Earnings Call: Q1 2020

Apr 29, 2020

Hello and welcome to the Lindab Q1 twenty twenty Report. After 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 and Marlin Samuelson, CFO. Please go ahead with your meeting. Hi everyone and welcome to this call. My name is Ola Ringdahl and I'm the President and CEO of Lindab. I'm sitting here together with our CFO, Marlin Somersand. We go to the agenda slide. In today's presentation, we have usual agenda. At the end, we will open up for questions. We'll start with the overview on slide four. So key highlights for q one. We had a positive development for the group until mid March, and then we started to see the negative effects of COVID-nineteen in certain countries. Net sales for the first quarter was in line with last year and amounted to SEK2.3 billion, an increase of 1%. Organically, the growth was minus 1% and currency contributed positively by 2%. The operating margin was 7.9% in the quarter, which was slightly below last year. However, we should remember that q one twenty nineteen was a very strong quarter for Roomba Group, and we even issued a reverse profit one during that after that quarter. Ventilation systems was the area with the highest profitability, and we reached 10% in the quarter. We continue to make investments at a higher pace than before according to the program that we have established, and investments reached 133,000,000 during the quarter. Net profit came in at 136,000,000. We are pleased with that level. It is almost on the same level as last year despite the negative effects at the end of the quarter from the COVID-nineteen. We move to the next slide and look at the sales per geographic region. In The Nordics, our largest region, we had organic growth of 4%. We had strong development of profile system, and a satisfactory development of ventilation systems in the region. We have limited negative impact of the COVID nineteen situation in the Nordic countries. They have been more free to operate their industrial activities and building activities compared to other parts of Europe. Western Europe, we saw a negative organic growth, and the main reason behind it is that we were impacted by restrictions and lockdowns during the March, particularly in countries like France and Italy where the restrictions came in in a a quite a hard way. In the Eastern Region, we had a minor organic sales decline also due to COVID nineteen, but the underlying activity and development was good. We can also see that in comparison to q one last year, we had last year quite a significant project in within building systems in in that Eastern region, and that product did not reoccur this year. Now we move over to the financial section, and I hand over to you, Mali. Thank you. So we are now on slide number seven, and we look at the group financial highlights. And the net sales amounted to 2,000,000,003 and 32,000,000, which is an organic growth that decreased by 1%, while we had a positive currency contribution by 2%. EBIT decreased slightly versus a strong first quarter last year as a result of strategic initiatives and somewhat lower organic sales growth. This was partly compensated by a strengthened gross margin. Net profit amounted to a 136,000,000 Swedish krona compared to a 142 during the same period of previous year, and this translates to an EPS of 1.78 per share versus 1.85 the same period last year. So now we look at the different business areas, and we start with ventilation systems at slide number eight. The net sales for ventilation systems amounted to 1,510,000,000, which is in line with the same period previous year. The organic growth amounted to a negative of 3%, while the currency was positive with two. Also had a small structure impact of 1% positive. The sales volumes were impacted to some extent by restrictions imposed related to COVID nineteen during the quarter. In comparison, the same period previous year had a historically high sales volume for the first quarter, primarily driven by the Nordic and the East Region. EBIT increased to SEK 151,000,000 versus SEK 149,000,000 first quarter last year. The improvement was mainly related to strengthened gross margin and a stable underlying cost despite the somewhat lower sales volume. So we continue to look at the profile system on Slide number nine. The net sales increased to SEK $587,000,000. The organic growth was positive and increased by 13%, while the currency was unchanged. Sales increased largely due to deliveries of industrial projects in Sweden compared to last year. In addition, the mild weather condition was favorable during the quarter, which has a positive impact on the products that are installed outdoors. EBIT increased to SEK44 million compared to previous year's SEK43 million due to significantly higher sales volume. The somewhat lower EBIT margin was a result of a changed product and customer mix as the proportion of sales in industrial projects was higher during the quarter versus same period last year. And we look now at the billing system financial highlights. The net sales amounted to 235,000,000 Swedish krona. Organic growth amounted to a negative of 18%, and the currency contributed positively with 3%. The decreased sales is compared to a very strong sales in q one nineteen with particularly large product deliveries primarily in Germany, but also in Poland. EBIT amounted to SEK 2,000,000 versus SEK 9,000,000 last year, mainly explained by lower sales volumes, which partly is offset by lower operating costs compared to last year. The backlog was lower at the end of Q1 compared to the same period last year, especially for Western Europe and the CEE regions, while it was significantly higher in the CIST region. Now we move to slide number 11 and look at the cash flow. The free cash flow before m and a amounted to negative SEK 107,000,000 versus SEK 35,000,000 during the same period last year. The decline in free cash flow in Q1 is due to a much higher investing activity, which is part of the investment program and a negative impact from changes in working capital. The net debt decreased to EUR 2,093,000,000, which gives a net debt equity ratio of 0.4. So that summarizes the financials. And Ola, now back to you. Thank you, Marlin. On slide 13, we have a little bit more details on the COVID nineteen impact on Lindbergh Group even though it is still early days, and we look here at the impact during q one. As I mentioned before, we saw a negative impact on sales in q one, but that was limited to to the countries, that took the, most severe action against the, the virus, in terms of lockdowns and, closing factories and building site. During q two, we see a more significant negative impact than in q one because we will have the effect coming from March, and they will also expand with more countries affected by the situation in Europe. If we should try to look at some positive light in the tunnel, we we start to see that in certain countries right now, countries that have been picked the most by these restrictions, we start to see a tendency that they are opening up industry and building sites again. We see this in Italy. We see that coming up soon in France, hopefully followed by UK, Ireland, Belgium, etcetera. So we believe that the countries that have been under the severe situation that they will start to open up their economies with insurance. How quickly that will result in improved demand and the normalized activities is very difficult to say. Lindab has 98 or more of its sales within Europe, and we have a high proportion of our sales in the Nordic Region. And the Nordic Region has not been very much affected yet. We will see how it develops, but so far, the development there for Linde is good. We are busy in our branches, in our factories, in our distribution centers, and we, of course, after this will continue could continue. We have a robust supply chain in the Lindab Group, and we are proud to say that we have kept the delivery performance up on very, very high levels throughout this crisis. We have stood up for our customers. We have stayed open for them, and we have only closed down activities when we have been forced by government to do so. And we have reopened as quickly as we have been allowed to. We have supplied important projects like hospitals and other key public infrastructure with our products and systems, and we are proud to say that we are keeping our promises to our customers. We have a robust supply chain, I'd say. And and what do we mean by that? Well, we have an extensive network of production facilities in Europe. We have stock in warehouses in strategic locations, and we have people, branches, smaller warehouses, where we are serving, the local customers in the neighborhood. So throughout Europe, we are always close to the customer and can help them in the best possible way. When it comes to further, measures taken by the group, we have, of course, taken all the, actions to guarantee the safety of our employees and our customers, with social distancing and and extra routines. And we have also, of course, looked through our cost base and initiated cost reduction measures everywhere where it is necessary to compensate for the, safe development. We are using short term work in many countries, at the moment, and we try to find the right balance there so we can keep supplying, but we're also adjusting the the cost to the situation. Our employees have been truly supportive and working very hard in these difficult times to adjust, adapt, and be there for our customers. And I really want to thank them for their work in these difficult times. Now I move over to slide 14 and our other focus areas except for COVID nineteen in these times because it should not only be about that. Our strategic focus areas remain despite the COVID nineteen situation, and we need to also try to have a long term perspective on our activity. We continue to strive for sustainable profitability in line with our targets. We try to achieve that through decentralization and very clear accountability, where each part of Lindau still has the same overall target as before this crisis. However, in the current circumstances, it can, of course, take a bit longer to reach those targets in certain countries. Customer satisfaction is more important than ever. During the corona crisis, Lindab has, as I mentioned, stood up for its customers. We have kept a remarkably high delivery performance throughout the crisis, and we are continuing to do that during April, including today. We have walked the extra mile to secure deliveries to customers even during severe lockdowns. And as I mentioned, hospitals are one example, but there are many other where we have shown that we are there. While handling short term challenges, we must plan for the future. We continue to implement key elements of our strategic investment program, especially the projects that will lead to improved cost efficiency and safety for our workers. Some less critical investments are being postponed until we are through the crisis. Now we go to slide 16, and it's time to summarize and wrap up. So q one, I I would say we are very satisfied with the results the sales in q one given the circumstances that hit Europe during the March. And we have to remember that we are comparing ourselves to a unusually strong q one from previous year. So I think this shows that Linde has reached a new level of performance under, let's say, normal circumstance. That said, we do expect a greater impact of the COVID nineteen during the coming quarter, quarter two, and I'm sure that we will also see effects in quarter three. And it is today very difficult to estimate how severe that will be, but we are in good shape to begin with to handle the situation. So I believe that we will come out of this crisis as a strong company ready to take the next step in Lindab's plan. This concludes the q one presentation. We are now opening up for questions. Now first question comes from the line of Karl Ragnstad from Nordea. Please go ahead. Your line is open. Hi, it's Karl here from Nordea. Thank you for taking my questions. First of all, could you please give an update if you currently have any closed production units in Europe? And also, could you perhaps update us on the utilization rates for the production that you recently reopened? Thank you, Carl. We have we have had factories closed in Europe, but we we have reopened those. So we all our factories are open at the moment, but not to a 100%. So we are working with reduced capacity in countries that are still under severe lockdown and where where we can only deliver to certain sectors and certain projects that are important for society. For examples of those countries where we still have these restrictions and and low capacity utilization is Italy, France, Belgium, and Ireland. Say if you're if you're running one day a week or is it possible to quantify at this point? No. Not really. We have we have parts of production open. They are open every day, but not all lines are are running. I I will not give a percentage of utilization here today, but we we I believe that in those countries, we see that we have reached a, bottom level and started to climb up again. I could say, however, that in most countries and in most factories, we continue to run our factories at close to 100% utilization. For example, in in The Nordics, in Central Europe, and in Eastern Europe, we are we are running pretty much as normal at this point. So we we see quite a large difference between the countries which have the severe measures, Italy, France, Ireland, Belgium, and the rest. Okay. Perfect. And just so I I got you right, you don't have any supply chain constraints, or you have quite solid inventory, I guess? We have a good situation in our stock and inventory. We have strived for the past two years to really get delivery precision up to the very high nineties, 98, 99, 99 and a half percent, and that has helped us in this situation. We we came into this crisis well prepared with a good inventory. We have kept close to all factories open, and we are not so relying on external suppliers. So with Lindab, it's quite vertically integrated, and we have a lot of our own production. So supply is a strength for us at this point in time. Okay. Perfect. Could you also perhaps shed some light on the demand side if we talked about the supply side here? Demand continues to be good in countries that allow building sites to be open and people to travel to work. We have seen a few examples where guest workers have returned home, so some projects have been stopped due to lack of labor. But I would not say that that is it has a great impact. The demand, however, in countries that have closed down the building sites and forbidding people to leave their house, That, of course, is it has a very negative impact. And there, we we can't do much. We have to wait until the those governments in a handful of countries decide to restart the economy, if the economy is willing to do so. Okay. Perfect. Could you perhaps also give any indication of the sales development in March in Western Europe, for instance, and maybe also in April if you No. We are we are not guiding like that. So I'm able to do that. Okay. Perfect. A final one for me. That's one. This question is regarding capital allocation. I mean, you kept a small dividend and I mean we saw increased CapEx during the quarter. So how much should we look at you, I mean postponing CapEx projects for 2020, maybe for 2021 as well? Also, could you shed some light on the M and A landscape? Do you have a new team there? Are you still looking for bolt on acquisitions, or is it put on hold during the turmoil? Let me see if I remember all those parts of the question. But if we start with acquisitions, m and a, it we we are continuing to investigate opportunities, but, of course, it is a less prioritized area at this very moment when we have to also think about finding the right balance between plans for future and handling the current situation and preserving cash. But we but we we are still actively looking, but I think those those types of questions will take a little bit longer during these times. It's also difficult with valuations, etcetera, at the at the moment. If we look at investment plans, I think I have mentioned before in one of these calls that when you decide on a on an investment program, it is it is very important to to show endurance, persistence, and not suddenly stop in the middle of a program. We have good support from our board here, and the prioritized parts of the investment program with very important plans and and equipment, we are continuing to implement those less critical projects, which would be good to have but not but not necessary in the short term perspective. We are investigating if we can postpone or we are actively postponing. We are trying to find the right balance there, but the majority of the investment program is still valid and ongoing. Then you asked You asked also about the dividend. I think the the the dividend question is is, of course, not my question to answer. It's it's a question for the board and the and the annual general meeting that we will have later today. But I think the in the discussions, the board is trying to find a balance between the the shareholders' interest and the the both short and long term prospects of the company. And and the proposal to the AGM was was revised from the previous suggestion of 3.6 Swedish krona to 1.75. And 1.75 is is the same level as we paid out last year. So I think we the board has found a a a balanced rate under the situation and to preserve cash in the company in in an unknown situation that every company today is trying to to handle. Okay. Thank you very much. Thank you, Karl. Thank you. The next question comes from the line of Douglas Linde from Kepler Cheuvreux. Please go ahead. Your line is open. Hello, Douglas here. I noticed that you were not willing to answer the question on volumes in Western Europe. I guess, would you comment on what you're seeing in The Nordics right now in terms of volumes or demand? Demand is relatively stable in The Nordics, and and we see that also in the in other economic indicators that bill building industry is still busy. What will happen later when the next projects should start up, We we we don't know. We believe that there is, to some degree, a higher uncertainty around new decisions to start or to activate investments also in the building industry because of the general economic uncertainty. But at the moment, I think macroeconomic indicators really give you good guidance in looking at the impact on different countries. So the Nordic countries, but also France and Italy who are suffering badly. Okay. Then maybe I can maybe I should add also that due to the fact that our business areas have, say, different geographic footprint, And not most of the impact on Lindab from COVID nineteen in in q one, it hit the ventilation systems, which is the business area that has more exposure to countries like Italy, France, Belgium, Ireland, UK. Perfect systems does not have much exposure to those countries. Yeah. And and on that note, with regards to profile systems, what are your expectations? Can you comment a bit on that on on growth rate? Because q one seems to be driven quite a lot about large product deliveries in Sweden. Could you just see if you're looking for positive or negative organic growth in the next quarter? In The Nordics, I'm quite optimistic about the growth prospects for Profile Systems. We write in the report that, yes, it was favorable weather conditions, and we had large projects. But the normal bread and butter business for system was also running in quite a good way. So we have we have, I would say, traction in the sales, and we see continued high activity levels in in The Nordics for purpose systems. So so there I'm rather optimistic. Then we have some exposure also to Eastern Europe within purpose systems, And I would say that currently, there is a little bit more political uncertainty about those countries and the actions that might be taken by governments in countries like Hungary or Romania, where the COVID nineteen is is, of course, also present. And and going back to countries, maybe a difficult question to answer, but is it possible to sort of generalize on a normalized basis what sort of margin levels you see in different geographies? One of your competitors have historically said that margins are more beneficial in The Nordics and sort of decrease the more south you go in Europe. Is that something you agree with? No. Okay. We we we don't I would not say that that we have such big margin differences between the different regions. So I I would not draw the same conclusion about Lindon. Okay. Very true. Yes. And I was just wondering also on the mix that you saw in ventilation in Q1. You mentioned that COVID-nineteen was a negative, so very strong margin in that context. But did mix have any impact on profitability in the first quarter? And, also, do you see a change in mix going forward potentially for ventilation? Well, we have let me see if I understand how you're asking the question. We we have a couple of different mix effects. We have, of course, between the we we have between countries. We have between the different product ranges or business areas, and then we have also a seasonality between the different products. Mhmm. So, normally, ventilation systems has a lot of weight in our sales during q one, for example, when normally, purposes and billing systems are a little bit they have a a weaker period. And then during q two and q three, normally, in billing systems and purposes, they they are at a stronger weight. So that that that can have an impact. We we had what did we have in q one? We saw a lower share of invoicing out of the group total from building systems, where you saw a larger decline. Yeah. Sorry. Maybe I was unspecific. I was talking about ventilation systems specifically. Within ventilation. Yes. Exactly. Okay. Within ventilation system. So you're wondering if there are different products within ventilation systems with different profitability where Yes. Where the mix effect can happen. No. We have not seen any any particular effect like that. Okay. Very clear. And final question, guess you sort of hinted on that, but the CapEx levels, you you remain firm that they should stay above 100% of D and A, I guess. Yes. Okay. Thanks. That's it for me. Thank you, Thank you. It became very silent now. So we are wondering if if people are still awake or if there are no more questions. As a reminder, if there are any questions, it's 01 on your telephone keypad if you would like to register. And we seem to have one more question registered. Just one moment whilst we capture the details for the question. And our next question comes from Carnegie. Please go ahead. Your line is open. Yes. Thank you. So I was a little bit curious. We talked a lot about now the current situation and outlook for Q2 and so on. But when we look into the end of this year and maybe into next year, do you see that demand would really bounce back as strongly as it has sort of closed down? The way I'm thinking about it is that maybe some construction companies and real estate owners get badly hit from these lockdowns and may not have the financial power or so on to restart projects. So maybe we have a sort of a slower recovery. So Mhmm. Yeah, another way to frame the question might be that when do you think that demand level could be back to the level it was in in q one? Do you think we could reach million dollar question. That's a million dollar question that we all want answered, and and there are so many aspects here. I mean, some some countries with a tough lockdown policy, and they they seem to hope that they can they can suddenly one day just decide to open up again and everything would be as it was. Some countries, they have a very good system for short term work and and social system that takes care of people and companies during the time of lockdown, and some other countries, they they don't even have that. Sweden has chosen its own way. We are very grateful for the way that Sweden is handling the situation. We might not have very clear or very generous short term work conditions. In fact, I think they are pretty difficult to understand. But we are not closing down the economy, and for that, we are eternally grateful. So then, I guess, the question is what will happen to the risk appetite from investors who are who want to build new and what will happen to the upgrading and repair and renovation market, and what will happen to the public investment market investing in badly needed hospitals, upgrading school indoor environment, taking you know, making sure to have good indoor air quality everywhere where people meet in large groups to prevent future viruses from spreading, etcetera, etcetera. It's extremely difficult to know how will this play out and in what quarter will we see what kind of growth. So I I would really like to be able to answer the question, but I simply can't. We the way we try to handle it is we we have outlined different kinds of scenarios. We don't have a scenario that says 25% growth next year. They they are more humble, these scenarios. But we have different kinds of scenarios for for different development, and we try to have very good action programs to activate depending on which of these tend to be likely at at the current planning horizon. And that's the best we can do. There are so many unknowns today that that we cannot and should not go out and and promise it. What we will promise is that Linda will be in the very best shape, and we will be among the leaders, when we start to see growth. And we will be one of the companies that will take opportunities, and and take advantage of this situation when we emerge as a strong company. We have the the supplied our customers throughout the crisis at 99 something percent delivery performance and and never closed down unless we were forced to. So that is how we want to show our strength, and we want to be well invested and extremely efficient, coming out of this crisis. Yeah. Also, one question. In in Sweden, there have been the debate that it's to use the government support system for employees working part time if if you pay a dividend. So many companies have excluded or cancel the dividend for this year. Do you see that discussion in other countries as well, or is it are you just affected by that in Sweden? It is mainly Swedish politicians who play that game, but, typically, you would also see it in France. The Sweden and France, they have the highest tax rate in in the world. So normally, you see those types of arguments from those two governments. The Swedish system for short term work, it's very difficult and very uncertain. So I think most companies choose not to utilize it because we we don't really believe in it. We are using this short term work system in most other European countries where it is much clearer and much quicker, and they were they were they already had these systems while Sweden was still trying to to find a treat. So in Sweden, we have we have still stable sales, but and we have decided to save cost in in other ways. And if sales is more affected in in Sweden and so on, maybe you can use well, I agree with the unions to have more flexible workforce and move some hours back and forth maybe. We have very good relations with the with the unions in Sweden, and we have already implemented voluntary schemes for the personnel to reduce time banks and and holidays and utilizing those kind of voluntary tools in good cooperation with the representatives from the union. So we we have found another model here, and that that is just that we don't need to to take more action. Let's hope that Sweden can stay open for business also for the coming months. Yeah. That's my hope as well. Thank you very much. Thank you. Thank you. And we seem to have no more questions registered. So I hand back to our speakers for any closing comments. We thank you for calling in. We my final remark is maybe that I want to thank all Lindab colleagues for a very strong quarter one. And it's it feels good to have that strength now when we are entering into more difficult times, but I believe we will come out as a strong company on the other side. So thank you for that. Thank you. Thank you for calling in. This now concludes