Earnings Call: Q2 2020

Jul 17, 2020

Hello, and welcome to Linkedin q two twenty twenty report. Throughout the calls, all participants will be in the listening only mode. And after that, there will be a question and answer section. Today, I'm pleased to present Please go ahead with your meeting. Thank you. Hi, everyone, and welcome to this call. My name is Ola Ringgold. I'm the president and CEO of Lindhav Group. And I'm sitting here together with our CFO, Marlin Somersen. We go to the agenda slide and we follow the same structure as we usually do. And 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 twenty twenty. We had a good development in terms of sales in the Nordic Region despite the COVID-nineteen 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 billion and we saw a very tough downturn in April and May. But June, we actually came back and saw a little bit of growth. Now despite these 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. And we think that the profitability in Profile Systems was especially strong. Cash flow was also quite strong despite the fact that we continue to invest substantially in automation and efficiency. And we decided at the or the AGM decided to pay a dividend to shareholders in 2020 on the same level as we did in 2019. So all in all, I can summarize the quarter two with high profitability, continued investment and improved cash flow. We move to the next slide and look at the geographic development. And we can see on this slide that in the Nordic region we had growth during the period and most 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 the 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 seven, and I hand over to you, Malin. Thank you, Ula. So we are at Slide number seven, and we are looking financial highlights. The net sales amounted to SEK 2,218,000,000.000. 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 76,000,000 compared to SEK 181,000,000 during the same period previous year. It was related to lower sales, onetime costs due to the strategic decision to close down INT Primark Group and higher tax. So we move over to the next slide, Slide number eight, and look at Ventilation Systems. Net sales for Ventilation Systems amounted to 1,297,000,000.000. Organically, sales decreased by 16%. Sales volume was impacted negatively in a number of markets due to COVID-nineteen, especially Western Europe and CEC, while sales in the Nordic region was in line with previous. The lower adjusted EBIT margin amounted to 9.6% versus 10.4% previous year. It was explained by reduced sales due to COVID-nineteen, but partly offset by strength in gross margin and clearly reduced operating costs. So we continue on Slide number nine with Profile Systems, where the net sales increased by SEK 60,000,000 to SEK $685,000,000. 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 opened throughout this quarter, COVID-nineteen 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 a strong volume growth and a notice about reduced operating costs. And we move to Slide number 10 and the Building Systems. The net sales amounted to SEK $236,000,000 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-nineteen at the beginning of the quarter. The adjusted EBIT margin was 6.4% versus 7% previous year. The lower EBIT margin is explained by significantly lower sales volume, but partly offset by a 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. So we now continue at Slide number 11, where the free cash flow adjusted for M and A amounted to SEK $229,000,000 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 1,869,000,000.000, which gives a net debt equity ratio of 0.4. And we continue on Slide number 12, and I hand over to you, Thank you, Marlene. We go into the chapter called Acquisitions and Structural Changes. We start on Slide 13. So in June, we actually made an acquisition and this was in Ireland where we acquired the technology of Fordact and it is used to extract smoke and prevent fire from spreading within buildings, especially strong in multi compartment fire protection. The home markets for this technology that is Ireland and also The UK and we see this as an interesting growth opportunity for Lindab in those countries with possible expansion outside of those geographies, but 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 €2,000,000 and it will add a positive contribution to our profitability. We want to be more active within acquisitions and we see that this as an early step to do so. But not so much after that on Page 14, we see that we also made an acquisition after the quarter two ended. So in the July, Lindab acquired Crena. Crena is a market leader in rectangular ventilation ducts in the Swedish market. Almost all of their sales is on the Swedish territory. And the 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. And usually you combine the rectangular ducts with the circular ducts to build a complete system. So with the acquisition of Krenna who has a very strong position in the Swedish market, we Lindab together with Krenna can offer a complete range of ventilation that's for the country. Kremna's expected chain sharing, 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. Kwena has revenues of approximately million and around SEK85 million. It is a very well run company under the leadership of the Managing Director, Niklas Whitsteen and he will remain in the company and lead Crena 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 IMPKlima Group. They have the main operations in Slovenia, but they also have subsidiaries in Serbia, in Montenegro and in Bosnia Herzegovina. Lindab acquired IMPKlima 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. Now despite our joint efforts and despite the best possible efforts from our colleagues at Iron Declima, the company had weak profitability and has continued to show weak development. It has been loss making for several years. So we took the decision to close down and that decision was accelerated by COVID-nineteen that made it even more difficult to achieve a substantial turnaround. We will have one time costs. We have shown in quarter two million. Most of the effects are on the balance sheet and the smaller part will impact the cash. There will be some more onetime costs following in the next couple of quarters as we wind down the business, but the largest part has been taken during Q2. Now we move to Slide 17 and talk about the way forward. And of course, in this kind of presentation, we have to make some special comments about the impact of COVID-nineteen 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-nineteen were mainly limited to some countries who experienced an early lockdown such as Italy. As it accelerated towards the March and from April and onwards, we saw more significant effects especially in countries with significant lockdowns such as France, Italy, UK, Ireland and Poland. And 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. So it had a lot of effect on that business area. But 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. And 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 will the COVID-nineteen 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-nineteen impact. We think that there will be an impact and lower demand relative to the time before COVID-nineteen. 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 it over and over again. But I think it's important to mention that our strategic focus there has actually remained unchanged despite the COVID-nineteen 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 Linde 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'll really walk 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. So we continue to implement the key elements of our strategic investment program and it is a substantial program. And 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. So to try to wrap this up, quarter two was an eventful quarter for Linde, decline a real drop in sales in April and May followed by a little bit of growth in June compared to last year. So that is worth mentioning. In terms of results, we believe that it was a result that we can be proud of. We've managed to quickly adapt our cost to the new situation. And at the same time, we have stood up for our customers and for our employees and for our shareholders. We actually received a dividend this year and that cannot be said about all shareholders in our companies these days. And we believe that we 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. And we continue to invest. We believe that for the future that is what will make Linde stronger and more competitive. And looking at the future, we are prepared for a situation with lower demand and we will continue to strive for profitable growth. With that, Marlin and I say thank you for listening and we open up for questions. Thank If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. The first question from Carl Rechleston from Nordea. It's Karl here from Nordea. I have a few questions. First of all, you said that you expect or yes, lower demand over the next year compared with the precrisis level. So I wonder if it is it something that you see in the order intake backlog currently? Or is it more of a general macro view that you see from indicators and so on? Thank you, Carl. We we let's say, in our bread and butter business where we sell over the counter standardized products and so on, we don't see so much of that right now. But for the more project oriented business, we see that decisions take longer time. There is a delay in in making up your mind about quotations, order confirmations and that can be financing issues, etcetera, with our customers. So we see that things are taking longer and that is a sign that the project business will will be a bit more soft going forward. What 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. And given, let's say, percent to 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% to 15% is your qualified guess. Guess we have not mentioned it. But if you get a little bit time to adapt, yes, I think that Linde could make those kind of we could achieve profitability targets even if volumes are down as you mentioned. But 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. And and in terms of the demand situations in in in a situation in the countries where they they had the strict lockdowns, what what what can you see there currently? In the countries that were affected the worst, our sales was down by 80%. Sometimes even more, sometimes up to 90% for several weeks in a row. And that is, of course, an extreme situation. And now we are back to the worst countries on on 70% of the normal level and there are countries who have been in this worst lockdown that are actually back to normal levels again. So rough answer, around 70 to 100% 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, well, there you need to still meet some clients, so that can mean that the construction work can accelerate during a period and then we don't know how long it will be like that. So whether countries who have come back to a 100% will actually stay there or if they will fall fall down a bit again, that that is what the right man to answer. Okay, perfect. And in Process Systems, you yet again reported quite impressive organic growth numbers, I guess a combination of do it yourself trend and Linde Valen. But focusing on the latter one, I mean, what can you see there in terms of project pipeline and demand for Lindavalen? The Lindabalen referred to the very economic steel steel buildings. They they are becoming more and more popular. We I think we have a winning concept there, and it is very suitable for example e commerce buildings, warehouse that you see 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 deal build 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. So 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's also a relatively strong seasonality because this is some of the work related to process is better done in the summer period rather than in the winter period. So so I think we have to get used to the fact that there is fluctuation in process systems and and instead look at a little bit longer trends. Okay, perfect. And 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 and 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 nineteen crisis comes, things are things are changing a bit in how you have to prioritize and so on. But we are working actively to develop a pipeline. This takes time to do. And we, you know, we we wanna find good well around 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 that things we understand and where we can quickly do a soft integration and get up to speed. And I think that these two examples are that we have done, they are representative. We hope to do more acquisitions, but when or if that is for the future to tell. Okay. Great. Thank you very much. Thank you. The next participant will be from Martella Klein Handelsbanken. Please go ahead. You. Hi, Ula and Malin, and good afternoon. A couple of more questions regarding your strong performance in the Profile division. You mentioned a lot of large industrial orders. Do you expect this momentum to continue? And do you also have better profitability on these orders? Basically, what I'm wondering about this operating margin of about 13%, how sustainable is it? Or is it something special in the second quarter? Purpose Systems, they have a seasonality. Normally, Perpet Systems quarter three is the strongest quarter. Quarter two is the second strongest quarter. And the winter months are a bit weaker because we one one of the concepts in terms of systems that is roofing systems and and roofs do 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 peripheral systems is what we aim for. It is much more difficult to reach during the part of the year. So seen over a twelve month period, Profasys should absolutely make more than 10% EBIT margin. Sounds good. Then 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. So 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 that a little bit more? I think it's better to invite Malin to answer that question. I might try, but I might say. So Malin? No. But we have a withholding tax that is connected to a dividend payment. So that is the main explanation. Yes. But we can say that we can even quantify that yes. We can quantify it to €21,000,000 €21,000,000 is the kind of coupon tax or dividend tax from a Russian company. That's the main explanation, yes. And then a final question. You spoke about the and butter business compared to project business. Is there also a difference in profitability for you? Or is this more a question of volumes that you expect weaker project business, but the bread and butter continues? Well, it is, of course, a good question, and it is not so easy to answer it. But overall, we have a relatively evenly distributed profitability projects or bread and butter business. It actually looks rather similar, not any major difference. So it doesn't matter so much if there is more potential from one or more weight on the other, but this is more a question of total volume. And 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, but it's a beautiful business to have. There's no drama and it comes in it walks in through the door every day. But 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. And then on the operations side, get your operational efficiency improvements every year through working most monthly, fewer operators, more efficient machines at the logistic network, etcetera. And we are really working on that. Of course, smart pricing, so you are not underpricing yourself, it's another aspect. But we I think Lindab has a in our niche, we have a very strong brand name both towards ventilation systems and purpose systems. And I would say building systems in their niche, they also have a very strong brand name, which is Astron in their case. And so 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. This was my final question. Thank you. Thank you, Masada. Thank you. The next participant is from Kenneth from Carnegie. Please go ahead. Number 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. So are you now when things are going well, are you considering to increase these CapEx projects even more? And have you started to see any benefits from the ones you have initiated? Yes. Thank you, Kenneth. We are running at full capacity in our investment program. It is not it's actually today, I would say I hope I can say this. This is not limited by Monday, but it is limited by the engineering resources that we have because these are complex projects. They are big machine lines, a lot 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 efficient system. In the bottleneck is more in design and engineering and suppliers rather than in CapEx budget. 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 every meeting we have. So I'm satisfied so far with the pace and I'm actually quite happy to say that there's a lot more that can be done. We have we are we are did made a three year plan in the autumn of twenty eighteen. And the autumn this year, we renew and have a new three year plan because there's so many attractive investments to make with a very, very good payback. Are the results starting to show? Yes, they are starting to show. They start to show now. Sounds very good. Finally then on 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. And those government supports will have a very green tilt. You have talked before about you having very energy efficient ventilation systems and so on. So how are you preparing for those? And how do you think you're standing against competition in this field? We we are one of of many players in the ventilation industry, and we all have our specialties. As as you have read, our specialty might not be the air handling unit, but we I dare to say that we have outstanding air duct systems and we are also very strong in the air distribution rooms. So in those niches where we really are outstanding, we play our part. Work a lot with the certifying bodies and we try to upgrade the the requirements on on these green buildings and 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 and so on, but we know how to make absolutely airtight systems and very efficient air distribution systems. So then Linda will definitely benefit from this. Wherever these requirements are made more of a mandatory or more difficult, we we benefit. Okay. Great. Thanks. Thank you, Kenneth. Thank you. The next participant is mister from. Please go ahead with your question. Hello. This is Douglas Slimov from Kepler Cheuvreux. Hopefully, you can hear me. Hi, Douglas. It's we can. Hi. Hi, Ola. 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, Ula, can you give some sort of indication for how long you've seen this behavior? That's my first question. Yeah. I I think it's it's a, of course, a very good question and a and a difficult one to answer. It depends on geography. It depends on the size of projects. The the biggest projects, they can have a decision lead time of, let's say, one year. And and it's very easy that they are delayed now by for six months or twelve months. A smaller renovation project of a school might might have a a shorter delay. So I don't know really. I I I think a lot of people, they tried to finish the project they had before before the summer holidays, and they were postponing the decision making for what to start in late August, early September. So so I think that there can be gaps in the project pipeline. And I think that that probably starts now in August, September that we will see some projects that should have been started, they are delayed or not stopped. But that's what I personally believe. I'm I'm sure there are more many who are more competent to evaluate that than than me and and most likely, we'll find much better answers in the construction sector because we depend on the jobs they get and also the installation companies. So this is Braavida, had I mean, that is one of our large customers. They they had organic growth, so they seem to do quite well. So hopefully, that is an indication that that this can work out okay. But in my job, I have to be prepared for a situation that is less than optimal. 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 would be a surprise to people if I had answered it. Yeah. At least I tried. Maybe not anything specific, but in general terms, In in general terms, since I joined, I have been very clear within our organization that if 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 company to who don't generate enough cash so they can invest and improve and become a leading company within their niche. And I think that people got the message. The the few who didn't, they will get it now. And and that that can be in the future more companies who need to be close to the divested but 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 to generate good cash flow, they 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 wanna build. So we are on our way and 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, but more specifically on your investments in automation. Is it possible to quantify for you come with this project specifically? How much is left, so to say? It never stops. Okay. But if you have been if you have been underinvesting for ten years and then you you really go for it, how how long will it take to catch up with those ten years and how now and at the same time, technology has accelerated, and it's it's accelerating all the time. I think that Linda will be on, say, a an investment level higher than depreciation for many years to come. Yeah. But but we will only we will only be there and do that if the returns are very attractive. And 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 to keep going like this. If it is like that still seven or eight years from now, I I might have failed in my job. Yeah. Okay. Thanks, Ola. That's very clear. That's it for me. Thank you, Ola. Thank you. Since they were not participant for the q and a session, so I will hand over back to the speaker for the closing. Please go ahead, mister Ola or Malin. Yeah. Please say thank you for listening in today. Thank you from both Malin and myself, and 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 attending. You may now disconnect your line. Thank you.