We have, of course, done a lot. But there is more that can be done if we have to. But we also need to work on the gross margins, continue that good development we have. It's about pricing, it's about efficiency. But there comes a point where you also need to consider the structural measures that I have been talking about. Shall you shrink a business into shape? Shall you divest it? Shall you close it down? And the organization knows that my patience is quite limited at the moment if there is not the desired performance. So we have some units under special scrutiny. And if we don't see improvement soon, then we will take structural measures.

All right, thank you for all your answers. This was all my questions.

Thank you, Sofia.

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

Hello, Ola and Lars. actually I had only one question coming back to what you mentioned previously Ola that you continue to add smart products so it's a question of R&D I guess can you give some examples of what you're sorry spending research and development on right now I notice it's up slightly year over year are you thinking of it you know developing these things more in-house or in collaboration with others as you've done historically or should acquisitions more be a driver of adding these solutions just Your thoughts around that will be interesting to hear.

In general, I think that the Lindab Group is not spending enough on R&D. So I would wish that we could spend a bit more. I think there's a lot of exciting technology developments happening. But we are mainly focused on... R&D internally, focusing on energy savings and renovation, the products that are suitable for renovation so that you can quickly upgrade a ventilation system and make it much more, make it smarter, but also make it more energy efficient. And we have many of those solutions developed in-house. But then, as you mentioned, definitely acquisitions is a way to, in a quicker way, get more technology into the Lindab Group. In areas where we might not be the experts, for example, decentralized ventilation, quite R&D heavy, Airmaster is spending a large part of their budget on R&D and they are really at the forefront. And we have other examples where we have acquired companies who are really good at R&D. We can learn from them and we also need to find our way how to focus our limited R&D budgets. Since one year we have a new R&D manager who has a very exciting agenda and we see a lot of good projects and activity in the R&D field. And then we have one final comment perhaps. Quite a lot of what we spend on technical development is spent on production development. We have very advanced and automated production that nobody in the industry can really match. So when making standard products, which you might when you see them, they might not look so technical, but the whole technology behind producing them in the way we do and at the cost and speed is quite advanced.

Okay, thanks so much for elaborating a bit on that. That's it for me. Thank you, Douglas.

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

Thank you for that, and thank you all for listening in. We are quite happy with the result that we could present today. We think it shows... stability and endurance in a difficult time and I'm pleased that we are able to show the operating margins we do in a tough market as it is and with negative organic growth, but I'm proud today to be able to show these results and thank you all for listening.