Hello, welcome to the Lindab Q4 2019 report. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question- and- answer session. Today, I'm pleased to present Ola Ringdahl, CEO. Please go ahead with your meeting.
Hello, everyone, and welcome to this call. My name is Ola Ringdahl. I'm the President and CEO for Lindab Group. I'm sitting here together with our CFO, Malin Samuelsson. We go to the agenda page, slide two. In today's presentation, the agenda is as follows. You can read there on the screen. At the end, we will open up for questions. We start with an overview on slide number four. To summarize the fourth quarter of 2019, we saw net sales increasing by 6%. The organic growth was 3%. The adjusted operating profit increased by 23% to SEK 212 million. We saw an increase in operating profit in all three business areas.
The profit for the period increased by 36% to SEK 143 million, and we are pleased to see that our cash flow was strong, our investment activity was high, and we strengthened our balance sheets during the quarter. During the fourth quarter, the Board of Directors have decided on an updated dividend policy, increasing the dividend from 30% to 40% of earnings per share. The Board of Directors proposed a dividend of SEK 3.6 per share, which is an increase by 106% compared to previous year. We move to the next slide, and there we can see the sales growth per geographic region. Western Europe showed organic growth of 2%, with the strongest growth in absolute values coming from France and Luxembourg.
In the Eastern region, we continue to see strong sales development, with an increase of 12% for the quarter. The main growth drivers were in Hungary, Romania, and Russia. In the Nordic region, we also saw organic growth in the quarter, and that is mainly related to the increase of industrial building projects in Sweden. Now we go to the financial section, and I hand over to you, Malin.
Thank you, Ola. We now move to slide number seven. And we look first at the group financial highlights. The net sales amounted to SEK 2.526 billion. The organic growth was 3%, with currency contributed positively also by 3%. The largest positive currency effects on sales in absolute terms comes from euro. EBIT increased mainly as a result of a volume increase and strength in gross margins. All three business areas contributed to this increase in profitability. The net profit increased to SEK 143 million, and compared to SEK 106 million during the same period previous year. The higher effective tax is mainly related to withholding tax on increased dividends from Astron Russia.
The dividend distribution is part of our ongoing focus on the capital structure in the group. Now let's have a look at the Ventilation Systems at the next slide. We can see that the net sales amounted to SEK 1,478 million, which is in line with the same period previous year. The organic growth amounted to negative 4%, while currency was positive with 3%. Structure also had a little positive effect of 1%. Sales volumes are impacted by our continued priority to increase profitability, and we also see a general lower demand in Europe. EBIT amounted to SEK 129 million, compared to SEK 127 million a year ago. 2018 was an all-time high fourth quarter. The improvement was mainly related to improved gross margins and stable underlying costs.
We move to the next slide. Net sales in Profile Systems amounted to SEK 707 million. The organic growth was positive and amounted to 11%. Sales increased due to large delivery on industrial projects in Sweden and CEE compared to last year. EBIT increased to SEK 85 million compared to previous year, SEK 56 million, due to significant higher sales volumes and slightly strengthening gross margins. We move to the next slide number 10. We take a look at the Building Systems financial highlights. The business area reports strong sales. Net sales increased by 31% and amounted to SEK 341 million. Organic growth amounted to 24%. Currency contributed positively by 7%. The largest positive currency effect on sales in absolute terms comes from Ruble.
The EBIT increased to SEK 50 million compared to zero last year, mainly explained by the strong sales volume growth. The backlog was lower at the end of Q4 compared to the same period previous year, as a result of large shipments, mainly to Western Europe, but also due to a lower order intake during the second half of the year compared to last year. We move over to the cash flow on slide 11. Adjusted free cash flow amounted to SEK 274 million, compared to SEK 198 million during the same period last year. The improvement in free cash flow is due to higher operating profit and a favorable change in working capital.
The net debt, excluding the effect from IFRS 16, decreased to SEK 732 million, compared to SEK 1.052 billion last year. Next slide, this is a summary of the financial highlights for the full year. When we summarize 2019, we look back on a year with continued sales growth, but also, above all, significant improvements in profitability. For the group as a whole, net sales increased by 6% and amounted to SEK 9.9 billion. EBIT increased by SEK 281 million to SEK 915 million, and no one-off items have been recorded in 2019, compared to SEK 87 million in 2018.
The net profit increased to SEK 678 million, resulting in an EPS increase of 72% and amounting to SEK 8.89 compared to SEK 5.16. The Board of Directors proposes an increased dividend, which amounts to SEK 3.6 per share and approximately 40% of the reported profit. This is in line with the updated dividend policy of at least 50% of the company's profit after tax. The improved net debt EBITDA ratio with lower net debt in Swedish krona supports the dividend proposal. This concludes the financials, and I turn back over to you, Ola.
Thank you, Malin. We move over to slide number 14. We have published a press release about this last year, and last year, updated financial targets and dividend policy. The Board of Directors decided in December to keep some of the financial targets and to update some, and to adjust the dividend policy according to the content on this slide. Growth rates, those targets are, they remain unchanged. Operating margin also remains unchanged, 10% target. However, the net debt to EBITDA ratio, that has been adjusted from 2.5x to the ratio of 3.0x. That should have a 12-month average. That is to reflect the changes coming from the IFRS 16. There's no real change in policy regarding this.
It's mainly to reflect the updated IFRS 16. Dividend however, the dividend policy was adjusted and went from 30% to minimum 40% of the company's net profit. This has contributed to the proposed increase in the dividend for 2019. We move over to slide 16, and look at the current focus areas. Some of you will recognize the slide. We have worked hard during 2019 to decentralize and simplify how the Lindab Group works, and the key word for us is accountability. We have also put extra emphasis on delivery excellence. I'm pleased to say that we have managed to reduce our delivery times substantially. We have also cut the number of delayed deliveries, by a very high, so we are quite pleased about this operational improvements during the year.
It's a substantial step forward for the Lindab team. I think our customers are noticing a substantially better service from us. Our investment program is continuing at a high pace. We are gradually increasing both our capacity and our efficiency, both in production and logistics. We move to slide 18, the outlook. This slide describes a bit about the market development and the Euroconstruct data. The Euroconstruct data indicates slow, or practically no market growth ahead of us, at least low kind of 1%. Lindab Group aims for sales growth. We are also making all the preparations needed for a no-growth scenario should that occur. We move to the summary on slide 20. A few words to summarize the fourth quarter and the year of 2019.
In the quarter, we managed to grow our sales despite a softer market demand, we are pleased with that development from our side. We saw a good profitability development in the quarter. As Malin said, we want to make you observe that we did not register any one-time costs during the year 2019. We reached a full year operating margin of 9.3%, and we consider the EBIT target of 10% to be within reach. Our strong cash flow enables Lindab to invest in the future in ways that I have described a bit about before. It has also meant that we have updated certain targets, and we have updated our dividend policy. The fact that we can more than double the dividend while we are implementing substantial investment programs is a sign of strength.
We are also able to look at acquisition possibilities going forward. I thank all our colleagues for a job well done in 2019. We are looking forward to continued improvement efforts in 2020. This was the last slide in the presentation. Let's open up for questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad, and if you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Douglas Lindahl from Kepler Cheuvreux. Please go ahead.
Hello, Ola. Hello, Malin. Hope you can hear me. A few questions from my side. You have talked now for a few quarters in a row here that the order backlog in Building Systems is down year-over-year, while we're seeing continued strong growth from this business area. Can you just remind us what the average execution time is on your backlog? Meaning, when should we start to see the sort of negative growth effects come through, unless you turn the order intake trend around? On that, what can you say about the order intake activity? Is this a weaker margin market purely, or? If so, is that sustainable going forward? Those would be my first questions.
That's quite a lot.
I know. Sorry.
I think, if we go back to the second half of 2018, we received substantial orders for large projects, the majority of that work has been executed in 2019. While executing these large projects, we did a very good job, we got also follow-up orders on the existing large orders. I think that this has been part of the explanation why we have continued to have strong invoicing late into the, say, towards the end of 2019. The normal turnaround time on a project from order to delivery, it can vary quite a lot. It can be from two months up to 12 months normally, depending on the size of the project and if the design is known or not, beforehand.
It is possible that we can receive orders in a quarter and actually execute an invoice during the quarter, but I would say that the normal scenario is that we invoice one or two quarters after we have received the order. We did not expect to see as strong invoicing in Q4 for Building Systems as we saw. They did a very good job to finalize projects ahead of New Year's. We are quite pleased with their performance. Now when we compare the backlog to a year ago, it is lower than it was because of all the high invoicing done during 2019.
Okay. Going back to your 10% EBIT margin target, it's looking increasingly attainable. Does this mean you now are starting to shift more and more into growth once you hit potentially the 10% margin target? Or how should we view sort of the balance between margin and growth in a scenario that you actually hit the 10% margin target?
I think it's natural that you can shift a bit of your focus over to growth when you have reached your profitability targets. We are not there yet. There's still some way to go, I think for every decimal point now, we need to fight really hard to make sure we get above the 10%. To find the right balance here between continued operational improvements, being very cost aware, and selectively finding these interesting pockets of growth, that is how we are trying to address this year, 2020. With the background that we have seen a softer market. We also have to be aware that there's no no tailwind. We have to try to grow in a stable market.
Okay. A final question from me, then I'll get let someone else also ask a few questions. On CapEx, I remember that you previously talked about increasing CapEx, and you've done so, and I think, Ola, you talked about it should move closer to 1x depreciation, and you haven't really hit that number in 2019. How should we view CapEx for 2020 specifically?
Well, some CapEx will come quickly after you have made up your mind to invest in something, and other types of CapEx that takes a while to actually implement and get done. We are working with a wide portfolio of investments now. Everything from machine investments that can be implemented in two or three months, but also including major expansions of facilities where it can take one and a half years. I think you should look at our investment program as a, you know, at minimum, a three-year program, where we are significantly raising the ambition level. It is to some extent ramped up over time because you cannot start to execute these investments and get impact from day one.
It takes preparation, takes building permits, takes, you know, construction of automation lines, et cetera. I would think that 2020 will see significant investments, and I think part of 2019 was a startup period.
No sort of indication on we're talking about EUR 400 million, or, you don't want to be specific?
You're looking up. You're looking for money.
Yeah.
Uh, I, uh-
Maybe more than that.
Indication is to be a model, which has a lot of money. I, my situation is, I expect our investment, our CapEx, to be, quite some bit higher than the depreciation rate.
Over time, yeah.
Over the next-
Over the period.
Over the next few years.
Okay. Yeah. Okay, thanks, I'll get back in line. Thanks.
The next question comes from the line of Carl Ragnerstam from Nordea. Please go ahead.
Hi, it's Carl here from Nordea. First of all, can you help us try to split out how much of the growth in Profile Systems was due to project deliveries? Can you also give us an idea of the gross margin in those projects, we can sort of back out the underlying margins?
No, we can't answer those questions exactly, Carl. There were industrial projects for Profile Systems in Q4, maybe a little bit more than usual. There is some effect, and we are also commenting on that the strong growth that we saw in Q4 was helped by some larger projects. I would add that in addition to that, we saw a favorable weather conditions with a mild winter weather, which is good for our business in Profile Systems, because that means people can be outdoors and work on the facades and the roofs of the buildings. The growth is a combination of favorable weather and industrial projects at a higher rate than before.
Okay, perfect. And regarding M&A, I mean, you have a financial target of a top line growth of 5%-8%. Can you give us sort of a split, how we should look at the contribution from organic growth and from M&A? Can you also talk a little bit about your M&A pipeline, what multiples you see in the market, and if you're staffed in order to increase M&A pace?
I think the proportions of, you know, organic versus acquired growth will change over time and over the business cycle. If we are looking at a little bit softer market now, then the acquisitions would have to make up a bigger part of your growth. If we have very, very strong organic growth, then perhaps we don't have the same time, and the prices of the possible acquisitions might also be higher. I think that will fluctuate over time. We are looking for a healthy combination of acquired and organic growth. I cannot give you exact how many of the five to eight percentage points will come from either one of them. We are working on both methods to grow.
When it comes to multiples, we are not commenting on that, but I mean, it's not in our DNA to pay significantly different from what other people in the industry would pay. We are not going to address this in a, in a significantly different way than any other company would do.
Okay, okay, perfect. The final one, perhaps, I mean, we talked about the CapEx before. Can you mention some of the projects that you will work on in 2020?
There, there are, there are many, but we can mention a few. We are, we are putting a lot of effort into our central and our regional ventilation factories. We have a large set of factories in Czech Republic, and we have also in Sweden. We are investing significantly in those. At the same time, we are also investing in the second tier factories, which are, they are smaller, but they are, play a very important role as regional hubs for distribution. Then we are talking about major investment in our infrastructure in U.K., France, Germany, Denmark, Estonia, Hungary, and I'm probably forgetting some.
We are talking about quite significant enlargements and automation projects in these factories. Why are we doing that? Well, it's partly to offload the central factories and now allow them to become more specialized and better. It is also to give much quicker and better service to the local or regional customers, and to cut transport costs by huge amounts. Transport is becoming more and more expensive in Europe. Expected delivery times are shorter and shorter, Lindab has a quite a vast logistics network and operation that we have to fine-tune according to the way Europe looks today and all the associated costs. Attractive paybacks, very good projects, and we have plenty of them.
Okay, thank you very much.
The next question comes from the line of Kenneth Toll from Carnegie. Please go ahead.
Thanks, plants there. You say that you're investing a lot in many plants on the ventilation side. Does that mean that we should not expect any sort of structural changes that you might sort of close a plant and move production somewhere else, or outsource production and close some plants and so on? Have you rather decided to invest in what you have instead?
Well, I mean, there's always the possibility that you will rearrange where you produce what. That can also be a situation where you close a plant, but I would not say that that is the main challenge for Lindab today. I think, if anything, we have insufficient capacity. We don't have overcapacity, we have insufficient capacity to meet the growing demand from our customers. We have been working at very, very high capacity utilization in many factories. This can be nice, but it can also be quite expensive to do, to run many shifts at expensive hours.
I think we are trying to now, invest in both capacity and automation to find a better balance going forward and higher efficiency, but also room for growth.
Mm. And-
What we are also doing is that we are trying to find where is the optimal place to produce a certain product. You know, demand patterns are changing, so it might very well be that we are moving production of certain products from one factory to the other. I don't think that we will see any major restructuring of within our plant closings and so on. That is not what I expect.
Mm, okay. Then I was wondering, your EBIT margin have come up now, and it's getting closer to your target. When you started at Lindab, there was a lot of discussion about underperforming units and changes needed to be done. Now you communicate more that you have to fight much more for any additional margin increases. Do you still have underperforming assets out there that you need to take care of, or is it more that you need to reduce a little bit of cost here and there, if you understand where I'm going for?
Yes, I understand. Life would be terribly boring if we didn't have some really difficult things to improve. Of course, we still have units that we are struggling with, but they are much fewer than a year ago. We had quite a substantial part of our turnover, was actually not contributing much to our bottom line a year ago. Today, I would say that the units not contributing in a good way to our bottom line, they are very few.
Mm.
A very small percentage of our turnover. We are still working on improving some units. I believe that actually all units in Lindab can do better, but it is not necessarily so that they will automatically do better next month just because I tell them to. There. It's a combination of, you know, how we work, what we are investing in, how we are addressing our customers, and 1,000 things that need to work a little bit better every day, that will continue to drive the improvement. I think we've taken a quite a big step in 2019 and reached a different level than before, so it's a good starting point for further improvement.
Mm. Do you also, when do you think that we should start seeing some positive effects from the automation projects?
We are gradually seeing the positive effects. I cannot isolate and say exactly how much I think, but we are by investing in improved efficiency in our factory, we are increasing our competitiveness every day.
Mm.
It will be seen both in our revenues and in our operational KPIs and gross margins going forward.
Mm.
That is something that I am expecting will help us over the next years, as they gradually kick in.
Mm.
Most of the initiatives, most of the investments, they have not yet been commissioned, so to say.
Mm.
The those rewards lie mostly ahead of us.
Mm.
Yeah, we have previously communicated as well, that we see a lot of these investments with an implementation time of something over a year, up to 18 months, and so maybe that could be one indication.
If a larger project is not much benefit until 2021, then probably.
It can be like that. I mean, we still continue to keep a very high pace in all the investment decisions. The investment decisions have been at a very intense pace since Q4, 2018.
Okay. In terms of acquisitions, you said before that you were looking rather to make several smaller acquisitions than one big one, so to say. But what are you looking for in terms of product range? Is Ventilation more interesting than the other parts? And from a regional perspective, if it's Western or Eastern Europe, or?
We are primarily looking at Ventilation Systems, but that does not exclude the possibility that we will, if we find something very appetizing, that we will do it in another of our business areas.
Mm.
The primary focus is Ventilation Systems. We are looking at the major European countries.
Mm.
Say, the top 15 to maximum 20 countries in Europe, where we already today, have a strong position. We are not looking at remote places. We are not looking at U.S. or Middle East or Asia. We stay in Europe and focus on that.
Mm-hmm. Okay, sounds reasonable. Thanks a lot.
Thank you.
The last question comes from the line of Henrik Alveskog from Redeye . Please go ahead.
Yes, hello. Thanks for taking my question. You covered almost everything, but maybe if you could comment on your margins in the Ventilation Systems segment in this last quarter. It's a little lower than previously in 2019, and I understand there are seasonal variations, but is it? Could you give an easy answer to this? Is it a product mix question, or do they maybe have higher costs for some reason in this quarter?
There are many good questions here. The Ventilation Systems, well, if you compare only to last year, it will look like this result is approximately the same, there's not much of an improvement. If you look back in time, you will see that 2018 Q4, the result was unusually strong for Ventilation Systems. We are actually very happy with the results, that we managed to stay on that record high level also this year, despite a softer market. December is a difficult month, it was a difficult month in 2019, quite a short month. It's not so strange that we have a lower EBIT margin in Q4 compared to Q3 or Q2. That is normal for us.
Mm.
We should maybe also point out that we have not taken any one-time costs, OTC, in 2019, which also means a small effect on Ventilation Systems, where we had a SEK 3 million OTC in Q4 2018. Well, you know, we don't see the same improvement pace compared to last year Ventilation Systems in Q4. We are actually quite happy with the results delivered by that organization during last quarter.
Great. Yeah. Thank you.
Thank you.
I have no further questions, so I'll hand it back to the speakers.
Thank you so much for participating in this call.
Thank you very much from us. We hope to see you next time, and we close the meeting. Thank you.
Thank you. Bye-bye.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.