Hello and welcome to Lindab Q2 2020 report. Throughout the calls, all participants will be in the listening only mode. After that, there will be a question and answer section. Today, I'm pleased to present Ola Ringdahl, CEO, and Malin Samuelsson, CFO. Please go ahead with your meeting. Thank you.
Hi, everyone, and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO of Lindab Group. I'm sitting here together with our CFO, Malin Samuelsson. We go to the agenda slide, and we follow the same structure as we usually do. I'll give an overview first before we get into the financials. If we move to the overview on slide four and some highlights from the second quarter of 2020. We had a good development in terms of sales in the Nordic region, despite the COVID-19 situation. However, in the rest of Europe, and in quite many countries, we saw countries going into lockdown, and that affected our sales quite a lot in those countries. In total, during the period, net sales declined by 14% to 2.2 billion SEK. We saw a very tough downturn in April and May.
June, we actually came back and saw a little bit of growth. Despite the lower sales, we reached an adjusted operating margin of 10%, and that is actually an improvement compared to last year. The financial performance for the business area was good in all three cases, despite these challenging times. We think that the profitability in Profile Systems was especially strong. Cash flow was also quite strong, despite the fact that we continued to invest substantially in automation and efficiency. The AGM decided to pay a dividend to shareholders for 2020 on the same level as we did in 2019. All in all, I can summarize the Q2 with high profitability, continued investment, and improved cash flow. We move to the next slide and look at the geographic development.
Now we can see on this slide that in the Nordic region, we had growth during the period, a lot of it driven by Profile Systems that is especially strong in the Nordics, but we also had a satisfactory development of Ventilation Systems. In Western Europe and countries in Eastern Europe, there was a lot more effect from lockdowns, and we suffered badly in April and May, but gradually in June, the situation improved. Now we move over to the financials on slide number 7, and I hand over to you, Malin.
Thank you, Ola. We are at slide seven, and we are looking at the group's financial highlights. The net sales amounted to SEK 2,218,000,000. Organically, the sales decreased by 12%, and currency had a negative impact of 2%. Adjusted EBIT margin improved, as Ola mentioned before, to 10% versus 9.3% previous year due to reduced operating costs, but also strengthened gross margin. Net profit amounted to SEK 76 million, compared to SEK 181 million during the same period previous year. It was related to lower sales, one-time cost due to the strategic decision to close down IMP Klima Group, and higher tax. We move over to the next slide eight, and look at Ventilation Systems. Net sales for Ventilation Systems amounted to SEK 1,297,000,000. Organically, sales decreased by 16%.
Sales volume was impacted negatively in a number of markets due to COVID-19, especially Western Europe and CESEE. While sales in the Nordic region was in line with previous years. The lower adjusted EBIT margin amounted to 9.6% versus 10.4% previous year. It was explained by reduced sales due to COVID-19, but partly offset by strengthened gross margin and clearly reduced operating costs. We continue on slide number nine with Profile Systems, where the net sales increased by SEK 60 million to SEK 685 million. The organic growth was positive by 12%. Sales increased largely due to deliveries of industrial projects in Sweden compared with last year. Since the majority of the construction sites in the Nordics have been open throughout this quarter, COVID-19 did not have any significant impact on the sales volume. Adjusted EBIT margin increased to 13.4% versus 9.6% previous year.
The improved adjusted EBIT is explained by strong volume growth and a noticeable reduced operating cost. We move to slide number 10 on the Building Systems. The net sales amounted to SEK 236 million, with organically, the sales decreased by 37%. The decreased sales during the quarter was mainly explained by particularly large product deliveries during Q2 previous year, and that was primarily in Germany and Poland. Sales was also affected by the imposed restrictions related to COVID-19 at the beginning of the quarter. The adjusted EBIT margin of 6.4% versus 7% previous year. The lower EBIT margin is explained by significantly lower sales volume, but partly offset by strength in gross margin and lower operating costs. Net order intake increased in the quarter, but the total order backlog at the end of Q2 is lower than a year ago.
We now continue at slide number 11, where the free cash flow, adjusted for M&A, amounted to SEK 229 million in Q2. The improvement in cash flow is driven by changes in working capital, which was partly offset by higher paid tax. Net debt decreased to SEK 1.869 billion, which gives a net debt equity ratio of 0.4. We continue on slide number 12, and I hand over to you, Ola.
Thank you, Malin. We go into the chapter called Acquisitions and Structural Changes. We start on slide 13. In June, we actually made an acquisition, this was in Ireland where we acquired the technology of fire ducts, and it is used to extract smoke and prevent fire from spreading within buildings, especially strong in multi-compartment fire protection. The home market for this technology, that is Ireland and also the U.K. We see this as an interesting growth opportunity for Lindab in those countries with possible expansion outside of those geographies. We start by focusing on those two countries where we see a lot of potential for this technology. The acquisition includes customer contracts to a value of EUR 2 million, and it will add a positive contribution to our profitability.
We want to be more active within acquisitions, we see that this as an early step to do so. Not so much after that, on page 14, we see that we also made an acquisition after the quarter two ended. In the beginning of July, Lindab acquired Crenna. Crenna is a market leader in rectangular ventilation ducts in the Swedish market. Almost all of the sales is on the Swedish territory. Rectangular ventilation ducts, that is an important part of the Swedish market. We estimate that it is around 40% of the market for ventilation ducts. Usually you combine the rectangular ducts with the circular ducts to build a complete system.
With the acquisition of Crenna, who has a very strong position in the Swedish market, we, Lindab, together with Crenna, can offer a complete range of ventilation ducts for all kinds of needs in the Swedish market from the very north to the very south of the country. Crenna is located in Enköping, not so far from Stockholm, could also be developed into a central hub for production within Lindab and will help us to better serve the northern part of the Stockholm area. Crenna has revenues of approximately SEK 120 million and around 85 employees. It is a very well-run company under the leadership of the managing director, Niklas Hyttsten, and he will remain in the company and lead Crenna within the Lindab Group going forward.
Operating margin for Crenna is in line with that of Lindab Group, and Crenna will be a subsidiary and part of business area Ventilation Systems. We are very happy to welcome the Crenna team into the Lindab Group. On page 15, we continue. Now, this is not about acquisitions, but unfortunately about us discontinuing a business. In the second quarter, we took the difficult decision to close IMP Klima Group. They have the main operations in Slovenia, but they also have subsidiaries in Serbia, in Montenegro, and in Bosnia Herzegovina. Lindab acquired IMP Klima in 2015, and we did so to establish a presence in the air handling unit markets where Lindab did not have a presence before. We're talking relatively large and customized air handling units here.
Despite our joint efforts and despite the best possible efforts from our colleagues at IMP Klima, the company had weak profitability and has continued to show weak development. It has been loss-making for several years. We took the decision to close down, and that decision was accelerated by COVID-19, that made it even more difficult to achieve a substantial turnaround. We will have one-time costs. We have shown in quarter two, SEK 74 million. Most of the effects are on the balance sheet, and the smaller part will impact the cash. There will be some more one-time costs following in the next couple of quarters as we wind down the business, but the largest part has been taken during Q2. We move to slide 17 and talk about the way forward.
Of course, in this kind of presentation, we have to make some special comments about the impact of COVID-19, and we try to do so on this slide. In quarter one, if we go back a little bit in time, the effects of COVID-19 were mainly limited to some countries who experienced an early lockdown, such as Italy. It accelerated towards the end of March, and from April onwards, we saw more significant effects, especially in countries with significant lockdowns such as France, Italy, U.K., Ireland, and Poland. In all of these countries, Lindab has significant operations, so there we suffered quite badly. I can also add that in those countries, we are especially active within the area of Ventilation Systems. It had a lot of effect on that business area.
Thanks to our decentralized organization, we could act fast, and we adapted our business to the new market conditions and lowered the cost levels in all subsidiaries. We can also say that the supply chain that we have built up over the years, with production close to the customers and with local sourcing and manufacturing rather than a lot of imports, that helped us to keep a very high delivery performance throughout this period, and that is so important for our customers. We also aim to stay open throughout the crisis everywhere where we have operations, so we stayed open in all countries, as much as it was legally possible. We have limited the presence of staff at some sites, but we have remained open, and we have delivered to all critical projects. Looking ahead, what with the COVID-19 impact be in quarter three and quarter four?
It is very difficult to say. We plan according to different scenarios. The fact that we had good sales in June does not mean that we think that there is no more COVID-19 impact. We think that there will be an impact and lower demand relative to the time before COVID-19. How much lower? That is the question. We don't know. We plan according to different scenarios. If we go to slide 18, and talk about our focus areas, and those of you who have been in this meeting a few times, you will recognize the slide. I tend to use this over and over again. I think it's important to mention that our strategic focus areas actually remain unchanged despite the COVID-19 situation.
We continue to strive for sustainable profitability in line with targets, and this is achieved through a decentralized approach and very clear accountability in every part of the organization. The same targets for Lindab remain as before the crisis. However, it can, of course, take a bit longer time to reach them when this pandemic has hit Europe and the rest of the world. We continue to work a lot with customer satisfaction, and we think it is more important than ever during a crisis like this. We have had, as I mentioned, exceptionally high delivery performance throughout the crisis, and we really walked that extra mile to secure deliveries to customers even during severe lockdown. For example, we have delivered to many important hospital projects when the communities have tried to mobilize and fight the disease. While handling the short-term challenges, we must also plan for the future.
We continue to implement the key elements of our strategic investment program, and it is a substantial program. We focus especially on the projects that will lead to improved efficiency and safety. There are some less critical investments that we have postponed until after the crisis, but I would say that the absolute majority of the planned investments, they run according to the plan. We move to slide 20 and the summary. To try to wrap this up, quarter two was an eventful quarter for Lindab. Decline or a real drop in sales in April and May, followed by a little bit of growth in June compared to last year. That is worth mentioning. In terms of results, we believe that it was a result that we can be proud of.
We managed to quickly adapt our cost to the new situation. At the same time, we have stood up for our customers, for our employees, and for our shareholders, who actually receive a dividend this year, and that cannot be said about all shareholders in all companies these days. We believe that with our robust supply chain and with our production and distribution system that is very close to the customers, we have very good delivery performance and continue to reach high customer satisfaction. We continue to invest. We believe that for the future, that is what will make Lindab stronger and more competitive. Looking at the future, we are prepared for a situation with lower demand, and we will continue to strive for profitable growth. With that, Malin and I say thank you for listening, and we open up for questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause while questions are being registered. The first question from Carl Ragnerstam from Nordea. Please go ahead with your question.
Hi, it's Carl here from Nordea. I have a few questions. First of all, you said that you expect lower demand over the next year compared with the pre-crisis level. I wonder, is it something that you see in the order take and backlog currently, or is it more of a general macro view that you see from indicators and so on?
Thank you, Carl. Let's say, in our bread-and-butter business where we sell over-the-counter standardized product and so on, we don't see so much of that right now. For the more project-oriented business, we see that decisions take longer time. There is a delay in making up your mind about quotations, order confirmations, and there can be financing issues, et cetera, with our customers. We see that things are taking longer, and that is a sign that the project business will be a bit more soft going forward. What that actually will mean in real numbers is, of course, difficult to say, but there must be some impact from that kind of behavior where people are thinking about the risks a bit more than they might have done a year ago.
Okay, perfect. Given, let's say, 10%-15% lower volumes, if you compare it to the pre-crisis level, do you think that you still would be able to reach your financial target of a group EBIT margin of 10%?
The 10%-15% is your qualified guess. I don't think that we have.
My guess exactly.
We have not mentioned it. If you get a little bit of time to adapt, I think that We could achieve our profitability targets, even if volumes are down as you mentioned. You cannot do it overnight. It takes some time to adapt an organization to a new demand level or sales level. Now we have done it in a crisis mode, but if you have to do it in a more sustainable way, you have to rebuild a little bit more.
Okay, perfect. In terms of the demand situations in the countries where they had strict lockdowns, what can you see there currently?
In the countries that were affected the worst, our sales was down by 70%, 80%, sometimes even more, sometimes up to 90% for several weeks in a row. That is, of course, an extreme situation. Now we are back to, I would say, the worst countries on 70% of normal level. There are countries who have been in this worst lockdown that are actually back to normal levels again. Rough answer, around 70%-100% of previous levels. Maybe to add one aspect, we still don't know if there is a catching up effect in that or not. A lot of the delays were there. You need to still need some time, that can mean that the construction work can accelerate during a period, we don't know for how long it will be like that.
Whether countries who have come back to 100% will actually stay there, or if they will fall down a bit again, that is quite difficult to answer.
Okay, perfect. In Profile Systems, you yet again report the quite impressive organic growth numbers. I guess a combination of do-it-yourself trend and Lindab Wall. By focusing on the latter one, what can you see there in terms of project pipeline and demand for Lindab Hallen?
The Lindab Hallen refer to the very economic steel buildings. They are becoming more and more popular, and I think we have a winning concept there, and it is very suitable for example, e-commerce buildings, warehouse, that you see popping up everywhere. I believe that we have a competitive edge in that niche, and I think we are seeing growth thanks to that. That said, these steel buildings, it fluctuates between the quarters how many we have. A few of them ending up in one quarter instead of another one can swing the numbers for Profile Systems quite a lot.
We tend to be a bit cautious when we talk about this because we know that there can be effects between the quarters and there is also a relatively strong seasonality because some of the work related to Profile Systems is better done in the summer period rather than in the winter period. I think we have to get used to the fact that there is fluctuation in Profile Systems and instead look at a little bit longer trend.
Okay, perfect. The final one for me. Now that you have closed two acquisitions year to date, you have a strong balance sheet as well. Can you give some flavors on your current M&A pipeline?
We have worked more actively on that pipeline during the past six to nine months, I would say. Now, of course, when the COVID-19 crisis comes, things are changing a bit in how you have to prioritize and so on. We are working actively to develop a pipeline. This takes time to do. We want to find good, well-run companies, and look at those. We are not interested so much in turnarounds or in major transformational acquisitions. We are interested in add-on, bolt-on acquisitions, things we understand and where we can quickly do a soft integration and get up to speed. I think that these two examples that we have just done, they are representative. We hope to do more acquisitions, when or if, that is for the future to tell.
Okay, great. Thank you very much.
Thank you. The next participant will be from Marketta, Handelsbanken. Please go ahead.
Thank you. Hi, Ola and Malin, and good afternoon. A couple of more questions regarding your strong performance in the Profile Systems. You mentioned a lot of large industrial orders. Do you expect this momentum to continue? Do you also have better profitability on these orders? Basically what I'm wondering about this operating margin of above 13%, how sustainable is it, or is it something special in the second quarter?
Profile Systems, as I said, they have a seasonality. Normally for Profile Systems, quarter 3 is the strongest quarter 2 is the second strongest quarter, and the winter months are a bit weaker because one of the concepts in Profile Systems that is roofing systems, and roofs you normally work more on the roof during the warmer period of the year. Is the margin sustainable or not? Well, I think during the second and the third quarter, this kind of margin for Profile Systems is what we aim for. It is much more difficult to reach during the part of the year. Seen over a 12-month period, Profile Systems should absolutely make more than 10% EBIT margin.
Sounds good. A follow-up question. You mentioned growth in June. Is this compared to June a year ago, or is it compared to May?
It is compared to one year ago. June 2020 versus June 2019, we had organic growth.
Do you want to say something about the momentum so far in July?
No, not really.
Next question. The tax rate has been so high this quarter. Can you explain this a little bit more?
I think it's better to invite Malin to answer that question. I might try, but I might fail. So Malin.
We have a withholding tax that is connected to a dividend payment. That is the main explanation.
Yeah, we can even quantify that.
Yeah.
If I dare.
Yeah. We can quantify it to SEK 21 million.
SEK 21 million is the kind of coupon tax or dividend tax from a Russian company.
Yeah. That's the main explanation. Yes.
A final question. You spoke about the bread-and-butter business compared to project business. Is there also a difference in profitability for you, or is it more a question of volumes that you expect weaker project business, but the bread-and-butter continues?
No. Well, it is, of course, a good question, and it is not so easy to answer it. Overall, we have a relatively evenly distributed profitability projects or bread-and-butter business. It actually looks rather similar. Not any major difference. It doesn't matter so much if there is more potential from one or more weight on the other, but it is more a question of total volume.
Do you think you will be able to basically compensate for some of the losses of volume in project business by increasing the bread-and-butter?
We always try to increase the bread-and-butter business, because it's a beautiful business to have. There's no drama, and it walks in through the door every day. It is also difficult to increase it. We have to fight for market share without eroding margins. I think what we are doing to really succeed there are many things, but being truly excellent in your delivery performance is one. Always having the items on stock when they are needed, without having a ridiculous amount of stock, of course. Then on the operation side, to get your operational efficiency improvements every year through working more smartly, fewer operators, more efficient machines at the logistic network, et cetera. We are really working on that. Of course, smart pricing, so you are not underpricing yourself is another aspect.
I think Lindab, in our niche, we have a very strong brand name, both towards Ventilation Systems and Profile Systems, and I would say Building Systems in their niche, they also have a very strong brand name, which is Astron in their case. Maybe that is one of our most useful weapons, because we have a good reputation for quality and being technically competent and helpful.
Sounds like exactly the right recipe. That was my final question. Thank you.
Thank you, Marketta.
Thank you. The next participant is from Kenneth from Carnegie. Please go ahead.
A longer one, maybe. First, your balance sheet is strong and you're making acquisitions. You also talked last year about increasing the CapEx levels in order to improve the efficiency and capacity of your manufacturing system. Now when things are going well, are you considering to increase these CapEx projects even more? Have you started to see any benefits from the ones you have initiated?
Thank you, Kenneth. We are running at full capacity in our investment program. Actually, today, I would say, I hope I can say this, it is not limited by money, but it is limited by the engineering resources that we have, because these are complex projects. They are big machine lines, lots of technology. We design many of our own machines because they are unique, and we become the most efficient producer in the world of the system. The bottleneck is more in the design and engineering and suppliers, rather than in CapEx budgets. That said, we are really pushing this three-year plan through at the desired speed. We have great support from the board, who are constantly reviewing the next investment in every meeting we have.
I'm satisfied so far with the pace, and I actually quite happy to say that there's a lot more that can be done. We made a three-year plan in the autumn of 2018, and the autumn this year, we will renew and have a new three-year plan because there's so many attractive investments to make with a very good payback. Are the results starting to show? Yes. They are starting to show. They start to show now.
Sounds very good. Finally, there is a lot of discussions in the EU and different countries about supporting construction in order to support the economic recovery after the coronavirus. Those government reports will have a very green tilt. We have talked before about you having very energy efficient ventilation systems and so on. How are you preparing for those and how do you think you're standing against competition in this field is?
We are one of many players in the ventilation industry, and we all have our specialties. As you have read, our specialty might not be the air handling unit, but I dare to say that we have outstanding air duct systems, and we are also very strong in the air distribution in the rooms. In those niches where we really are outstanding, we play our part. We work a lot with the certifying bodies, and we try to upgrade the requirements on these green buildings, and we set the standard for our parts of the system. There are other companies who know a lot more about the heat exchange parts and so on, but we know how to make absolutely airtight air duct systems and very efficient air distribution systems. Lindab will definitely benefit from this.
Wherever these requirements are made more, say, mandatory or more difficult, we benefit.
Okay, great. Thanks.
Thank you, Kenneth.
Thank you. The next participant is Mr. Douglas from Kepler. Please go ahead with your question.
Hello, this is Douglas from Kepler Cheuvreux. Hopefully you can hear me.
Hi, Douglas. Yes, we can.
Hi, Ola. Hi, Malin. Most of my questions have been asked and answered, but I had a few, just some detailed questions. On the comment of softer demand from the project business, Ola, can you give some sort of indication for how long you've seen this behavior? That's my first question.
Yeah. I think it's, of course, a very good question and a difficult one to answer. It depends on geography. It depends on the size of projects. The biggest projects, they can have a decision lead time of, let's say, one year, and very easy that they are delayed now for six months or 12 months. A smaller renovation project of a school might have a shorter delay. I don't know, really. I think a lot of people, they tried to finish the project they had before the summer holidays, and they were postponing the decision making for what to start in late August, early September. I think that there can be gaps in the project pipeline, and I think that probably starts now in August, September, that we will see some projects that should have been started, they are delayed or not started.
That's what I personally believe. I'm sure that there are many who are more competent to evaluate that than me, and most likely will find much better answers in the construction sector, because we depend on the jobs they get, and also the installation companies. I saw that Bravida, that is one of our large customers. They had organic growth, and they seem to do quite well. Hopefully that is an indicator that this can work out okay. In my job, I have to be prepared for a situation that is less than optimum.
Okay. I understand it's a difficult question to answer. On the topic of closures, are there any further units that you're currently looking at which have been underperforming for some time, and which potentially might be shut down in the short term?
That is a wonderful question, Douglas, and it will be a surprise to people if I had answered it.
Yeah. At least I tried. Maybe not specific, but in general terms, obviously.
In general terms, since I joined, I have been very clear within our organization that if companies are not able to make money, they will be either closed down or divested. There is no room in Lindab for underperformance, and there is no room for companies who don't generate enough cash so they can invest and improve and become a leading company within their niche. I think that people got the message. The few who didn't, they will get it now.
There can be, in the future, more companies who need to be closed or divested. We take it step by step. We are building a high-performance culture, and I think people in Lindab, they start to realize that if they perform, if they make money, if they generate good cash flow, they can make very interesting investments. They can build a great organization. They can have nice-looking facilities with well-trained staff, and they can also look at acquisitions and build a stronger position in their market, in their geography, and so on. That makes people proud, and that's the culture I want to build. We are on our way. I think this report is one step in the right direction.
Okay. Just a final one from my side. You've already answered a few questions on CapEx, more specifically on your investments in automation, is it possible to quantify how far you've come with this project specifically? How much is left, so to say?
It never stops.
Okay.
If you have been under-investing for 10 years, and then you really go for it, how long will it take to catch up with those 10 years? At the same time, technology has accelerated, and it's accelerating all the time. I think that Lindab will be on an investment level higher than depreciation for many years to come.
Yeah.
We would only be there and do that if the returns are very attractive. Right now they are, and I can tell you for the next three-year decision period, we will find enough very attractive investment cases to keep going like this. If it is like that till seven or eight years from now, I might have failed in my job.
Yeah. Okay. Thanks, Ola. That's very clear. That's it from me.
Thank you, Douglas.
Thank you. Since there is no participant for the Q&A session, I will hand over back to the speaker for the closing. Please go ahead, Mr. Ola or Malin. Yeah.
We say thank you for listening in today. Thank you from both Malin and myself. We wish everybody a nice and sunny summer. Thank you.
Thank you.
Okay. Thank you. This now concludes our conference call. Thank you for all the attendees. You may now disconnect your line. Thank you.