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. And next to me, I have our CFO Lars Inno. We start with a Q3 summary. In the third quarter, Lindab increased sales by 3% and reached the highest sales ever for a third quarter. Business area ventilation systems, which accounted for 76% of sales in the quarter, continue to grow as a result of completed acquisitions. For the group, the adjusted operating margin was 9.1%, which is lower than the same period the previous year. The profitability was below our target and our own expectations. Further cost savings will be implemented during the fourth quarter to achieve the profitability targets. Cash flow developed according to our expectations and cash flow from operating activities amounted to 259 million SEK. Let's first take a closer look at the revenue development. Ventilation systems increased sales by 6%. Acquisitions continued to contribute strongly to our sales growth. And in the third quarter, acquisitions added 11% to our sales. Organic sales growth was negative by 3% due to a slow market demand. For profile systems, total sales decreased by 6%. Sales in the Nordic region has stabilized on a low level and early signs of market recovery can be seen. The Nordic region represents 80% of profile sales. However, sales development in Eastern Europe shows no signs of improvement. Let's now move on to operating profit development. Lindab has successfully managed 24 months of negative market development. ventilation systems has shown a stable operating margin during this period. In the third quarter, the adjusted operating margin amounted to 9.5% for ventilation systems, somewhat below our targets. Actions to reduce our cost base will be implemented during the fourth quarter in order to fulfill our financial targets in 2025. Over the past two years, Profile systems has been negatively affected by reduced construction activity in the Nordic region and a very challenging situation in Eastern Europe. Profile systems had a weak start of the year, but has gradually reversed the trend in the Nordic region and improved profitability. In the third quarter, the adjusted operating margin was 8.8%. The strategic evaluation of activities for profile systems in Eastern Europe are being intensified during the fourth quarter. Let's now take a look at our financial position, and I'll hand over to Lars Ynner, our CFO.

Thank you, Ola. Linna had a solid cash flow during the third quarter, as cash flow from operating activities amounted to 259 million SEK. During the third quarter, The operating profit is adjusted with one of items and restructuring cost of 30 million SEK, which is related to the write down of assets in the company Leapcraft. Leapcraft is an acquisition of a minority stake in a software and sensor company in Denmark, which Linda acquired in 2020. Leapcraft is working with visualization of indoor climate. It's been difficult to find the optimal commercial revenue model for LeapCraft and we have now taken the decision to write off 100% of the investment. Lindab's target for net debt to ABTA is that it should be below three times. In Q3, net debt to ABTA increased to 2.3 times due to acquisitions. Financial net debt to ABTA is at 1.7 end of September. We conclude that Lindab has a healthy financial position. And now back to Ola.

Thank you Lars. And then let us look a bit at what we do and how we are building a stronger Lindab with high ambitions. For a number of quarters, we have included this slide to show our ambition to reach 20 billion in sales in 2027. Growth will take place in ventilation systems a combination of organic growth and acquisitions the goal is for the operating margin to exceed 10 percent and over time 12 to 15 percent should be possible demand for energy efficient solutions and the 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 We'll continue to play an important role in Lindab's future development, and we estimate that acquisitions will account for two thirds of our growth until 2027. Now let's talk about profitability and what we do to strengthen that. As you all know, the construction market in Europe is in a challenging situation. Lindab has experienced seven quarters of negative organic growth. In the past two years, we have worked very actively on our costs and our efficiency. We have gradually in these two years reduced headcount by 400 people or close to 10% of the total number of employees in Linda Group in order to adjust to lower volumes. Since the market recovery is delayed, we are now taking additional actions in the fourth quarter of this year to adapt the cost base to updated volume forecasts and to ensure that we reach our financial targets in 2025. In addition to the cost reductions, we are putting extra focus on cost synergies with the acquired companies. We aim to fast track insourcing of products that we can manufacture in our own factories instead of sourcing them from external suppliers. Finally, The disappointing development for the profile systems business in Eastern Europe will lead to an acceleration of structural actions in that region in the near future. I will have reason to come back to that later during the fourth quarter. Lindab's investment program that has been running since 2019. We see results from the program in higher production efficiency, higher capacity and a safer work environment. But obviously now with lower volumes in our factories, the depreciation on those assets is a bit of a burden in the short term. 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 which is in line with the actual investments yet to date of 181 million SEK. 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. When the market picks up again, Lindab will be in an excellent position to quickly take advantage of higher demand. Our operating margin will increase with growing volumes thanks to our investment program. Another important focus area in the 2027 plan is acquisitions. In the third quarter, we added ATIB in France to the Lindab Group. ATIB is a well-established French distributor of ventilation and indoor climate products. Most of the sales consist of ventilation systems for commercial properties. The product range includes air handling units, silencers, air diffusers, fire protection, and filters. Sales of technical products are, to a large extent, directed through ventilation consultants who prescribe the products to be used in ventilation systems. ATIB has in-depth knowledge of technical sales and long-standing relationships with important customers in the field. This creates opportunities for additional sales of Lindab's technical products and knowledge transfer to other parts of Lindab. ATIB is based in Nantes and Bordeaux in Western France. The company has annual sales of approximately 250 million SEK with an operating margin in line with Lindab's operating margin. Then we move focus to the UK. In mid-October, the UK Competition and Markets Authority announced its decision regarding Lindab's acquisition of Hasven, Husvent, that acquisition was signed in October 2023. The decision from the UK Competition and Markets Authority is that in two locations where Lindab and Husvent both have one branch each, one of the branches in each location will need to be divested in the near future. Now, after We have divested those two branches. Lindab Group will have 30 3-0 distribution branches in the UK. So the divestment is estimated to have a very small impact on our sales in the UK. We approximate it to a possible reduction of sales in the UK of around 2%. This competition investigation has been ongoing for approximately one year and has led to delays in the integration of the businesses. But once we have now finalized the investigation, we can move to the next phase and together we will build a strong business in the UK with significant synergies. Now let's end this presentation with comments about the market and the market outlook. The market situation remains weak with many projects on hold. Year to date, we estimate that the European ventilation market has declined by approximately 5%. And that is approximately the same rate of decline as we saw in 2023. Although early signs of recovery have been noted, this will not have a positive impact until next year as ventilation installations are completed in the later phases of the construction project. The long-term demand for energy efficient ventilation is, however, strong. There are several factors working in our favor. Energy efficient ventilation is reducing the cost while improving the indoor climate. Also, new legislation and EU directives are beneficial for Linda. However, in the short term, we need to plan for continued weak demand during the first half of 2025. After that, we believe in gradually increasing volumes from the second half of 2025. And thereafter, our assessment is that the ventilation market will enter into a multi-year growth phase. 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 6 on your telephone keypad. The next question comes from Carl Ragnastam from Nordia. Please go ahead.

Good morning. It's Carl here from Nordia. A couple of questions from my side. Looking at ventilation systems. We're looking at the organic growth. I think it was down 3%, right, in the quarter. while the margin dropped 170 basis points. And if we just take Q2 for a reference, the organic growth was larger, but seemingly with margins up. And also margins are down sequentially. So I cannot really square what happened in the quarter. So is it pricing? Is it mix, product mix, geographical mix? Or could you, yeah, please give some more flavor on that.

Thank you, Carl, for the question around margins. I think it's fair to say that we have not been able to increase the prices or get effect from price increases to the level where we would have needed to. We are lacking around 1% in effectuated price increases that we would have needed to see. The result from that is that our gross margins did not strengthen as they would have needed to in the third quarter. We've had a good gross margin improvement development continuously for several quarters, but it did not materialize in the way I expected in the third quarter. And of course, with volumes continuing to be lower quarter by quarter, And without strengthening the gross margins, this has a negative impact on profitability. We can add a small comment about negative currency effects in the quarter, but it's not the main reason. The main reason is a little bit too low volumes, a little bit too weak gross margin. And then the result is what you see here. And that is also why we need to further reduce the cost base and of course continuously work on pricing activities.

Because you talked about or you said that these implemented prices price increases earlier this year you talked about implementing new price increases mainly or especially in profile in during second half are you considering to do what price increase are you considering to do in ventilation systems as well in order to cover the one percent in in lack of price in them or is it that one percent you'll close the gap?

I think in order to get one percent net effect on your price increases you're going to need to increase prices by more than that because there's always a leakage and there's a leakage over time and And it's just the fact is that even if we are increasing prices and we are continuously doing so, there is also an erosion of prices out there if you want to keep your market position and if you want to have a decent load in your factories. So it's a balancing act. and here I'm lacking approximately one percent on ventilation and we continue to work hard to correct that.

So you will implement price increases is that the answer?

Yes.

From Q4 or is it from early next year?

We are making price adjustments every month, and it takes some months for them to have full effect. We have made price increases in July and in August and in September, not everywhere in the company, but market by market. But it's one thing for me to say that prices are increased. But there's, of course, always a dialogue with your partners and your customers. When can it happen? How will it have an effect? The short answer is yes, we are pushing price increases so that we can show improving cross margin. We need that because otherwise we will not get the right operating margin.

Sure. And on ventilation, you talked about cost savings. You previously took out 400 FTEs, I guess, across the organization. In ventilation, what type of cost are you targeting and also could you talk a little bit about the cost ramp up here?

We should have delivered around 1% percentage point better profitability in ventilation systems. We need to come back on track there. So in a combination of strengthening gross margin and reducing our fixed cost base, we need to find a one percentage point improvement at least in a combination of different actions. But yes, we will need to address staff levels, but also all types of other costs. I should not make it sound too dramatic. doing after seven quarters of negative organic growth, we do nine and a half percent operating margin in ventilation. It's not exactly where it should be, but it's not a bad number either. So I'm proud of the achievements from our organization, but we want a bit more. So yes, there will be cost actions. affected in the fourth quarter and we should have a lower cost base going into quarter one next year.

Okay very clear and in profile also here with lower margins year of year if I interpreted correctly it's mainly Eastern Europe. Eastern Europe I think is 15 percent of profile so for it to have a big sort of margin impact it must be pretty pretty grim environment I guess. Could you give some flavor on the Eastern European margins? And also what structured measures you talked about that you might come back to for us? I guess I need to wait. But what does the margin look like in the Nordic part of the profile, which is 80% of the business?

It looks okay, actually. We have a very negative contribution from Eastern Europe, where we are currently not making money. So clearly that part of the business is strongly diluting the profitability and profile systems. I should comment that we had good years making good strong profitability in Eastern Europe, but the last 18 months there we have had a very difficult situation. You can say pretty much immediately after Russia invaded Ukraine, the environment in Eastern Europe when it comes to the types of investments where profile systems have their business has been really affected. I do not see that it will improve in the near term. I think the market there will be tough for quite some time to come. And we need to focus our resources and our management attention on the ventilation business. So yes, we are considering quick structural actions for our profile business in Eastern Europe.

because I guess divesting it might be difficult with the selling point tough market for quite some time right so I guess a closure would be or yeah might be the only picker we will investigate and quickly so all alternatives of course the best is if

it's better to divest than to close down. But if we need to close down certain parts of the business, then that is what we will do.

Okay. Thank you.

Thank you, Carl.

The next question comes from Hanna Grimborg from Handelsbanken. Please go ahead.

Hi, Ola and Lars. So my first question is,

Hanna, we can't really hear you.

Sorry, can you hear me better now?

Yes.

Okay, great. So my first question is, how confident are you in reaching a 10% margin for 2025 if the market remains this week? And is it dependent on making structural changes and profile systems in Eastern Europe before entering 2025 in order for you to reach 10%?

I am very determined that we will reach the financial target 10% operating margin in 2025. And we will take measures now to ensure that we have a lower cost base and that we do not have unprofitable businesses going into 2025.

All right. And then just a second question on the husband. Can you give us any more details, just time-wise, like what's the near future and just how the market for divestment looks right now?

Yes, we will, as I said, divest one branch, it's to be on a detailed level, one branch in Nottingham and one branch in Stoke-on-Trent. Whether that is a Lindab branch or a Husvent branch that remains to be seen. And we are not allowed to close down the branch but we have to divest it to somebody who can offer us competition in the future. So a serious player in the ventilation business to safeguard local competition. And we will do that. We will find buyers. We have of course already started that work. And the aim is to finalize these divestments within the next few months. I cannot say exactly when, because it's of course a process and it needs to be approved by the competition market authorities.

the UK but as the sooner we can do it the better for all parties all right thanks that's okay thank you thank you the next question comes from Anna Whitstrom from Carnegie please go ahead hello hello Lars and so just a follow-up question on the sound of the branches If that would happen for something that's coming forward, could you give us an estimate on the maybe cost effect that that would give to close down these two branches?

Anna, that it will not be any say material amounts. We will, I mean of course we are a forced seller you can say so so we will we are not in the best negotiation position but the we are talking we are talking about sales branches small sites with limited amounts of material in them and no no fixed assets so to say so it will not be any substantial amounts in these transactions. If I should estimate possible negative impact for Lindam Group, it would probably be capped at around 10 million SEK. But it is an estimation, not material for group performance.

Okay, thank you. And maybe if we talk a bit on your market position in your other regions. Would you say that you're held back to do some acquisition in some other regions due to the competitive situation?

No, I wouldn't say that. I mean, we entered into this acquisition in the UK having made a comprehensive analysis about the competitive landscape and we of course understand and respect the competition rules. Our assessment was that there was no competition issue with the acquisition of Husvent. However, when we were reported to the CMA in the UK, they started to look at it. They found that there was a possibility of limited competition in two of the smaller cities in the UK. But we have to remember that Lindabon has went together. We have 32 sales branches and the corrective action is expected to happen in only two sites. So I would say it has been a lot of work for 12 months and The remedy is rather limited. We are not holding back on our acquisition strategy in Europe. But of course, doing a similar transaction in the UK in the near term, we have to catch our breath before we do that.

Okay, thank you. And maybe if you could give us more details on the current investment focus from like production hardware to digital tools and services, what do you mean by that? What is the goal going forward?

We see, I mean, we have in Lindav Group, as I think in many industrial companies, a need to become more digital and modernize. But what is, but the the core systems that we have in the Lindab group per the year 2020, that works. It's fine. We can continue to work with that. However, with all the acquired companies and to make sure that we get all the positive synergies there and that we can connect everybody together in one group, we see a great need for taking the step to the the next generation software systems and infrastructure. And in addition to that, of course, with everything around cybersecurity and so on, we need to make investments to have a more modern platform in the Linda Group. I see it as a strong business case. We can become a much more efficient company, but we can also create much better and more connected sales. And final comment on that. If we look at how the building or the construction industry is developing, it is digitalizing fast. We are at the forefront there. providing technical consultants and construction companies and installation companies with a lot of software tools to simplify how they can create ventilation systems install them catch sustainability data and everything and we would need to continue to invest in this digital model around our products that will be one of the core reasons to choose Lindab on top of, you know, fantastic product quality, delivery on time, availability, et cetera. But a more digital Lindab would be a stronger Lindab and also a better group with all the acquired companies. And that journey, we are continuing. So I think it's necessary. I think it is a good business case and the timing is right.

Okay, that's very clear. 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.

From Lars Unruh and myself, we would like to say thank you. It's a hectic report day today, so wish everybody a good Thursday and thank you.