Good morning, and welcome to the Lindab Q3 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ola Ringdahl. Please go ahead.
Thank you very much. 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, Jonas Arkestad, who will help me to answer questions. Let's start on slide number two. Lindab continues to develop in a positive direction. We have gone through a major transformation in the past three years. We have divested Astron Building Systems and focused on our core business in the HVAC and ventilation segment. We have upgraded our production sites through an ambitious investment program, and we have managed to complete 17 acquisitions in the past two and a half years. In Q3, Lindab increased sales by 30%, of which 20% are related to acquisitions. Felderer in Germany and Airvent in the Netherlands are the main contributors to the acquired growth.
The organic growth in the quarter was 7%. Our operating profit was a solid SEK 361 million, compared to SEK 403 million last year. The operating profit is one of the highest Lindab has ever achieved for a single quarter. The adjusted operating margin reached 11.1% in Q3 , and 12.1% year to date, which is above our financial target of 10%. The operating margin is lower than for Q3 last year, and it should be noted that the comparison numbers are high. I will comment more on the margin development later in the presentation. Let's take a closer look on the sales development on the next slide. For Lindab, the quarter began with unexpectedly weak sales in the month of July, but during August and September, sales developed as expected.
Sales in the acquired companies have developed well. Ventilation Systems reported organic growth of 8% in the quarter, and Profile Systems reported organic growth of 6%. In July, we experienced lower volumes than previous year. In August and September, volumes were more in line with previous year. Now we move to the EBIT development on the next slide. On this slide, you can see a 12-month rolling trend of the adjusted EBIT margin, and you can also see the red line, which is the quarterly margin development. Lindab has had strong earnings growth and margin development during the past four years. The margin level in 2021 was particularly strong, especially in the Q3 , as you can see in the graphs. There are three main reasons why we see lower operating margins in Q3 of this year versus last year.
First of all, the comparison numbers are clearly challenging. If we look at the years 2018 to 2020, the average operating margin for the Q3 was 10.8% for Lindab. In Q3, 2021, it was 16.2%. As I have mentioned in previous calls, Lindab's operating margin in 2021 was boosted by increasing raw material prices. Lindab managed that well and reacted quickly. We managed to increase prices to compensate for these effects, and we were successful in doing so. During the past six months, steel prices have declined, and Lindab is experiencing the opposite effect of 2021 since we prioritize high delivery capacity and the necessary safety stocks so that we can always deliver to our customers.
This means that there is pressure on our gross margins during the H2 of the year as we turn over our stock of raw materials, but these effects will pass. Secondly, the high energy prices in Europe have created strong cost inflation for raw materials and for transports. In an already strained market, Lindab has not been able to fully compensate for this yet. Finally, there is a margin effect from the acquired companies. The acquired companies are profitable and successful companies, but they are joining Lindab with a lower average profitability margin. The dilution effect on the operating margin in Q3 is approximately one percentage point. Over time, the acquired companies' margins will increase as the positive synergies are implemented. Now let's move to the next slide and the financial position.
Cash flow from operating activities increased to SEK 216 million, compared to SEK 202 million in Q3 last year. Our cash flow has been strained in the past year because of the high raw material prices, and we have tied up additional cash in our inventory. If the steel prices remain stable on the levels we have seen since August, we expect a positive impact on Lindab's cash flow in the next coming quarters. Net debt has increased as a result of completed acquisitions, and increased capital tied up in stock of raw material. It is not the stock levels as such in tons, but rather the changes in raw material prices that are affecting the stock value.
The net debt to EBITDA ratio is at 1.3, which is on the right side of the target level that we have to stay below three. Our financial position remains strong, and supports continued growth, both organically and through acquisitions. With that, I would like to move to the next part of the presentation, Building a Stronger Lindab. Let's start on slide number seven. Let's start by talking about acquisitions. Lindab's strategy is to acquire well-managed, successful 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 Lindab's sourcing agreements, expertise, and sales network at their chosen pace. During the quarter, we have acquired four companies.
In June, we announced the acquisition of Muncholm, and with Muncholm, Lindab gains established relationships with architects, builders, and tinsmiths in Denmark. Acquisition was closed in July, and adds approximately SEK 250 million in revenue on an annual basis. Muncholm will belong to our business area, Profile Systems. In July, we acquired Girovent in Sweden. They manufacture rectangular ventilation ducts in the Stockholm area. Girovent will be part of Crenna, and Crenna was an acquisition that we made in 2020. Both Girovent and Crenna produce rectangular ventilation ducts, and we see very good synergies between these two companies, and with Lindab overall. Girovent has sales of approximately SEK 55 million on an annual basis. In September, we made an acquisition in the UK, and this was in the area of fire protection.
Disys Technologies have developed intelligent fire and smoke control and monitoring solutions for ventilation systems. They have sales of approximately SEK 18 million on an annual basis, with excellent growth prospects and very healthy margins. Also in September, we made our first acquisition in a long time in France. With Liftas ud, we will increase sales in France by 50%, 50. Liftas ud gives an extended distribution network, and we gain access to a broad range of HVAC products. Liftas ud has sales of approximately SEK 250 million on an annual basis. In total, we've made eight acquisitions in 2022, and in 2020 and 2021 combined, we made another nine acquisitions. The companies we acquired in the last 12 months have added 20% sales growth in the Q3 .
Some of the larger acquisitions have had a lower margin than Lindab in general when they have entered the group, and this makes the average margin for the acquired companies lower than the group. As these are well-managed companies where we have dedicated and skilled management teams, I'm confident that the margin levels will increase over time. A good example of a positive synergy comes from Felderer in Germany. They are one of Germany's largest ventilation distributors, and we acquired them in April. They are now planning to launch the Lindab Safe ventilation ducts as part of the product offering. This is an excellent way to please both customers, and raise the margins for both Felderer and the Lindab Group. With that, let's move to the next slide. Investments.
Lindab's investment program has been at the top of our agenda since 2019, and it's rewarding to see how the benefits become more and more visible. In the Q3 , we invested SEK 72 million in our operation, in our European operations, and we will continue to invest on a higher level until 2025. This will gradually be reduced every year now, since we have completed a large part of the program. We reached the peak of these investments in the year 2020. Now let's move to slide nine, and talk about Lindab's market in the future. We have shown this slide before about the increasing demand for energy-efficient and sustainable solution. This remains very high on the agenda, and especially so with the current extraordinarily high energy prices in Europe.
Buildings in Europe make up about 40% of the total energy consumption in Europe. To reduce the amount of energy consumed in Europe, we believe that there will be a major renovation wave in terms of energy efficiency for buildings. We can already hear from the major ventilation installers that they're increasingly busy with energy efficiency projects. The demand for energy efficient ventilation and sustainable solutions will favor large suppliers with premium products and a strong sustainability profile. Lindab is really at the forefront here, and we aim to take a leading role in this transformation all across Europe. We can move to slide 10, Outlook and Priorities. In the short term, we are prepared for a scenario with lower demand and volumes for both business areas as the construction industry suffers from higher costs, rising interest rates, and longer decision times.
This is specifically for the part of Lindab's business, which is aimed at the new construction of new buildings. However, in the medium term, we are quite optimistic about both the industries and Lindab's prospects. The high energy prices put even more focus on well-insulated buildings and energy-efficient ventilation, which benefits Lindab. We expect a long period of renovation of public and private properties in Europe. As Lindab has half of its sales today towards renovation and remodeling, we see very good growth opportunities in this segment as necessary energy efficiency projects are started throughout Europe. Within new construction, the demand for sustainable and energy-efficient buildings will increase further, also to the advantage of Lindab and our leading product range.
If we talk more about Lindab's near-term priorities, obviously, in the current economic environment, we are working with proactive cost measures to balance costs, and future outlook on demand. We are also adjusting our pricing to mitigate higher energy and transportation costs. Finally, with our strong balance sheet, we intend to continue to pursue attractive acquisition opportunities. The European HVAC industry is still fragmented, and there are plenty of opportunities to create long-term value as an aggregator in this industry, and Lindab intends to play a leading role here. We have a clear plan for how Lindab will continue to develop positively. After the transformation of the business in recent years, the subsidiaries in the group are well-managed and profitable, and in our decentralized management structure, they're able to make quick decisions, and they take very high responsibility for delivering the required results.
We now conclude this presentation, and we open up for questions.
Thank you. We will now begin the Q&A session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Your first question comes from Carl Ragnerstam from Nordea. Please go ahead.
Good morning. It's Carl from Nordea. Firstly, you just said that you're looking to adjust prices again. What increases are we talking about? When do you expect to sort of implement them? Also on that note, I mean, we heard rumors that, or actually the fact that one of your biggest competitors is actually lowering prices on several ducts. I mean, so what is your pricing strategy from here? I guess raising prices. Are you worried to sort of have long-term effects on your market shares when competitors are lowering, or how should we look at that?
Thank you, Carl. Well, I think, there are several components in the pricing which you need to take into account. Of course, if transport costs increase significantly because of higher prices of diesel and other factors, it is necessary to compensate for that. Lindab is working very much with trying to be a sustainable company and to reduce the carbon footprint, and we think that putting the correct price on transports is a very important, say, pricing mechanism to encourage a behavior which is also taking the environment into account. We are not able to absorb higher transport costs, so these types of costs need to be forwarded to the user, to the customer.
If we talk about electricity and energy costs, well, we have seen very sudden increases in Europe, especially after Russia's invasion of Ukraine. Normally in a normal environment, these types of costs are built into the product price so to say. We see that with these significant fluctuations in energy prices, we need to either add them more quickly to the product pricing or in many cases, we need to add them as an extra charge for specific energy costs. There are different ways to compensate for this. If we talk about the general price level, we do not see any possibilities to reduce prices at the given how the inflation in Europe is working.
Yes, steel prices are coming down, but many other costs are increasing rapidly. All in all, I believe that price stability is what we will aim for going forward with some certain surcharges on specific costs that have increased significantly in the past months.
If we look back during the past, I mean, two years or so, I mean, we had, obviously, a scarcity of steel. You had big inventories, and by that, of course, with a good brand as well, but you managed to push forward prices quite nicely. Do you believe that your customers will take price increases now that we don't have scarcity of steel anymore, or?
I think there is no reason or nobody wants to implement any unjustified price increases. That is not what I'm talking about. Where I'm simply talking about compensating for the increased costs that you have as a major supplier. We aim to have a fair and reliable pricing to our customers, and we believe that to have, say, long-term pricing agreements with the customers is very important. It is also important that the customers know that you can always deliver. We have proven that during very tricky times, during the pandemic and during scarcity of material and also in connection to Russia's invasion of Ukraine, that we can always be relied on to deliver to our customers. I think they very much appreciate that.
Of course, we aim to have a fair pricing model, definitely.
Also a bit on sort of the margin impacts in the quarter. Is it possible to sort of rank the three points you're making in the report of negative impacts? Which one is sort of the bigger effect?
I think they are, in the order that they are written today is the correct ranking. The major or most important effect is the raw material effect. We had a tailwind last year, and we have a headwind, during the H2 of this year. We today have, an inventory of raw materials, that we have to turn over for the price levels or the cost of steel to come down. That takes, around two quarters to do that. We are in that period now. Second effect mentioned in the comments is the other types of inflation that we see in Europe. Much of it is energy related, but not everything is energy related.
We also see a broader cost inflation in Europe, including salaries and a lot of different materials and services. That would be the second one on the list. The third one is a natural consequence of the acquisitions that we have made. The acquired companies are performing well, and they have developed very well under Lindab's ownership as well. T hey do enter Lindab at a somewhat lower margin level, and thereby they dilute initially the operating margin for Lindab. We will gradually work on that and get them up to the group level of profitability.
By that, with sort of constant steel prices from here, you said a half a year inventory cycle, then is it fair to assume that you'll have a neutral steel price impact already in Q1 or Q2 then or?
Around that time, yes.
Okay.
It's difficult to say an exact month because it depends also a bit on how the volumes are developing, et cetera. It will be in Q1, Q2, where these effects are diminishing. That is of course, assuming that we have stability in raw material prices going forward. We will see about that. We have seen stability of steel prices, at least since the month of August. You know, we've gone through a period of two-three years here with extreme movements in raw material prices. It's best to be cautious when guessing what the steel prices will look like three or even six months from now.
Okay. That's all from me. Thank you.
Thank you, Carl.
Thank you. The next question is from Douglas Lindahl from DNB Markets. Please go ahead.
Hello, Ola and Jonas. Thanks for taking my questions. I wanted to ask about your well. Obviously, the new construction business is most likely entering a tough period here in 2023. Talking about the renovation part of your business, 50% of sales, what sort of visibility do you have there? And what are your sort of expectations there in the more short term? That's my first question.
We hear from our partners, our customers, the big installation companies, that they are quite fully booked with these types of jobs. What that will look like half a year from now, I don't know. At the moment, the activity level seems to be very high, and there's in many countries a shortage of installation capacity for all the type of work that needs to happen. I think there are some signs also that the component shortage is easing up a bit. I think that part of the business will be increasingly busy going forward. Whether or not the installation capacity will be a bottleneck to really get full traction or not, I don't have to say.
I am quite bullish about the activity levels on the energy renovation side going forward.
Okay. In terms of, I guess, we're as always entering uncharted territory, but going back historically, what is your experience from the performance of the renovation exposure relative to new construction exposure? Thinking about both, in terms of growth, but also on the margin side. Are you able to give some sort of comparison between the two? I would guess the renovation part is much more stable, but just hear your wording on that.
Well, I have in some ways been a long time at Lindab, four years now, and in other respects, maybe not long enough to experience.
Yeah
How this fluctuates over a complete business cycle. Our sales is to quite a large extent decided by the activities of our main customers, the ventilation installers, the tinsmiths and builders. They have their personnel resources that they allocate to the projects that are the hottest. When new construction is weaker, they tend to find more projects. Allocate more people to the renovation side. The type of products that we are selling.
They are very similar, whether we sell them to new construction or to renovation. The same components are needed. Yeah. We don't have perfect traceability of that. We listen to our customers and see how their activity level is developing.
Okay, very clear. Switching topic and on the M&A side, very helpful with the comment on profitability. Also you mentioned that you have synergy expectations for Felderer. Are you able to give some sort of magnitude on by how much you think that could expand profitability for Felderer and maybe a timeframe on when you expect those impacts to come?
No, I will not quantify that today, but Felderer, I mean, today, they are performing around 5% EBIT margin, so that can be a data point. They are a ventilation distributor, and distributor margins in Germany are normally not double digits. W e aim to support Felderer in increasing their EBIT margin through different activities. We aim to capture certain synergies from internal purchasing and insourcing of production as well. All in all, if we combine the different effects, we aim for Felderer to have a total integrated profitability on the same level as the group within, let's say, three years. It does take some time to lift it from the level where it is now.
That said, I am very happy with how the Felderer company is performing. Good sales development, extremely motivated organization, good plans. It is, there is no criticism in it. It's simply how the German distribution industry looks at the moment. I'm quite confident that we can develop it further.
Just a final question, if I may. On the investment program, where is your focus right now on the CapEx side?
Since 2019, we've had a primary focus to automate production processes. It's for efficiency reasons mainly. There are two other important priorities as well. One is, you know, while automating our processes, we get the added benefit of higher production capacity so that we can grow organically without losing efficiency.
The third aspect is that we are working very much with increasing the work safety for our employees. Old machines without the necessary safety equipment and so on should be replaced by new equipment where it is near impossible to injure yourself or your fingers, etc. Now we have come very far on the safety side. They have the safety investments always prioritized. We have pretty much eliminated the machine related accidents in the company in a short time, which I'm very proud of. There's not so much more to be done there.
When it comes to capacity investments, we have removed bottlenecks, and we are prepared for organic growth, strong organic growth when that period comes and when the European economy allows that. What remains is still some investments in the area of efficiency. We still have some decisions made waiting to be implemented. We see that as we invest and improve certain parts of the production, other weak spots are identified where we can make very good investments. I think it's on the automation side where we'll see the most investments going forward on a lower level than we have seen in the past two years, but still on a higher level than, say, Lindab traditionally has been on.
Perhaps, one extra comment is that the acquisitions, there are of course also interesting investment opportunities and low-hanging fruits in those companies. They might not have been able to afford certain investments, or they didn't have the expertise to make the right investments or identify the right technical solutions. With our very skilled automation teams, and machine builders, we are able to find the right solutions for those companies and find very good efficiencies, in those companies.
Thank you very much. Well, that's a very extensive answer. That's all the questions from my side.
Thank you, Douglas Lindahl.
Thank you. Once again, if you have a question, please press star then one. Your next question is from Anna Winström, from Handelsbanken. Please go ahead.
Hello, Ola and Jonas. Thank you for taking my questions. I have two questions. Maybe just beginning on, because I'm trying to figure out, like, the as we now see the prices that are decreasing and stabilizing at lower levels, but at the same time, we're seeing costs such as electricity and transportation increasing. Could margins for Lindab become a bit more volatile, or how should we sort of think about the structure of your contracts on these costs?
Let me see if I understand the question. I think for any industrial company, pricing and margins will be more volatile if all raw materials and services and, you know, utilities you have to buy, if that price volatility is very extreme, as it has been in Europe for the past two years. What all of us want, including consumers and, you know, in your household when you buy electricity, you want stability. You want to be able to plan, you want to be able to pretty much print the product catalog and send it out with prices, and it doesn't change. That doesn't work now. Inflation and wild fluctuations of a lot of your costs makes this extremely difficult. You have to be agile. That's the new word.
You have to be very agile, constantly update. I'm hoping for stability, but we are preparing for several scenarios. I think the energy prices are especially difficult right now. How will the impact be when the winter comes in continental Europe? The costs for people and companies, they are difficult to estimate at the moment. When it comes to steel prices, I mean, steel prices have come down, but they are still 30-40% higher than they were three years ago. They are on a high level. Will they be able to come down further? They have gone down, like, 50% from the peak. I don't think that they will come down much further because the energy prices are keeping the steel prices up.
You know, we update our product calculations and all our assumptions every month. It used to be okay to do it every quarter or every half year, but now it's every month. We are careful not to make promises about very long price agreements. We need to be able to change costs. That's the best answer I can give.
Okay, thank you. Maybe if you could maybe give us some comments on the different geographies outlook from here. In your report, you mentioned the Eastern Europe, for example, having quite a cyclical impact currently.
Yes, I can try. Well, we say in the report that we have seen the most clear signs of a slowdown we've seen in Eastern Europe. We saw it actually in general in July, but then it recovered for the group in August, September. Specifically in Eastern Europe, we've seen volume decline in the quarter. Our Profile Systems is rather heavy in several of our Eastern European countries. Normally, we know from the past that Profile Systems is more sensitive to the business cycle than Ventilation Systems, and Eastern Europe is more sensitive to ups and downs in the business cycle versus Western or Northern Europe. I think this is what we're seeing. They are closer to the war.
They are more exposed to very high gas prices, natural gas prices. The interest rates have been seriously increased in those countries. It would be natural to think that certain projects and investments are delayed. That is what we see. It's not the bread and butter sales, so to say, that has slowed down very much, but it is the project sales where we see hesitation in the market, a delay and wait-and-see approach. Let's see how that is spreading through Europe, but the earliest signs we have seen are in Eastern Europe.
Perfect. Thank you so much.
Thank you. There are no further questions at this time. I'll now hand the conference back to Ola Ringdahl for any closing remarks.
From myself and Jonas, I would like to thank you all for listening in, and I wish you a good day. Thank you.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.