Ladies and gentlemen, welcome to the Lindab Q4 report for 2018. Today, I am pleased to present the CEO, Ola Ringdahl, and the CFO, Malin Samuelsson. For the first part of this call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. Speakers, please begin.
Hello, everyone, and welcome to this call. My name is Ola Ringdahl. I'm the President and CEO for Lindab Group, and I'm here together with our CFO, Malin Samuelsson. We move to slide number 2, and the agenda. In today's presentation, we will present according to the following agenda, and at the end, we will open up for questions. As we move forward and start with an overview on slide number 4. Key highlights, Q4 2018. We try to summarize the fourth quarter. We saw continued sales growth in both our segments, and we saw also improved profitability. Net sales increased by a good 9%, the organic growth was 5%. Our adjusted operating profit increased to SEK 173 million as a result of strong volume increases in both segments, and also slightly improved margins.
Profit for the period increased to SEK 106 million, negatively impacted by one-off items of SEK 26 million in this quarter. The Board of directors proposed a dividend of SEK 1.75 per share. During the quarter, the review of the business has continued, and the new organization structure has been presented for Products & Solutions as it was divided into two business areas on January 1 this year. The turnaround program within Building Systems has continued according to plan, and we have taken yet another step towards creating sustainable profitability. We move to next slide, number 5. Here, a few comments about the growth in the different geographies. We saw good sales development and organic growth in all major regions for Lindab Group.
If we look at the Nordic first, good and strong sales development. All countries reported good organic growth. In West Europe, we saw the strongest growth coming from Germany and Switzerland. In the Central Eastern Europe region, we continue to see positive sales development and strong growth, particularly in Poland, Belarus, and Czech Republic. We move to the next slide and look at the sales by product area. Q4, as I said before, we saw good sales growth. The positive sales trend in ventilation continues. We had good healthy numbers for both the ventilation products and ICS products. In the profile business, both the rainwater and building products had a good quarter, with sales increasing in all regions, and particularly good development in markets like Sweden, Hungary, and the Czech Republic.
Now we move to the next slide and the financials, and I'm handing over to you, Malin.
Thank you, Ola. We now move into slide number eight. First, we take a look at the group financial highlights for the quarter, we had a net sales increase by 9% or SEK 199 million, of which the organic growth amounted to 5%. The EBIT margin increased as a result of increased sales volumes in both segments, as well as improved gross margin in both Products & Solutions and Building Systems. The net profit increased 26% to SEK 106 million. Let's have a look at Products & Solutions at the next slide number nine. Products & Solutions net sales increased by 8%, and in Swedish krona, it's SEK 164 million. The organic growth amounted to 4%.
There has, you know, been a continued growth with good sales development in all regions within Europe, with particularly strong growth in the CEE/ CIS, as well as the Nordics. EBIT increased to SEK 183 million, mainly as a result of strong sales development, but also due to improved efficiency and gross margin. Moving to slide 10. The Building Systems organic growth for the quarter was 13%, and there was a favorable currency effect of 2%. The main positive impact came from the Euro, but it was partly offset by the Russian ruble. The EBIT improvement compared to last year is mainly explained by higher sales and strengthened gross margin. We have had a lower order intake in the quarter versus the same period last year.
However, the backlog is clearly stronger compared to the same period last year, particularly in Western Europe and CEE. Moving to the next slide, number 11, we take a look at the cash flow. Adjusted free cash flow amounted to SEK 198 million versus SEK 326 million, same period last year. The relative decrease was impacted by the change in working capital. The impact is mainly due to the fact that a larger portion of accounts payables were affected compared to the same period last year. Net investing activities were lower versus last year. In the fourth quarter, 2017, we had cash flow included from the acquisition of the Irish ventilation company, A.C. Manufacturing Limited, which amounted to SEK 64 million. This is excluded from the adjusted free cash flow.
Net debt amounted to SEK 1.052 billion, and our net debt EBITDA ratio improved to 1.6. On slide 12, we will conclude on the full year financials. If we summarize 2018, we look back on a year with continued sales growth, but also gradual improvement in profitability for both Products & Solutions, as well as Building Systems. For the group as a whole, net sales increased by approximately SEK 1 billion or 13%, and the EBIT increased by SEK 123 million to SEK 634 million. The strategic assessment and restructuring activities that occurred during the year have caused unusually high one-off costs, amounting to SEK 87 million in total.
The net profit increased to SEK 394 million, resulting in an EPS increase of 14%, equivalent to SEK 5.16. The board of directors proposed an increase in dividend, which amounts to SEK 1.75 per share, approximately 34% of reported profit. The improved net debt, EBITDA ratio, also with a lower net debt in million SEK, supports this dividend proposal. This concludes the financials. Back to you, Ola Ringdahl.
Thank you, Malin. We move to slide 14 and some highlights. We start with Building Systems. Building Systems received 4 orders during the quarter, worth more than SEK 10 million. Those were 2 warehouse buildings in Germany, 1 large parking garage in France, and 1 manufacturing building in Russia. During quarter four, our investment in the Přerov factory in Czech Republic also delivered its first project that was fully engineered and produced from the site in Czech Republic, and that was a parking garage to Austria. The parking garage business is developing well and looks interesting for the future. Moving to slide 15 and Products & Solutions.
Here I want to comment that most of our business in Products & Solutions, which we are now dividing up into ventilation and profile systems, it is normal day-to-day business. We sometimes highlight a few projects on this slide here, but we want the project business to be a limited part of our turnover. Nevertheless, we are pleased to say that during the quarter, we received an additional order from our customer, Catena in Sweden. We will deliver an energy-efficient building totaling 11,000 square meters to the new logistic center outside Helsingborg in Sweden. Total project value is SEK 27 million. We're delivering the smart roofing systems, walls, opening solutions, et c. Building is expected to be finalized during the autumn of 2019. We go to slide 17, and the outlook.
Some words about the market development. We all read a lot about this in the newspaper and analytical reports. We are following the macroeconomic reports from our side, there seems to be some uncertainty when looking at new building permits and construction activity in the future. At the moment, we don't feel that in our order intake or our net sales, we are ready if it should happen. Our expectation for 2019 is that we expect some growth in 2019, at a slower pace than in 2018. We go to slide 19 and try to summarize. To conclude the quarter, I would say that it looks okay, given the circumstances.
When we look at the full year, 2018, and try to summarize that, we saw strong sales growth during the year. During the first half of the year, we did not succeed to translate that sales growth into increased profits. However, in the second half of the year, we have tried to improve our efficiency and our gross margins, and we have gradually seen some increase in the drop through, which is a good step in the right direction. With this, we conclude the presentation, and we open up for questions.
Thank you very much. If you have a question for the speakers, please press zero one on your telephone keypad. We have a question from the line of Carl Ragnerstam of Nordea.
Can you hear me?
We can hear you.
Okay, perfect. First of all, the drop through within Building Systems seems fairly weak. Can you comment on the reasons behind that?
I look at for Building Systems, which was loss-making last year, I mainly look at the EBIT improvement compared to last year, and I see that we have seen good solid EBIT improvement of between five and six percentage points during the year and also in the fourth quarter. That is following the improvement plan that we have made. To do that kind of transformation faster, would be a very steep challenge.
Okay, no, negative product mix or so on?
Not material. The turnaround of Building Systems is following the plan and the expectations we have.
Okay, perfect. You also write about the action plan that was launched during the quarter. Can you perhaps give some further information about the plan and the different initiatives? What CapEx increase can we expect in 2019? Yeah.
One important part of the plan to improve financial performance in Lindab is to find a more suitable way to organize the group. It is a relatively large group, more than 5,000 people. An important step for us is to split up the quite large business area Products & Solutions into two separate business areas. We will achieve more focus on the relevant customer segments, which I think is good for both our customers and for us internally. This reorganization, it also, it is not only something done at the top, it's something that will affect the entire organization and clarify roles and responsibility for many people in the group. Both from the commercial side, but also from the operations side.
When we talk about operations, we come into quite a lot of the investment discussions. I feel that there is a need for Lindab to increase the pace of investment. That has been less of a priority during certain years, when Lindab had quite a lot of debt. We are starting now to look financially more healthy and can afford to increase the pace of investment, both in terms of efficiency investment and capacity investment, where that is necessary. Yes, I expect the CapEx for production-related investment to increase for Lindab Group going forward.
Could you perhaps quantify that? Also, how much will be allocated to automation, also which geographical areas or plants are you going to approach first? Also, what effect could this have on earnings when fully materialized?
No, I will not go into those details, but I today I will only comment that we are talking about significant increases in investments, and we have very attractive paybacks on these investments. One should expect a good and quick payback and resulting efficiency improvement. The business cases look very attractive.
Okay, we should expect it from H1 2019 already, or?
That I did not say. One also has to have respect for the time it takes to decide, buy, install, and approve high-tech equipment. We are not deliberately waiting with anything, but to exactly say when you will see this in the P&L, that is not possible.
Okay, the last one for me, if I may. You also comment that the Building Systems order intake decreased during the quarter. Can you perhaps quantify that? Also, would you say that the decrease is a function of a weaker underlying market or just a timing issue?
W e don't see a weaker underlying market, it's probably more timing effect. The business of Building Systems is project related by nature, and both order intake and invoicing, net sales, and profit generation will fluctuate between quarters. There's a clear seasonality if you study the history of that business area from quarter to quarter. We have a good backlog of orders. For Building Systems, we are stronger now than we were a year ago. I'm not concerned about the backlog for Building Systems. On the contrary, it gives me comfort.
Okay, thanks very much.
Thank you.
Thank you. Our next question comes from the line of Marcela Klang of Handelsbanken. Please go ahead. Your line is open.
Thank you so much, Marcela Klang, Handelsbanken, and congratulations on a very solid report. A couple of questions from my side. Maybe if we start with, you mentioned that there is increased uncertainty in the market. Are you yourself seeing any small signals of slowdown affecting your business? What kind of delay are you preparing for? Because obviously the non-residential construction is late cyclical, but what kind of delay are you yourself counting in, and are you taking any measures, or is it full steam on for your business at this point?
We are not seeing and not feeling any impact or any possible future slowdown. We are reading about it, just like I think you are. There seem to be some pretty solid statistics about building permits, et c., that indicate that we will face the slowdown at some point. I am relatively new in the industry. I also hear that we are late cyclical, which can give us some time to prepare for a downturn. We are ready for a downturn. We have contingency plans if that day should come. We saw very strong growth in 2018.
To be honest, I think that we would be happy if we didn't see as strong growth again this year, because growing by that much every year, it puts enormous requirements on your infrastructure, and it can give you growth pain. I think Lindab experienced some growth pain in 2018. I think a more healthy growth pace will be beneficial for Lindab Group. If we were to see a downturn, we would be ready for that as well. We are a stable company.
Thank you. Looking maybe a little bit closer into the future, looking through your cash flow, you showed less stock decrease than in the fourth quarter last year. What kind of implication for the start of 2019 can we draw from this, or what was the reason behind it?
There are definitely reasons behind it. I think it is dangerous for a company like Lindab, who is known for their good service level, to have too little on stock and risk that customers are becoming disappointed with you. One of my priorities is to have a very good service level towards our customers. I want to have the right stock and inventory in our branches and warehouses and so on. When you grow as quickly as we are doing at the moment, you need to be careful not to reduce your stocks too much. I am consciously making sure that we are not having too little on stock.
Thank you. Also, you have implemented several price hikes. What are the reactions that you get from your customers and also competitors? How is this welcomed in the market?
I think in the segments where we are the clear market leader, our competitors, as you say, they could be quite happy that we are increasing prices because they probably also need to do it, but they don't have to do it first. Most of the time they follow when we do it. In the business segments where we are the challenger and not the leader, it can of course be more tricky, but we have to have the courage to increase if our current gross margins are unhealthy, and they are unhealthy or have been unhealthy for certain product segments for Lindab Group. We have to correct that. Of course, it's a delicate situation when you have to take these discussions with your customers, with whom you have.
long lasting relationships. It's never fun to have to increase prices. Lindab did not increase prices in line with the raw material cost increases during 2017 and early 2018, unfortunately. We fell a bit behind, and we have a bit of catching up to do. That means that whatever we didn't do before, we have to do now. That can be a bit painful and cause some reaction. Frankly, we don't really have a choice. This has led to a situation where we have to, I mean, prioritize gross margins a bit higher and volume a bit less.
Do you see further need to do any further price hikes in maybe the first half of 2009?
We are still making selective price adjustments to ensure that we have a good balance and a good, a healthy gross margin, so we can continue to build the company for the future. I will not comment on exactly how much and exactly where, but we you're never done with your price adjustment, but at least we have caught up a little bit. We are approaching a situation where we are, seeing acceptable gross margin for most of our product categories, but we are not really there yet.
Okay. Okay. You mentioned that there are primarily cost synergies between the future ventilation systems and profile systems. Do you see any other synergies between these two divisions as a reason to keep them within Lindab?
Uh-
On the client side or anything else?
There can be in some cases, but most of the time, the customers are, they are more specialized today than they used to be. In the distant past, an installer would happily buy both product assortments. Today, they are more specialized, so you are probably either a customer on the ventilation side or on the profile side. We share really a lot behind the scenes. Everything from shops, warehouses, logistics, production sites, raw material purchasing, et c., et c. There are far-reaching integration and cost synergies behind that customer meeting.
A final question from me, and then I'll let others in. You're a relatively new CEO to Lindab. Anything that surprised you so far with the company?
I think about that occasionally, so thank you for asking. I went in trying to be very open-minded about what I could expect. I was ready for pretty much everything. I have worked in many companies in the past, so I've seen quite a lot. I can maybe conclude at least now, after six months, that, no, I'm not really surprised about things in Lindab. I think I can understand what the situation is, why it is like it is, how it developed. There are many very good things in Lindab that have been developed over many years.
We just celebrated our sixtieth anniversary last week, and there's a lot of very dedicated employees that have been with the company for a long, long time, and that's a special Lindab spirit in the company. We have a very good platform to build on. We have very strong customer relationships, products that are very good quality and highly respected. Then, of course, there are certain things that haven't worked so well lately, but we have a very good opportunity to fix that. So I must say, I feel excited about being at Lindab. I see many improvement possibilities, but I also see a very good base to build upon, and that is very valuable for the future.
Thank you so much. That's all from me, at this point. Thank you.
Thank you.
Thank you. Our next question comes from the line of Max Frydén of Danske Bank. Go ahead, your line is now open.
Yes, thank you. Just a question for Malin. I missed the start of the call there on the working capital release was less than the seasonal pattern. Are you expecting that to come back a little bit in Q1, having less of a negative effect in Q1?
Yes, that could potentially be the case. There are also other things that will impact Q1. Let's see.
Okay, fair enough. For both of you took some extraordinary charges here in Q4. Are we expecting that for Q1 as well, and for the Products & Solutions business?
No.
Perfect. Thank you. Thank you. May I remind you that if you want to ask a question, please press zero one on your telephone keypad. Our next question comes from the line of Marcela Klang of Handelsbanken. Go ahead, your line is now open. Hey, Marcela, you may go ahead and ask your question.
Yeah. Marcela Klang, Handelsbanken again. If there are no questions from others, then I'm happy to continue. Ola, you mentioned many improvement opportunities for Lindab ahead. Looking from your perspective, what are the biggest challenges for Lindab for the coming maybe a year or 2? Where are the biggest improvement opportunities? I know that you have the restructuring program ongoing until 2019, but what are the biggest challenges and the biggest improvement opportunities?
There are many, and that is very good, because it means we can improve a lot. Building Systems, we have talked about, that is in the middle of this turnaround program, and can still improve a lot. Now when we split the Products & Solutions into two separate business areas, I think that we will see many improvement possibilities there. Reviewing the product range we have, we have a vast product range. We're sure that we dedicate enough focus and resources to the winnning products, and should we perhaps prune that entire product catalog a little bit? If we look at the map of Europe, we have sales companies and operations in very many countries.
We are in almost every European country with our people, production, sales, office, and so on. We are reviewing that. We are shutting down certain units that are too small to be profitable or worth investing in. That will continue. We're in the middle of that right now. On the product development side, focusing our resources and investing, I think, a bit more in that will be key for us going forward. We are launching some initiatives, I think already in a few days. There will be a little bit more to read about what we are doing in the area of innovation. We have in our both operational efficiency and logistics and trade efficiency, really a lot of very exciting improvement opportunities.
Both increase in capacity where we feel that we can actually sell a lot more if we have the capacity, and automating the manufacturing in sites where we still have a little bit too much manual production. Very attractive payback, as I said, from those investments, and we are investing as fast as we can cope. There is quite an interesting development in Europe as well, which we have to adapt to and hopefully manage well. That is the European map is kind of redrawn when Eastern European salaries are approaching Western European salaries.
Transport costs are increasing, and it means that we have to take a new fresh look at where we produce what, how we transport it, where our products are sold, where are they made, and how do we actually create the optimal setup that will be good for the next five years. That map is redrawn quite quickly now in Europe, not only for Lindab, but for all companies. If I can mention a final thing, I think, you know, we, as all other companies in the world, we have to invest more and faster in digital tools and e-commerce. That is an area where I think we have done quite a lot, but we can do even more.
Thank you so much. Very good answer. A final question from me. M&A, is it on the agenda for you at all during 2019? When, when earliest? Because I understand that you have a lot of good things to be busy with in 2019, but what is your view on M&A and Lindab's need for M&A or not?
Yeah. Normally, when I start a new job, like this one, for the 1st 12 months, I do not focus on M&A. I try to stay away from M&A activity. That is the plan also here at Lindab. Sometimes you cannot entirely control that yourself, because sometimes there can be opportunities presented, where you can't wait. I'm not seeking any acquisitions at the moment. Hopefully, we will be in a good enough shape after Q2, that we can actually start to actively look and open our eyes and ears a little bit. It takes time to build enough cases and so on. It will probably take a little bit of time.
My belief is that an organization should be in good shape and really ready to make acquisitions before you do that, and then you have to do it very, very well. Otherwise, you can destroy a lot of value.
I agree. Thank you so much. It looks like we have a lot of good things to look forward to in the coming years. I will let the other analysts back in line. Thank you.
Thank you.
Thank you. There are no further questions at this time. Please go ahead, speakers.
From Malin and myself, we would like to say thank you for listening in. We close this Q4 presentation. Thank you very much.
Thank you.
This now concludes our call. Thank you for attending. Participants, you may disconnect your line.