Welcome to the Lindab Q4 presentation for 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions- and- answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to the President and CEO, Ola Ringdahl. Please go ahead.
Hello and welcome to this call. My name is Ola Ringdahl. I'm the President and CEO for Lindab Group. Next to me, I have our CFO, Jonas Arkestad, who will help me to answer questions. Some Q4 highlights. Lindab ended the year with a quarter of strong sales growth and improved cash flow. Margins were temporarily under pressure, primarily due to changes in raw material prices. We will come back to that. In Q4, sales increased by 26%, of which 20% are related to acquisitions. Felderer in Germany and R-Vent in the Netherlands are the two largest acquisitions impacting this. They are part of the numbers from April and June 2022 respectively. Organic growth was 1% and currency had a positive effect of 5%. Both business areas had positive sales development. Ventilation Systems reported its highest quarterly sales ever in Lindab's history.
Our adjusted operating profit in Q4 amounted to SEK 244 million, compared to SEK 311 million last year. The adjusted operating margin was 7.6%. The lower operating margin was mainly explained by lower gross margin from inventory effects and also from increased energy-related costs. It should be noted that the comparison numbers are high. I will comment more on the margins later in the presentation. Let's move from quarter to full year results. Overall, 2022 was a strong year for Lindab. We met all of our financial targets, which are listed on this slide. Sales growth for the year was 24%, significantly higher than our 10% target. Sales exceeded SEK 12 billion for the first time in Lindab's history.
Adjusted operating margin for 2022 was 10.9% despite challenging market conditions, especially in the second half of the year. Our net debt to EBITDA ratio at 1.6x is well below three. Let's take a closer look at how sales has developed on the next slide. Lindab's total revenue has shown strong growth in the past two years, mainly thanks to acquisitions, but also due to price increases to compensate for increasing raw material costs. business area Ventilation Systems has continued to grow very strongly. The sales growth for the fourth quarter was 35%, mainly driven by acquisitions. Organic growth was 4%, and this is explained by higher prices. For the full year, Ventilation Systems sales increased with 32%, of which organic growth was 11%.
The ventilation business is positively affected by increased focus on efficient ventilation due to higher energy prices. Lindab also benefits from new building regulations and higher demand for sustainable solutions. We have the right products to fulfill those requirements. Profile Systems is a more cyclical business with a larger exposure to new construction. Profile Systems had 8% growth in the fourth quarter, mainly driven by acquisitions, while organic growth was negative by 4%. For the full year, Profile Systems reported increased sales by 20%, of which organic growth was 10%. We now move over to the operating profit development. During the fourth quarter, Lindab's margin suffered from negative raw material stock effects in combination with high cost inflation. In addition, we took proactive measures to rebalance our stock levels and to adjust our personnel resources to the current situation.
Stock rebalancing and redundancies cost Lindab an extra SEK 25 million in the quarter. All in all, the mentioned effects and actions led to an operating margin in the fourth quarter that was lower than our plan. What do we mean by negative raw material effects? Let me try to explain a bit on that topic. Lindab has a large safety stock in order to have the best availability and the best delivery capacity in the industry. In 2021, Lindab benefited from increasing material prices, which enhanced our margins. In the second half of 2022, as material prices calmed down, Lindab suffered from the opposite effect of 2021. Material we bought during the spring and summer of 2022 at high prices because of Russia's invasion of Ukraine, that is now putting our gross margins under pressure temporarily.
The effects are expected to remain in the first quarter of this year and to some extent into the second quarter, and then it should be rebalanced. For 2023, our financial targets are unchanged, and I'm determined that we should deliver above 10% operating margin, even if the market conditions are challenging. Now let's move to the next slide and the financial position. Lindab has a solid financial position that supports continued growth. Cash flow from operating activities increased to SEK 525 million compared to SEK 215 million in the fourth quarter last year. This was due to less capital tied up in stock, resulting in favorable change in working capital. Net debt has increased during 2022 as a result of completed acquisitions and increased capital tied up in stock of raw material versus 2021.
We have not increased the stock levels as such, the changes in raw material prices have affected the stock values. The net debt to EBITDA ratio is at 1.6 which gives us good financial flexibility. A solid financial position is also a prerequisite for a shareholder-friendly dividend policy. Let's look at the next. In light of the strong profit development and considering Lindab's financial position, the board of directors are proposing a dividend of SEK 5.20 per share, which is an increase of 30% versus last year. This represents a dividend out of our net profit of 41%, which is in line with the dividend policy that we should have a dividend of at least 40% of the net profit. Let's shift focus from the numbers to how we will continue to build an even stronger Lindab.
We start to talk a bit about acquisitions. Lindab's strategy is to acquire well-managed successful companies that complement our offering in selected regions and product areas. The acquired companies continue to operate independently under their own brands, while at the same time benefiting from Lindab's sourcing agreements, expertise, and sales network at their chosen pace. In 2022, we have made eight acquisitions, totaling an annual pro forma sales of SEK 1.9 billion, and since 2020, we have made all in all 17 acquisitions. The acquired companies continue to develop very well within the group also during the fourth quarter. In the charts, the newest acquisitions are in dark blue. The circles represent their annual sales. As you can see, the more recent acquisitions have been larger in size.
I think this is a natural development from 2020 when we started the acquisition journey. We started with smaller companies. Gradually, as our skills are increasing, the acquisitions tend to become a bit larger. We have a very strong M&A team and an organization who is eager to continue to consolidate the industry. Acquisitions form an essential part of our strategy. We see good opportunities to make attractive future acquisitions also in the more turbulent markets. I emphasize that we are not holding back on acquisitions in 2023. We are very actively pursuing opportunities also this year. Investments, that is another building block in Lindab's strategy. We have had the investment program at the top of our agenda since 2019. It's very rewarding to see how the benefits become more and more visible.
We see results in higher production efficiency, higher capacity, and also a safer work environment. These are very important areas for continuing to build a profitable and sustainable Lindab in the long term. In 2022, we invested SEK 359 million in our European operations. We will continue to invest on a relatively high level until 2025. However, we gradually reduce the amount every year since we have completed a large part of the program. The peak in terms of investment amounts was reached in 2020. Sustainability continues to be at the top of Lindab's agenda. In early 2023, Lindab joined the Science Based Targets initiative. This means that we will set science-based targets for our work to reduce greenhouse gas emissions. We are also launching products manufactured with low-carbon emissions steel.
We are starting with roofs and facades and will extend the product range with rectangular ventilation ducts and roof hoods later in the year. For Lindab and for our customers, sustainability is business critical. Lindab is and will be the leader in climate-efficient ventilation solutions. Now we are at outlook and priorities. We are positive about the prospects for both the industry and Lindab, although there are challenges in the short term. The market trends during the second half of 2022 are estimated to continue during the beginning of 2023, and the market situation for the full year 2023 is, of course, difficult to predict. We see high inflation and rising interest rates that are likely to lead to lower investments in new construction. However, there is a possibility that the willingness to invest will increase when the interest rate situation stabilizes.
High energy prices are putting focus on energy-efficient ventilation, which will benefit Lindab also in the short term, and especially business area Ventilation Systems, where we see high activity in renovation and upgrading of existing buildings. In the medium and long term, we are very optimistic about both the market and Lindab's prospects. High energy prices put even more focus on well-insulated buildings and energy-efficient ventilation to the benefit of Lindab. We expect a longer period of renovation of public and private properties in Europe. As Lindab has more than half of its sales towards renovation and remodeling, we see good growth opportunities in this segment as necessary energy efficiency projects are started all over Europe. With the new construction, the demand for sustainable and energy efficient buildings will increase further, this is also to the advantage of Lindab and our leading product range.
What are Lindab's near-term priorities? Naturally, in the current economic environment, we are working with proactive cost measures. We are also slowing down certain new investments, and we are cautious with new recruitments. Compared to one year ago, we today have 3% fewer full-time employees in comparable units, and we are adjusting to the market situation. We are also adjusting our pricing to mitigate higher energy costs and transportation costs. Finally, with our strong balance sheet, we intend to continue to pursue attractive acquisition opportunities. The European ventilation industry is still fragmented, and there are plenty of opportunities to create long-term value for a strong player like Lindab. We have a clear plan for how Lindab will continue to develop positively. After the transformation of the business in recent years, Lindab is in very good shape. This concludes the presentation, and we now open up for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Carl Ragnerstam from Nordea. Please go ahead.
Good morning, it's Carl here from Nordea. Just a couple of questions from my side. I mean, you mentioned, for instance, stock rebalancing of SEK 25 million in the quarter. Is it fair to assume that this continues in Q1 as well, or would you say that you're sort of done with the sell out of inventory during Q4? Also on that, how should we what read should we do into cash flows in the first half? Will it also be boosted by these effects?
If we start with the stock rebalancing, we are not planning any other measures similar to what we did in the fourth quarter when we look at the first quarter. But we also have to see how the current prices of materials are developing in the first quarter. In the last six to eight weeks, we have seen an uptick in raw material prices again. Since first of December, prices are up by roughly 20% again. There is volatility in the raw material market that will impact the decisions. No plans as of yet to make any other stock rebalancing. When it comes to cash flow, we did foresee and expect that cash flows would start to turn strongly positive in Q4, and that worked according to plan.
I will say that the first quarter of the year is normally not Lindab's strongest cash flow period, but we believe that we have good, strong positive cash flows ahead of us, and that we turned a corner in during the fourth quarter.
Okay, that's very good. Also on the demand side, you guided for a similar trend in H1 2023 as H2 2022. Is it the case for both segment, would you say, or is it fair to assume that ventilation with more late cyclicality and less cyclicality overall will see a sort of more stabilizing trend or while sort of a profile with more high cyclicality and also consumer exposure will maybe have a little bit tougher time in first half compared to maybe Q3, Q4?
Well, there is a difference in the volume development for Ventilation Systems and Profile Systems. As you correctly point out, Profile Systems is more cyclical, and it also has bigger seasonal variation. The winter months being normally the weaker ones in terms of sales, and then it starts to sales normally starts to increase in March, April, and continues until November. I would say as we see in the organic growth numbers, Profile Systems had negative organic growth in the fourth quarter, that there is a price component. We are probably talking a volume decline overall for Profile Systems in the fourth quarter of around 10%. We have a positive price component and a negative volume component.
For Ventilation Systems, that is more stable development, not so cyclical, not any major seasonal variation. I think they have held up very well. We have relatively flat sales development in terms of volumes compared to previous year, and we expect stability on those levels in the months ahead, helped by the renovation wave. We see our main customer category, the ventilation installers, they are pretty fully booked with all kinds of renovation upgrade projects and a lot of ventilation content in that.
Also on the order intake in Ventilation Systems, I mean, parts of it is with the sort of longer lead times and project-based. What can you see there in terms of orders? Is it a lot weaker, which might be a read into the second half of the year? I guess, because in first half you are delivering partly at least on your backlog.
We are relatively late in the building cycle. We are not participating in the foundation works for new building, but we come in a bit later in the project. We don't foresee any sudden changes, we do see that in the customers' business portfolios, there is a higher renovation contact and content and upgrading content rather than new build projects. The signals we have so far is that they are quite fully booked for the coming months.
Okay. That's very clear. Also on your cost initiatives, I mean, you're guiding for a 10% margin, I mean, maybe next year or how you define it. I mean, is it possible to quantify where you're doing cost initiatives or cost out measures, relating to what segments or geographies? I mean, you mentioned that you're doing some pricing initiatives as well. Is it broad-based or more related to any specific product area?
The pricing strategy, I think the main message to my organization is that we keep the current price level in general. When it comes to certain costs that have really increased substantially in the past months, for example, electricity and heating, and also transport charges, we need to. We cannot absorb all of that ourselves, so we need to build that into our pricing. I would say it's not a broad price increase initiative across all units and products, but it's rather a targeted pricing initiatives to cover the increased cost of energy-related inflation components. Then I forgot your second-
No, it was a little bit more on the cost out measures you're taking.
Cost initiatives. It's focusing on the I mean, on average, we have a certain volume development, but of course, there are some units, some geographies, some product areas that can have a bigger negative impact when we look at volume development. They have to take measures to get their costs down to a sustainable level. We have taken out different types of costs, different variable costs, also personnel costs, and we have a strict cost control in all units.
Okay. That's all for me. Thank you.
Thank you, Carl.
The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.
Yes. Hello, Ola and Jonas. Thanks for taking my questions. Coming back to your organic growth there, it seems as if Western Europe is actually doing really well, and sequentially, organically, it looks like you're stepping up there and well into the double-digit region. Maybe if you could comment a bit on that market in general. You, you already mentioned the renovation wave. Is that mainly one of the reason behind the strong growth?
Douglas, thank you for the question. Are you referring to total growth in the Western Europe region?
Well, total growth I see is obviously up 70-ish%. You know, adjusting for the M&A you've done and also the FX impact, it seems like you're still into the 40-plus region based on the numbers you report, at least. Organically.
Difficult question to answer, honestly. We have in Western Europe, of course. Since Lindab is built up of many different country organizations, the story can vary between the countries. I think it comes down to that we have extremely strong, motivated, skilled sales leaders and sales teams who are very actively pursuing opportunities, both when it comes to energy renovation projects, but also in new construction. We are defending our market position and sometimes also gaining market share in these times when a very stable and strong supplier like Lindab is appreciated by the customers. I think it comes down to it's a very good job done by my colleagues.
Is there any sort of negative mix effects with Western Europe outgrowing other regions, would you say? Should that not be exaggerated?
No, I don't think so. We have a good, relatively even profitability level across the geographies. If Western Europe would grow a little bit faster than other regions, that is not negatively impacting our profitability.
Okay. Ola, you talked quite a lot about your M&A strategy remaining firm. I would assume that multiples on potential targets have come down in recent time. Maybe if you could comment a bit on that, and geographically, where you would want to grow ideally?
I mean, logically, the multiples, and valuations should come down, shouldn't they? You know, we are often targeting family-owned businesses. They have been around 30, 40, 50 years. They are well run, profitable. Those potential sellers are not so used to thinking in terms of multiples and valuations. They have a fine business, and someday they might look for somebody to take good care of it. For a fair amount, they are willing to make a transaction. Lindab is not overpaying, never has. We are paying fairly, and we will continue to do that.
Okay. Do you think the trend of doing larger acquisitions should continue or.
We hope so. We hope so. I mean, we have to be realistic and say that in 2022 we made at least with Lindab measures, we made many transactions and several of them were unusually large for us. We added SEK 1.9 billion in sales if you translate it to annual sales. That is significantly above our target that we have indicated. We've indicated that around two-thirds of our 10% annual growth should come from acquisitions, and we overshot that in 2022. You know, working with this and trying to foresee how many deals there will be and exactly what deals will happen is difficult. We have high ambitions, but I think.
Yeah
It will be a challenge to reach the same additional turnover as we managed to secure in 2022. We are working on it.
Okay. No, I understand. Thank you so much, Ola, for that, and Jonas, all the best in the future.
Thank you very much.
The next question comes from Anna Lindholm-Widström from Handelsbanken. Please go ahead.
Hi, Ola and Jonas. Thank you for taking my questions. Firstly, I have just two follow-up questions. You mentioned that you have 3% lower amounts of employee in comparable units than one year ago. From which parts of the business are these employees?
That is mainly in production-related activities. Part of it is because we have come so far in the investment program that it's, we are gaining efficiencies. We can produce with fewer man-hours, so it's a logical consequence of having invested in automation. But a second group of employees where we can reduce and have to reduce is, of course, also among the white-collar workers. Try to be more efficient in administration and different kinds of planning functions. It is both blue collar and white collar. Part of it is due to automation, and part of it is just a, you know, we have to have tough requirements on cost efficiency, also among the white-collar employees.
That's very clear. Thank you. If we go back to the energy costs, could you give us like a rough number or cost ratio so that we can sort of get a grasp on the effect in this quarter compared to the previous year?
I wish I could do that, but we are talking, I mean, energy-related costs, we have, of course, we have electricity and heating for our operations, but quite a big part is also in the freight costs. Freight costs for Lindab is a substantial cost category. Old habits tend to stick. It's a nuisance, but there is a tradition that the freight conditions between suppliers and buyers they are quite generous. Many big wholesalers are offering free freight, et cetera. We're trying to get away from those types of agreements. We think it's bad for sustainability, it's bad for the environment that you don't have a price on transport, a price on freight services.
We are not there yet, but we're working hard to change basically the industry to start thinking in a more sustainable way so that we can optimize transport costs and reduce the carbon footprint. It is a significant cost increase in total coming from the higher prices on diesel, the higher electricity and heating costs in this war environment that we have in Europe as of recently. Difficult for me to quantify it exactly. I would say it's at least one percentage point on sales, meaning one percentage point margin erosion in Q4. That's what I can say.
Okay. Understood. Thank you. That brings me to my next question, which is the market share that you have currently. Do you feel that it's being challenged a bit more now that you have sort of price pressure as raw materials are coming down and maybe other competitors are lowering prices and so on? Could you maybe give us an idea what you're sensing in the market?
I had difficulties to hear you there. Anna, could you try to repeat?
Yeah. Of course. Sorry. The question is basically on the market shares currently as there is an increased price pressure in the market. As, you know, the raw materials prices are coming down, maybe other competitors can lower their prices more. Just a sense of your market position.
Yeah. It's a difficult balance to keep. I mean, Lindab takes, we take our role as the supplier of last resort very seriously. We saw during COVID and also during Russia's invasion of Ukraine that raw material was in short supply, and we were the one who could always deliver, you know, no matter what. That, we want it to be that way. It means we have high levels of safety stock, so that when things happen, Lindab can always deliver.
Then, of course, if we have a lot of stock and prices are coming down on raw materials, we can, in the short term, be challenged by other more opportunistic players who buy material cheaper and try to make some quick business on that. We are convinced that our business model over time is the right one and that we have great benefits from that. In the short term, we can be challenged, and we can lose a project, and we might have to counteract and offer some lower prices to secure a customer or a project. It can result in some margin erosion, and that is what I think we see now. We don't have 100% pricing power, of course.
It is an effect that will pass after a few months, and we have when we have rebalanced our stock values to the current situation. It takes between four and six months for the material to flow through Lindab from the time we buy it until it is leaving our organization. Just as an indication. I don't think that we have lost any significant market share. We are doing everything we can to defend our position. I'm very pleased with how our sales organization are handling the situation today.
Thank you. That's all my questions.
The next question comes from Sofia Sörling from Carnegie. Please go ahead.
Thank you, and thank you for your presentation. Hi, Ola and Jonas. Hi. Great question from the previous speakers. I only have a follow-up question regarding the negative cost effect from this rebalance of levels. Is this the only extraordinary cost during this quarter, this SEK 25 million? My second question is, you mentioned that you will be, or you expect to be a little bit squeezed on your gross margin also in the Q1 due to this, but you also mentioned that you do not expect any negative cost effects for just rebalance the stock levels. Could you just give us some more or elaborate a little bit more on that? Thank you.
Yes, we can try. There is a difference, between, say, actively rebalancing, meaning basically that you are selling out material at lower prices than you hoped to get for that material.
Mm.
That is what I mean with this active rebalancing we did in Q4. That meant that we had to, we had a negative margin on.
Yeah
on that material.
Sure
the other effect, is a more of a, say, normal gross margin squeeze.
Right
that will remain with us during Q1 and to some extent into Q2. It's very difficult to say an exact date, but when we leave Q2, it should be gone at least, and we should have a current stock at normal price levels not affected by what happened springtime, summertime 2022, post Russia's invasion of Ukraine.
Yeah.
You had a question about the extraordinary cost. I mean, in Lindab, we are very careful not to put too many one-time costs and, you know, adjust for a lot of different cost items in our profit and loss statement.
Yeah.
We have not stated that this is an extraordinary or one-time cost, but more as an explanation to the different effects of why we see a margin squeeze, because of course it is noticeable that we have lower margin quarter for 2022 compared to a year previous. We should of course start by stating that the comparison numbers are high. They are unusually high. But even compared to normal profitability levels, we are not completely satisfied with the margin in Q4, and the main explanation why there is a somewhat of a disappointment with that result is first of all, raw material stock effects, putting that pressure on the margin. Second is energy-related cost.
The third one, to be a bit helpful for people to understand, of course, we have used the fourth quarter also a bit to be in very good shape for 2023.
Oh, I see.
So with certain redundancy cost among personnel and also this active stock rebalancing, that I mentioned.
Okay. That's great answer. I actually have another question, if I may. During 2021, you mentioned you had this exposure to new build versus renovation of 50%/50%. Is this what you can see for the full year 2022 as well, or has it changed given the development during the second half of 2022? Also, perhaps your expectations on your exposure to new build versus renovation for 2023.
We cannot measure it in real time. We measure it through our customer base, who are the ones who can tell if a product is sold to a renovation project or to a new build. In Lindab, our products, they work for both purposes.
Yeah.
If we look at the reports and comments from our customers, it is clear that in the last six months, there has been.
Mm
Very strong focus on energy renovation and different types of remodeling efforts. In ventilation, I think, that trend is very clear. Profile Systems has a slightly different dynamic, but we focus these comments on the ventilation business.
Yeah. All right.
We expect the trend to continue like that in 2023 with high focus on energy renovation.
Okay. Thank you so much.
Thank you, Sofia.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
We have received a question in writing as well. What was the share of price increases versus volume of the organic sales growth for Q4 and full year 2022?
I can comment it on Q4, and I believe I actually already did. We had for Ventilation Systems, for Q4, we had an organic sales growth of 4%, that is price plus volume. The increase of 4%, that is basically price. Volume, around flat, meaning around 0% growth. For Profile Systems in Q4, we had organic sales decline of 4%, -4%. There was some benefit from price increases compared to previous year, so I would estimate the volume decline to around 10% with a then +6% on price. Price effect from raw material is higher in Profile Systems than in Ventilation Systems.
I have not prepared an answer for the second question, but as an indication, we saw some volume growth in the first half of the year for Ventilation Systems, around flat for Profile Systems. The second half of the year, negative development Profile Systems and still around flat for Ventilation Systems.
That was all questions. With that, we thank you for participating and wish you a good day. Thank you and goodbye.
Thank you very much. Thank you all.