Ladies and gentlemen, welcome to the Lindab Q3 Report 2019. Today, I am pleased to present CEO, Ola Ringdahl, and CFO, Malin Samuelsson. For the first part of the call, all participants will be in listen-only mode. Afterwards, there'll be a question and answer session. Speakers, please begin.
Hello, everyone, and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO for Lindab. I'm sitting here together with our CFO, Malin Samuelsson. We go to the agenda, we follow the same format as previous time. I will not dwell on that, but instead go to the overview on slide number four. We look at the key highlights for the third quarter. Net sales increased by 3%, that was including an organic growth effect of 1%. Adjusted operating profit increased by 31%, and that increase comes from all three business areas. Profit for the period increased by 39%, which is the high, bringing it to SEK 212 million, and that is the highest profit for a third quarter since 2008.
We continue to invest in automated production to improve efficiency, capacity, and safety, and that program proceeds at a high speed. In Building Systems, we are pleased to welcome a new Business Area Manager, Stefaan Sonjeau . Stefaan has a solid industrial background, recently from the company Baltimore Aircoil. In July, the Dutch subsidiary, Lindab Door, was divested. The company's business is primarily focused on sales and installation of industrial doors. The divestment is in accordance with Lindab's strategy to focus on long-term, sustainable profitability development. We move to the next slide, and look at the sales growth per geographic region. In Western Europe, we saw an organic growth of 5%, with the strongest growth in absolute value coming from France, Switzerland, and Luxembourg.
In the Eastern region, we continue to see positive sales developments, however, at a somewhat lower pace than previous quarters. The sales growth of 2% for the quarter mainly comes from Poland, Romania, and Russia. In the Nordic region, we had a slightly negative organic growth during the quarter, and the decline for the region is mainly related to fewer number of industrial building projects, since we are more selective in our project-related business. We are also seeing a generally lower activity on the market, which we are monitoring very carefully in order to understand if we need to take any action. Now, we move to the financial section, and I hand over to you, Malin.
Thank you, Ola. We move to slide number seven. First, we look at the group financial highlights. We can see a quarter with continued strong operating leverage. As Ola mentioned, the net sales was at the level of SEK 2. 462 billion, and the organic growth of 1%, where the currency contributed positively by 2%. The largest positive currency effect on sales in absolute term, comes from Euro, followed by Danish, Ruble, Swiss franc, and Polish zloty. EBIT increased mainly as a result of improved gross margin and improved efficiency. All three business areas contributed to the increase in profitability. As we have mentioned before, we balance between volume and profitability, and that work continues in all three segments, and that is with a clear objective to improve profit.
This results in an operating leverage of 38% on EBIT, excluding IFRS 16, in comparison to the same period of previous year. The net profit increased to SEK 212 million, compared to SEK 152 during the same period as the previous year. If you look at the EPS, that increased by 39% to SEK 2.78 in Q3. If you look at year to date, we see that up with 86%. Let's have a look at the Ventilation Systems at the next slide. We can see that the net sales amounted to SEK 1.467 billion, which is in line with a record high third quarter last year in the Ventilation area.
The organic growth amounted to negative 3%, while currency was positive with 2%. Structured had a positive impact of 1%. Sales volumes are affected by our continued priority to increase profitability and also a slowdown in some European markets. EBIT increased to SEK 168 million, which is the strongest EBIT result ever in absolute terms for a single quarter. The improvement was mainly related to improved gross margin and favorable currency development. The operating costs have, at the same time, been stable, which also contribute to the positive improvement in EBIT. We move to the next slide and look at Profile Systems. The net sales in Profile Systems amounted to SEK 637 million.
The organic growth was negative and amounted to -3%. As Ola mentioned before, the sales decline is largely due to fewer industrial building projects in the Swedish market compared to last year. The EBIT increased to SEK 82 million compared to previous year, SEK 73 million, despite the volume increase, and mainly as a result of improved gross margin and lower operating costs. We move to the next slide, and we look at Building Systems, financial highlights. This business area continued to report strong sales. Our net sales increased by 32% and amounted to SEK 358 million. Organic growth amounted to 27%, and currency contributed positively by 5%, where the largest positive currency effect in absolute terms, comes from Ruble followed by Euro.
EBIT increased to SEK 34 million compared to SEK 14 million last year. That is mainly explained by the strong volume growth. The total order backlog at the end of Q3 was slightly lower than a year ago, due to large deliveries from the Building Systems business area, both in Q2 and Q3. We move to the next slide, which is the cash flow. If we look at the adjusted free cash flow, it amounts to SEK 345 million, compared to SEK 243 million last year. The improvement in adjusted free cash flow is due to higher operating profit, which was partly offset by higher investment, where we now see a good momentum in our investment program. Net debt, excluding the effects from IFRS 16, decreased to SEK 1,000,000,003. I hand back to you, Ola Ringdahl.
Thank you, Malin. Now we move forward to slide 13 to share some highlights. A few selected highlights from the third quarter. In Ventilation Systems, Lindab's IT tool, Pascal Designer, was launched, and that enables the user to easily install the indoor climate system, Pascal, with Lindab's product. This is an important step in our sales of complete systems. In Profile Systems, we had some developments. In July, the Dutch subsidiary, as I mentioned, called Lindab Door, was divested. This business in Holland has not really contributed lately to our profitability in any positive way. We took this decision to follow our strategy of focusing on sustainable profitability development.
In August 2019, we were pleased to receive an order of SEK 43 million for the delivery of a large logistics terminal in Sweden, intended for the handling of general cargo, parcels, and letters. Lindab will, among other things, supply the frame, the roof, and the walls, the wall solutions to the building. We go over to Building Systems. During the quarter, Building Systems booked agreements on nine major orders, each worth more than SEK 10 million. That was seven in the eastern region and two in Western Europe. Also in Building Systems, we are pleased to announce that a new business area manager, Stefaan Sonjeau took office at the beginning of September, and he's now in an exciting phase to get to know that business and to formulate his thoughts on that.
We move over to slide 14. For those of you who have listened to this call before, you will recognize the current focus areas of the Lindab Group. We see good progress across the line. It seems to work quite well. We are not changing this right now. We keep on prioritizing according to these four themes, and we see quite a lot of improvement opportunities ahead of us. We move over to slide 16, and the outlook on the future. On market development, as we read in many reports, there is, in general, a slowdown expected in the European construction market, but of course, the effects will be different from country to country. For Lindab, we have noticed a lower activity level during the third quarter in Sweden, in Norway, and in Finland.
In the U.K. and Ireland, we see an uncertainty regarding the investment climate, and that is, of course, due to the Brexit uncertainties. We do, however, also see some positive signs. We have received recent statistics from Sweden, telling us that the building permits for non-residential buildings are increasing compared to previous year, and the non-residential segment is an important one for Lindab. We have to live with uncertainty, and we plan according to different growth scenarios, and we try to be as prepared as we can for those different scenarios. We move on to the summary on slide 18. To summarize the quarter, we are pleased with the profitability development, where we delivered a 39% net profit increase. We continue our improvement initiatives at a high pace.
There is a lot of activity in the entire Lindab Group to improve further. We are prepared for different market growth scenarios going forward, with plans to face different situations. Finally, we now have managed to increase profitability, strengthen our cash flow, and thereby also strengthen our balance sheet quite significantly. This means that we are getting ready to look more actively at possible acquisition opportunities, especially within the Ventilation Systems. Now, this concludes the presentation of the Q3 report, and we are happy to open up for questions.
Thank you, ladies and gentlemen, if you do wish to ask a question, please press zero-one on your telephone keypad now. The first question is from Carl Ragnerstam from Nordea. Please go ahead, your line is open.
Hi, it's Carl here from Nordea. We have seen a decline in steel sheet prices. When will you be able to see effects from that potential tailwind? Will you also be able to keep up your prices to your customers, or will you be more or less forced to lower them?
Well, thank you, Carl. It is true that Lindab is buying quite a lot of steel, but there is no automatic link between steel pricing and our prices to our customers. We are first off not selling steel, we are selling, systems and products that are engineered. Short term, we can benefit from a reduction in steel prices, long term, it is not that much of an issue, I would say.
Okay, we should expect a tailwind going into H1 2020, or when should we see that effect?
I think as in any industry, if the raw material prices are dropping a bit, then that will benefit the buyer of those materials. As you also point out, it can mean to reactions from other players in the market, where they might do something with the pricing, thereby increasing competition. It is always difficult to foresee what that will lead to. We want to keep a good price discipline. We want to have healthy gross margins in our business. We have managed to strengthen those gross margins through a number of activities, and we plan to keep the gross margins on a level which is high enough for us to produce the profitability needed for our group.
Okay, one final from me. Have you seen the soft market development in, for instance, the Nordics continuing going into Q4? Have you seen any change?
It is too early to say. We have a very active project pipeline. We have a lot of salespeople out there working very actively together with the customers. There are, of course, projects and a lot of business out there. A more severe downturn will hit us all, if it's a relatively soft downturn, I think that we will be doing quite well throughout that development. It's too early to say anything about the fourth quarter now.
Okay.
Next question is from Kenneth Toll from Carnegie. Please go ahead, your line is open.
Sorry to come back to the same question, basically, but I remember from a couple of managements ago when steel prices were declining, and at that time, the Lindab was negatively affected, because at that time, some competitors were buying sheet steel on spot prices, whereas Lindab was buying on three months rolling prices. The competitors took the opportunity to lower prices due to lower input costs for steel. Are you still having the same purchase contracts, the three months rolling prices, or have you seen any competitors being aggressive on prices yet?
Well, it's a, it's an interesting question. It is true that we are a very large steel buyer. We cannot, it is not enough for us to buy, you know, sporadic volumes on the spot market. We need to have long relationships and guaranteed volumes from the big steel suppliers. Yes, we are buying on longer contracts. It can be three or six months. I would say that if we have too much of a business where steel, the steel price is the only important component, then we are probably not in the business we would like to be.
We try to work much more with value-added knowledge on product design, et cetera, so that the importance of the steel price as a component in our costs is reduced. We have taken decisions in the past year to be less active in certain product categories where the margins are very thin and where we could be sensitive to behavior from competition, where they go only on, you know, selling a lot of steel based on spot prices. That is not a business that we are really pursuing. We want to see more value added, more engineering, and more know-how in our products.
Sounds great. One way of achieving that is also to acquire other companies that have a slight different product range than what you have today. You talk about now there's a stronger balance sheet and so on. Within ventilation, where you're interested in acquiring, what are you looking for? Are you looking for technology shifts, or are you looking to enter new geographical markets, or what would a very good acquisition look like?
At this point in time, we are not looking for any big bang acquisitions. We are more looking at small to medium-sized bolt-on acquisitions to our existing business.
Mm.
You can say, more of the same, in markets we know, in product areas we know, and where we can leverage our existing sales organization, our extensive distribution network, our customer relations, and our production know-how.
Mm.
We are not looking for some, you know, exotic ingredient to our business. We are looking at creating a denser geographical presence and more products that are, say, similar to the existing technologies we know very well today.
Okay, great. Finally, excuse me, I was a little bit late into the call. It's a busy day, but you introduced a new organization beginning of this year with more clear responsibilities for the business, basically. I guess that you're also evaluating the different business or profit units in more detail now. Can you say anything about how many that are sort of performing well, if there are underperforming businesses, and talk a little bit about around those things?
Well, compared to, I did that analysis when I joined, which is now five quarters ago. At that time, there were quite a lot of units that were underperforming or not contributing really positively to the overall profitability of the group. That situation has changed dramatically today. All units contribute positively to our results. All units have improved their results significantly. It is a, in the same way where we say that, you know, all three business areas have improved, we can also say the same for basically all countries, all legal units, all operating units. It's a broad improvement of performance.
Okay, there is still some things to do?
There is always a lot to do, and yes, there is a lot to do because we have had some tough years, and it takes time to get back into shape. The Lindab employees have always tried their very best, and we have very good people. In a time where we had quite a lot of debt and where we were struggling with profitability, we had to, or we could not do everything that we wanted, including investments. We are trying to work on those things now, but of course, you cannot expect that will get solved in one or two years. It's a longer-term effort to do that. We have come part of the way, at least.
I think that makes our colleagues in the group proud that we have achieved these results today.
Okay, great. Thank you.
Just as a reminder, if you have any further questions, please press zero-one on your telephone keypad now. We have a question from Marcela Klang from Handelsbanken. Please go ahead, your line is open.
Thank you, and congratulations to impressive report. I have a follow-up question regarding the future potential acquisition. Would you be willing to look at companies potentially diluting Lindab Group margins? Another question, what are price expectations out there in the market?
Well, I prefer to buy companies that are well-run and profitable. We are not looking to buy turnaround cases with making losses or very small margins. It can, of course, be that we will find a particular company very interesting, and they are performing slightly below our financial target at the moment, but we can have a firm belief that we can lift that profitability in a reasonable time. We are not looking for something that is broken, but we are looking for interesting assets that we can that we can add the Lindab touch to and make very successful. On the price expectations, I'm not commenting on that.
Another question, given the low, basically, indebtedness of Lindab right now, if it takes some time to find acquisitions, can you also imagine being more generous with dividends?
That is a discussion for the board of directors of Lindab. That is not something that we will go into. It is true that we have a higher financial capacity today, that has changed quite quickly, improved quite quickly. It is a new question for Lindab Group, you can say.
Mm-hmm.
We are investing a lot. We want to have the capacity for and be ready for potentially interesting acquisitions, plural. The financial targets and the dividend policy, that is something for the board to decide.
Understood. The final question, you have been a little bit tough with pricing in the Nordic market, and that contributed to negative organic sales development. Do you know if you're losing market share in Sweden or in Nordics, or is there any particular market where you're taking market share from competitors?
In the core product areas and with the core customers, I would not say that we are losing market share. There can be product categories or geographies where we have decided to reduce our market share. For what we consider really core and where we have a strong relationship with those customers, we continue to help them and serve them to the same extent that they've always done.
You basically are happy with the outcome of these tougher pricing negotiations so far?
Yes.
Okay. That's all for me. Thank you.
Thank you.
There are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
We want to thank you all for, listening in.
Thank you.
For the questions, and we wish you a continued happy reporting period.
Thank you so much.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.